By Tim Dean, University of New South Wales
You’d have to be a bastard, surely. To gamble away billions of dollars of other peoples’ money, playing the odds with their livelihoods, their retirement funds, their security. You’d have to be a bastard. Surely.
Or maybe even a psychopath?
What is it that makes someone do such a thing? What makes someone become a rogue trader, like Kweku Adoboli, who recently burned through over US$2 billion, or Jérôme Kerviel who likewise evaporated billions in dodgy deals in 2007 and 2008?
According to a report in German newspaper, Der Spiegel two Swiss MBA students, Pascal Scherrer and Thomas Noll, at the University of St Gallen looked at the psychology of share traders as a part of their thesis, hoping to glean some insights into what makes them prone to such radical departures from temperance and virtue.
To their shock and surprise, they found that traders behaviour is, on average, even more “reckless and manipulative” than that of psychopaths.
That’s a pretty harsh comparison: psychopaths are so renowned for their reckless and manipulative behaviour that it’s considered a psychopathology.
So what might make a group of people tend to be this way? Do they start out reckless and manipulative, or does the profession mould them that way?
The answer is: it’s likely a bit of both. Trading at this level is not a pursuit for the faint of heart. You’re thrust into this viciously competitive environment where the stakes are high and success comes in fits and spurts.
It’s not unlike gambling, not least because of the delicate mix of skill and chance in drawing the fine line between a titanic windfall and a sinking loss.
Most of us would shirk from such an environment, from the emotional ups and downs, and from the prospect that with our next trade we might banish millions of other peoples’ hard-earned to financial purgatory.
For natural risk takers such as these – and evolution suggests a certain percentage of the population is likely to be predisposed towards highly risk-taking behaviour, particularly young males (when was the last time you heard of a female rogue trader?) – they’ve found their ideal home in stockbroking.
So from the outset, you have a group of highly competitive, highly risk-taking individuals jockeying for success in an environment that lends terrific rewards to those who make the big wins.
And this is where the gambling comes in. If two people play roulette, and one plays conservative, placing only small bets and spreading their risk, while the other lumps all their (or their institution’s) chips on double-zero, it’s likely the former will outlast the latter. Slow and steady, and all that.
But occasionally the double-zero risk taker will win big. Bigger than the conservative player can ever hope for.
And lets say the roulette wheel has a quirk where it consistently comes up double-zero on a long sequence of spins. Similar to, say, during an economic boom, where high return investments suddenly appear to have low risk.
While the conservative players might eye double-zero with suspicion, knowing the run can’t last forever, more risk-takers will increasingly gravitate towards the winning number, steadily increasing their winnings as they go (at least until the next market wobble).
If there are enough people playing, and you’re only tracking the big wins, you’ll consistently see the risk-takers topping the charts – and getting the hefty commissions. And big promotions.
Sadly, it seems financial institutions like UBS, which was Adoboli’s home, are driven into the high risk, high reward mentality, driven by cascading forces of natural selection, biological and economic, where only the most risk-taking institutions employing the most naturally risk-taking individuals top the charts.
As former trader, Greg Secker, says: “Banks praise and punish for good and bad results; the trader’s intentions do not matter.”
But are they psychopaths? Probably not. It might seem that the behaviour of Adoboli et al. are lacking in empathy, particularly when they’re squandering other peoples’ money, but there’s a difference in this acute failure of empathy and the chronic empathy malfunction you find in psychopaths.
Empathy typically only applies to an individual’s perceived in-group – those people who are considered morally worthwhile agents. If you dehumanise a group of people, either by declaring them an out-group or by refusing to think of them as people at all, empathy is less likely to trigger.
That’s the rogue traders’ pathology: a stunted perspective that cordons off their in-group from their trade mentality.
Psychopaths, on the other hand, don’t have an in-group. They simply don’t have the same experience of empathy – or guilt, remorse, inhibition etc – that most people do.
I’d expect rogue traders, once exposed, to feel genuine remorse for their actions, as does former rogue trader Justin Paperny; psychopaths simply don’t feel remorse at all.
What does seem true is that rogue traders are unlikely to disappear. Human psychology is moulded, and the finance industry is structured, in such a way that it’s almost impossible to prevent abuse from occurring.
Should financial institutions implement policies that prevent high risk trading and backroom manipulation of accounts, they risk hobbling their profits enough to see their boldest traders move to more accommodating companies.
Because the simple fact is, in the world of finance, bastards make money.
Tim Dean does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.