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Monday, Oct. 1, 2012

Traders aren't wired like us

Special to The Japan Times

HONG KONG — Two experienced forensic experts working on an executive MBA thesis at a Swiss university devised computer simulations and intelligence tests to measure the egotism of 28 professional financial traders and to check their willingness to cooperate with others. They discovered that the share traders were both more reckless and more manipulative than psychopaths.

The thesis adds to a significant and growing body of evidence, both anecdotal and scientific, that financial traders are not wired like the rest of us, and they may have more in common with psychopaths than ordinary people. But the academic community and media have still to tackle the implications of the work: Are potential and actual psychopaths attracted to work in financial markets? Or is the impetus the other way round, with market practices encouraging psychopathic tendencies? Equally important, what are the implications for the economy and society?

One of the two Swiss MBA researchers, Thomas Noll, a psychiatrist and a prison administrator, told Germany's Spiegel that the "more egotistic" traders "were more willing to take risks than a group of psychopaths who took the same test."

What surprised the researchers was the competitive attitude of the financial traders, which had a destructive edge. Instead of being businesslike and aiming to reach the highest profit, explained Noll, "It was most important to the traders to get more than their opponents, and they spent a lot of energy trying to damage their opponents."

This came out when the participants played a prisoner's dilemma game, where the players can cooperate or betray each other. The bottom line was that the traders' performance was harmed and their results were no better than a control group's.

According to the thesis of Noll and his co-researcher Pascal Scherrer: "The outcome seems to indicate that bank traders are even more prone than psychopathic individuals to rely on strategies that do not maximize their own total profit [but instead do considerable harm] to the profit of their gaming partner. Healthy controls achieved the same profit on their own as traders and psychopaths, but used a strategy that led to an equal profit of their partner, and hence led to the highest overall profit, whereas the lowest overall profit was achieved by the traders."

Until now news media have concentrated on so-called rogue traders who cost their banks billions of dollars. Nick Leeson was the first modern anti-hero who brought the illustrious 233-year history of Barings Bank to an abrupt end with his losses of $1.3 billion on Nikkei futures trading, for which he received a 6½-year prison sentence and a subsequent career as an after-dinner speaker and an adviser on risk and corporate responsibility.

Since then, Leeson's record of losses has been bettered by several people, most recently by Jerome Kerviel, who cost Societe Generale €4.9 billion on European stock index futures, and Kweku Adoboli, who is accused of losing $2.3 billion for UBS through stock index futures trading.

But the recent research suggests that there is an underlying problem not merely of individual bad or rogue elements but an institutional issue — that financial trading encourages anti-social patterns of behavior and rewards people who without a sense of proportion or of right and wrong. The claim is not new. Since the 1990s, academic specializing in psychiatry, psychology and neurology have suggested that the stressed working lives of traders encouraged abnormal behavior patterns.

Indeed, one of my favorite pieces of research from more than 15 years ago was by Lisa Marshall of Glasgow Caledonian University, who did research into psychopaths and concluded that they were made, not born, but that with proper parenting could become successful stockbrokers rather than serial killers.

She found that psychopaths were easily bored and needed a career "where there is a lot of action. They would never do a mundane job. They are cold and quite callous and they are risk-takers. They have to be in a situation where things are changing the whole time and they don't have to make long-term plans."

In The Atlantic last year James Somers went on a Wall Street trading floor to report on a friend's day, noting that it was different from a law firm, a Silicon Valley startup, a magazine or a corporate headquarters: "Even if what they do there shakes the world, even if the staff practically sneezes vibrant creativity, still you can't escape that Office-y undercurrent, the imitation of malaise you find wherever adults are stuck inside doing their homework. This place (trading floor), on the other hand, feels like something closer to an active battleship."

He notices the banks of eternally flashing screens — his friend has six on which 44 windows are open — and the lizard eyes of the traders constantly darting from one to another, and follows his friend as he buys $60 million of S&P futures in four seconds.

"Imagine the psychological impact of having that kind of money and machinery at your fingertips," writes Somers. "You must feel powerful. Too powerful, even, like a young pilot who's just been given the keys to his first F-35 Lightning II tactical strike fighter. A mixture of relish and trepidation."

But is it only financial traders who get a special buzz from power over money?

Some psychologists believe that it is a combination of money and power that bring disturbing effects to those who have lots of it. Ian Robertson, professor of psychology at Trinity College Dublin, and author of "The Winner Effect," notes: "Holding power changes brains by boosting testosterone, which in turn increases the chemical messenger dopamine in the brain's reward systems. Extraordinary power causes extraordinary brain changes, which in their extreme form manifest themselves in personality distortions, such as those seen in dictators."

He claimed in The Guardian that: "The 'masters of the universe' who have arisen out of a deregulated world financial system were given unprecedented power. ... While power in moderate doses can make people smarter, more strategic in their thinking, bolder and less depressed, in too-large doses it can make them egocentric and un-empathic, greedy for rewards — financial, sexual, interpersonal, material — likely to treat others as objects, and with a dulled perception of risk."

Perhaps it is just money that is the root of all evil. In California, psychologist Paul Piff is making a name for himself with experiments that indicate that making lots of money, especially at other people's expense, can dehumanize and make people more selfish and less compassionate. In one experiment the rich showed themselves quite happy to take sweets from a bowl marked for children only.

"While having money doesn't necessarily make anybody anything," Piff commented to New York magazine, the rich are way more likely to prioritize their own self-interests above the interests of other people. It makes them more likely to exhibit characteristics that we would stereotypically associate with, say, assholes."

He adds that his findings indicate that, "People higher up on the socioeconomic ladder are about three times more likely to cheat than people on the lower rungs."

Of course, the thesis of the close relationship between money and evil has been noted for millennia. Jesus Christ declared that the way into heaven was especially narrow and difficult for a rich person. But in these days when high economic growth is sacred to governments yet large numbers of poor people are being left behind, we should rethink our priorities.

Kevin Rafferty is editor in chief of PlainWords Media.

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