Best practice | The human factor The jungle room
The trading scandals of the City are well documented but Mary Bogan explores the biological reasons and the ways to change the culture.
He was known as the “London Whale”, the “Caveman”, “Voldemort”. A mega-dollar earner, working for the bank famed for successfully circumnavigating the worst of the 2008 financial crisis, JP Morgan’s Bruno Iksil, was the kind of risk-taking trader whose long track record and bullish style made him widely admired, if a little feared, in the trading community. However, in 2012, Iksil’s career crashed around his ears. In a strategy which, according to the banks’ own chief executive, featured self-inflicted “errors, sloppiness and bad judgement”, Iksil, together with a handful of other key players, lost the bank a cool $6.2 bn, taking the record for the US bank’s biggest trading loss ever and earning a place in the league of greatest trading blunders of all time. Iksil’s story may be one of hubris writ large but the tale of the prudent trader who, after a long run of success, then crashes and burns is not an uncommon one. Why? Typically it’s to charts, data and strategy that banks turn to find a rationalisation. But, according to a man who once ran trading desks for Deutsche Bank and Goldman Sachs, the explanation for reckless trading and rash decision-making often resides in a more surprising place – the body.
“Risk-taking is not just an intellectual, cognitive activity based on analysis and reason,” says John Coates, a successful Wall Street trader turned Cambridge University neuroscientist. “When you take a risk, you face a threat, a potential hurt. And when humans are under threat, the body responds by preparing for action.”
The physical changes that kick in when traders prime themselves for action – the accelerated breathing, the thumping heart, the tense muscles,
Best Execution | Spring 2013
the knotted stomach, the sweating brow – are familiar to anyone who trades. What is less obvious though, and what Coates’ workplace research has proven is that, accompanying these visible outward changes, is a series of invisible, hormonal adjustments that can shift traders’ appetite for risk and affect their capacity for rational decision-making.
Central to these internal changes are the male hormone, testosterone, and the stress hormone, cortisol. In experiments conducted on London trading floors, Coates’ team has found that when traders get ready to risk-take – like other young males in the animal kingdom preparing for competition – their testosterone levels surge. But when testosterone rises, the chemical balance of the brain changes. Confidence rises and the appetite for risk increases. If then the risk pays off – if the trader ‘wins’ the bet – testosterone levels surge higher. In what becomes a virtuous winning cycle, the more the trader wins, the more testosterone rises, the more risks the trader takes, the greater the chances of winning again. What applies in the jungle, applies in the City. In just the same way that when two equally matched lions compete against each other, it is statistically more likely the testosterone-fuelled animal that won
“Risk managers need to get out on the floor and engage with the mentalities and personalities of traders.” Marcus Cree, SunGard
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