Friday, December 09, 2011

Freakonomics » What Makes a Rogue Trader Tick? A Q&A with FT Columnist John Gapper

Freakonomics » What Makes a Rogue Trader Tick? A Q&A with FT Columnist John Gapper

"In his new e-book, How to Be a Rogue Trader, Financial Times columnist John Gapper explains why this story has become so familiar over the years. As he puts it, the rogue trader is a species of sorts within the world of finance, a special breed with certain behaviors and characteristics that are consistent through time. Gapper delves into evolutionary biology and the research of Daniel Kahneman to better understand the nature of men like Nick Leeson, Joe Jett, and Jerome Kerviel.

Q. You start with a discussion of evolutionary biology to examine the motivations of a rogue trader. Explain that.
A. I found the research fascinating, these evolutionary studies of the ways that species adjust their behavior when foraging for food. When they’re comfortable, they behave with risk aversion — they’ll go to the place that is the most reliable, even if it doesn’t offer the best returns. But when their survival is threatened, they will go to the riskiest places.
Q. You also spend a bit of time discussing the work of Daniel Kahneman. ....
A. The Kahneman work is classic in the way that it explains how we react to gain and loss. It did strike me, the degree to which the behavior of traders falls in line with his work. They are hungry in a very basic sense. Kahneman talks about how moving the reference point changes people’s attitude to risk. If you look at a trading floor in those terms, you’re setting up an incentive system so that traders are eager to take risks."

I predict my students will LOVE this one!

Hat tip to Ismail Ali Mani for the link!!! 
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