Towards the end of last week, another rogue trader made it to the financial news. This time, the culprit was a wheat trader for MF Global, one of the world's largest commodities brokerage. According to FT.com, MF Global lost $141.5 million from Evan Dooley's "unauthorized" trades. This is, of course, loose change when compared to the multi-billion dollar loss of Societe Generale from similar "unauthorized" trades by Jerome Kerviel. Just the same, because of what happened MF Global's shares lost more than a quarter of its value.
Like the Kerviel affair, this is another risk management case. But unlike the elaborate manipulation done by Kerviel to circumvent the electronic control systems at Societe Generale, this one by Dooley was a walk in the park--the electronic controls were deactivated for certain traders like him because said controls allegedly "slowed transactions". I had to re-read that portion in the International Herald Tribune version of that same news to make sure I got it correctly. What can I say? It's simply unbelievable!
Now, beyond these cases being red flags for risk management vulnerabilities, what else does this string of trader-based irregularities signify? Jenny Anderson answered that in a recent article she wrote for the New York Times. Scientists, including some psychologists, have discovered that "the human brain...responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them."
In a specific study done by a Stanford University professor of psychology and neuroscience, Brian Knutson, where he mapped the brains of volunteers using high-power imaging machines as they traded, he concluded that "sometimes, people get high on making money." In another another work by Jason Zweig, he found that "brain images of drug addicts who are about to take another hit are indistinguishable from those of traders who are making money and about to place another trade."
There are more such findings on this subject in Ms. Anderson's article. If you have the time and you love details, just click on the link I provided above for her article. What I'd like to leave with you, however, is the thought that traders are not the only ones hard-wired for money (like I earlier believed). "There may be a bit of Mr. Kerviel in all of us," wrote Ms. Anderson. Time to look at myself in the mirror.
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2 comments:
Good research on Human Psychology. I call this the "Unsatiasable Appetite" of Human Nature. You see this true in the Financial World. I see this true in Philippine Politics. Our Political Leaders appear ever hungry for more power.
Ernie, like I said, we may have to look at the mirror ourselves. Good day :-)
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