In Excess

Gambling, Gaming and Extreme Behavior

On the Trading Flaw

Is excessive stock market speculation another form of addictive gambling?

Back in November 2012, British news was dominated by the story that British city trader Kweku Adoboli had been jailed for seven years after he defrauded £1.4bn while day trading at the Swiss bank UBS (the largest trading loss in British banking history). The phrases that kept recurring on most of the television reports that I saw was that Adoboli was "a gamble or two away from destroying Switzerland's largest bank" after losing money in "unprotected, unhedged, incautious and reckless" day trading, and that he claimed he “lost control over his trades” during a period of market turbulence in the latter half of 2011. The question I am always asked by the media is whether day trading is just gambling by another name – and in a nutshell, my answer is a resounding ‘yes’. The prosecution seemed to concur with my own opinion as they claimed Adoboli was a gambler who believed he had a “magic touch”. Detective Chief Inspector Perry Stokes gave evidence and said that Adoboli was "running completely out of control". More specifically he said:

"He did so, by breaking the rules, covering up and lying. In any business context, his actions amounted to fraud, pure and simple.The amount of money involved was staggering, impacting hugely on the bank but also on their employees, shareholders and investors. This was not a victimless crime. To all those around him, Kweku Adoboli appeared to be a man on the make whose career prospects and future earnings were taking off. He worked hard, looked the part and seemingly had an answer for everything. But behind this facade lay a trader who was running completely out of control and exposing UBS to huge financial risks on a daily basis. When Adoboli's pyramid of fictitious trades, exceeded trading limits and non-existent hedging came crashing down, the repercussions were felt in financial centres around the world."

The words ‘trader’ and ‘trading’ could easily be swapped for ‘gambler’ and ‘gambling’ as all the consequences are the same. Here is someone who lost all control of his behaviour, thought he had the ‘magic touch, and lied and deceived to cover his tracks. As someone that as spent over 27 years studying problem gambling, the media accounts sound all too familiar. (I ought to add that the prosecution alleged that outside of his job, Adoboli was taking extra bets with his own money and was accused of being "addicted to gambling”). The press coverage also made much reference to the fact that Adoboli engaged in the classic ‘double or quits’ strategies used by many hardcore gamblers (where, after a big loss, gamblers will double their bet in an attempt to recoup their lost money as quickly as possible). Again, this is further evidence that trading is just gambling under another name.

Nick Leeson (Time Magazine)
And of course, Adoboli was not the first trader to do this. Nick Leeson – you may remember, the so-called ‘Rogue Trader’ – was the man who in 1995 single-handedly brought down the UK’s oldest investment bank (Barings). Leeson was a derivatives broker whose fraudulent gambling caused the spectacular collapse of one of the UK’s most established financial institutions. From the early 1990s, Leeson made countless speculative (and unauthorized) gambles on the stock market that at first made large profits for his employers. However, as with most gamblers, his ‘beginner’s luck’ soon ran out and he started to lose huge amounts of money. To cover up his losses, he began to hide his large losses in an ‘error account’ (i.e., accounts that are used by financial companies to correct their mistakes made in trading). It was on 16 January 1995 that one national disaster (the Kobe earthquake) led to a disastrous financial one (the collapse of Barings Bank).

Things went tragically wrong when Leeson – using his employer’s money in an effort to recoup some of the money he had lost – placed a bet that the Japanese stock market would not move significantly overnight. However, on the morning of January 17, the Kobe earthquake occurred and it sent the Asian financial markets into turmoil. To try and retrieve the lost money, Leeson made a series of increasingly risky gambles by betting that the Nikkei Stock Market would recover quickly – but it didn’t. Leeson’s losses eventually reached £827 million (which was more than twice the bank's available trading capital). After a failed bailout attempt, Barings Bank was declared insolvent just over five weeks later (February 26 1995). Leeson fled but was eventually caught in November 1995 and was charged with fraud. He received a jail sentence of six-and-a-half years. Interestingly, Leeson (and others) went on to blame Baring's own poor auditing and risk management practices (just as Adoboli claimed in his trial too).

Most companies probably do not have policies in place to prevent one individual employee gambling away all of the company profits. However, Leeson’s and Adoboli’s (albeit somewhat extreme) antics demonstrate that organizations need to acknowledge that gambling with company money can be disastrous for the company if things go horribly wrong. While no company expects an employee gambling to bring about their collapse, the cases of Leeson and Adoboli do at least highlight gambling as an issue that companies ought to think about in terms of risk assessment.

The BBC Online News website published an article by Laurence Knight on ‘the psychology of the rogue trader’. Knight worked for six years for an investment bank. Although Knight wasn’t a trader, he interacted daily with traders. Knight said: 

"For many traders, their sense of self-worth is defined almost uniquely by their ‘P&L’ – the profit and loss they make for the bank – and, by implication, the size of their bonus. Making a profitable trade shows that they are right. And the bigger the profit, the more right they are. As for the enormous bonuses…their importance is not so much in the material wealth they bring, so much as the recognition of the trader's status and success… Adoboli specifically denied being motivated by personal gain in the form of a bonus, and the jury appear to have believed him. But he does nonetheless seem to have suffered from a fixation on profit above all else, which he claimed was because he felt under pressure to produce results."

Knight’s former trainer at the investment bank where he worked – Bruno Curnier – claimed many traders suffer from 'Gekko syndrome' (named after the fictitious greed is good film character Gordon Gekko in Oliver Stone’s Wall Street). Curnier claimed:

"[Some traders] lack self-awareness – the ability to understand their own emotions and how they affect others. The aggressive, risk-taking, boundary-pushing, ‘high-roller’ image of the trader tends to attract exactly that kind of applicant. This self-selection effect can then be reinforced by a recruitment process in which the successful candidates are ultimately picked by the traders they will work for. I don't think some traders have any clue how to manage people. They recruit people they like – if they see the same drive."

Knight claims the traders he knew fell into one of three types (‘flow traders’, ‘quant traders’ and ‘elephant hunters’). These three types are not based on any scientific research, just on Knight’s sex-year experience of working with such people. More specifically he claimed:

"The most stereotypically aggressive are the 'flow' traders – people who work in the simplest, most competitive and fast-moving markets, such as currencies or shares…The traders had rigged their computers to blare out noises or tunes every time they bought or sold. Then there were the ‘quant’ traders – those dealing with financial options or complicated transactions know as synthetic CDOs. They were brainy types, who needed to have an intuitive grip on the complex maths involved, and occasionally blew up when they got their maths wrong. Finally, there were the ‘elephant hunters’. These characters might spend months on one big transaction earning millions of dollars in profit. They too were deep thinkers, but their thoughts were turned to negotiating tactics, complex legal documents and accounting issues. They also seemed to be mostly likeable family men. Nearly all of the traders that I have heard of losing millions or billions (including two minor cases that never became public) fit somewhere between the first two types."

Knight also made reference to a fascinating study that I tracked down quite easily. The study examined the biology of traders by measuring their levels of testosterone and cortisol among 17 traders while working. The study was carried out by Dr. John Coates and Dr. J. Herbert and published in a 2008 issue of the Proceedings of the Natlonal Academy of Sciences. The authors reported:

"Little is known about the role of the endocrine system in financial risk taking. Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader’s morning testosterone level predicts his day’s profitability. We also found that a trader’s cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk. Our results point to a further possibility: testosterone and cortisol are known to have cognitive and behavioral effects, so if the acutely elevated steroids we observed were to persist or increase as volatility rises, they may shift risk preferences and even affect a trader’s ability to engage in rational choice."

Knight interviewed Coates who reportedly said:

"What I firmly believe is that financial risk-taking is a profoundly physical act. It's a bit like an army gearing up for a cavalry charge. If we are doing well, the body tells us: 'Go for it, there's fruit everywhere'. The downside is that it makes the winner stupidly reckless – when traders blow up, it typically comes at the end of a long winning streak. And this is what seems to have happened with Adoboli."

Gambling is a popular leisure activity and recent national surveys into gambling participation show that around two-thirds of adults gamble annually and that problem gambling affects around 1% of the British population (as measured by our most recent national gambling prevalence survey. There are a number of socio-demographic factors associated with problem gambling. These included being male, having a parent who was or who has been a problem gambler, being single, and having a low income. Other research shows that those who experience unemployment, poor health, housing, and low educational qualifications have significantly higher rates of problem gambling than the general population. 

It is clear that the social and health costs of problem gambling can be large on both an individual and societal level. Personal costs can include irritability, extreme moodiness, problems with personal relationships (including divorce), absenteeism from work, family neglect, and bankruptcy. There can also be adverse health consequences for both the gambler and their partner including depression, insomnia, intestinal disorders, migraines, and other stress-related disorders. “Addicted’ traders are likely to experience similar (if not exactly the same) effects. 

Problem gambling can clearly be a hidden activity and the growing availability of internet gambling is making it easier to gamble from the workplace. Thankfully, it would appear that for most people, gambling is not a serious problem. For those whose gambling starts to become more of a problem, it can affect both the organisation and other work colleagues (and in extreme cases, such as Leeson and Adoboli, cause major problems for the company as a whole). Managers clearly need to have their awareness of this issue raised, and once this has happened, they need to raise awareness of the issue among the work force. Gambling is a social issue, a health issue and an occupational issue. Although not high on the list for most employers, the issues highlighted here suggest that it should at least be on the list somewhere.

References and further reading

BBC News (2012). Kweku Adoboli jailed for fraud over £1.4bn. November 20. Located at: http://www.bbc.co.uk/news/uk-20338042

Coates, J. & Herbert, J. (2008). Endogenous steroids and financial risk taking on a London trading floor. Proceedings of the Natlonal Academy of Sciences, 105, 6167-6172.

Griffiths, M.D. (2000). Day trading: Another possible gambling addiction? GamCare News, 8, 13-14.

Griffiths, M.D. (2002). Internet gambling in the workplace. In M. Anandarajan & C. Simmers (Eds.). Managing Web Usage in the Workplace: A Social, Ethical and Legal Perspective (pp. 148-167). Hershey, Pennsylvania: Idea Publishing.

Griffiths, M.D. (2004). Betting your life on it: Problem gambling has clear health related consequences. British Medical Journal, 329, 1055-1056.

Griffiths, M. D. (2006). Pathological gambling. In T. Plante (Ed.), Abnormal Psychology in the 21st Century (pp. 73-98). New York: Greenwood.

Griffiths, M.D. (2009). Internet gambling in the workplace. Journal of Workplace Learning, 21, 658-670.

Knight, L. (2012). The psychology of the rogue trader. BBC News, November 20. Located at: http://www.bbc.co.uk/news/business-19849147 

Wardle, H., Moody. A., Spence, S., Orford, J., Volberg, R., Jotangia, D., Griffiths, M.D., Hussey, D. & Dobbie, F. (2011). British Gambling Prevalence Survey 2010. London: The Stationery Office.

Dr. Mark Griffiths is a Chartered Psychologist and Director of the International Gaming Research Unit in the Psychology Division at Nottingham Trent University (UK).

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