Since the crash in the world's financial markets there has been a huge amount of interest in financial risk-taking, both risks taken by the public and professionals alike. The popular media on both sides of the Atlantic has painted an image of reckless investors throwing caution to the wind in the leadup to the crash. Coates (2010, 2009, 2008) has amassed a convincing body of evidence to support the idea that male hormones play an important role in the risks investors are prepared to endure - perhaps the global economy would be in safer hands if trading was not such a predominantly male career choice?
Banker bashing (nobody can do this better than Max Keiser) can be comforting for ordinary tax-payers shouldering the debt incurred responding to the crash, however it is not going to move us very far forward - we need to understand the wider human causes of the crash. There is much agreement that the mis-understanding of risk by housebuyers and the mis-representation of risk by mortgage brokers played a significant role in the inflation of house price bubbles. Furthermore the risk these bubbles generated was hidden in complex financial instruments and resold around the world in a way which made it almost impossible for investors to make sensible information-based decisions about how much risk they should carry in their portfolios.
We all know the result and are still living with the consequences. While we are waiting for the global economy to recover there is much we can all do on an individual level to ensure we approach the inevitable financial risks we face everyday in a productive fashion. Is the answer to try and avoid risk completely? This would mean more than not visiting your local casino - any form of credit or even using banking services necessitates a degree of risk, one we usually take without much consideration. The ability to optimise our financial risk taking by carefully identifying risk and weighing it up against the potential benefits is something I call financial IQ. We are currently studying how this relates to other personality traits and have developed a test where you can calculate your own financial IQ. It takes around 10-15 minutes.
Whats your financial IQ?
Test your Entrepreneurial Potential and Normal IQ here / Are you a Cyber-slacker?
Coates, J. M., Gurnell, M., & Sarnyai, Z. (2010). From molecule to market: steroid hormones and financial risk-taking. Philosophical transactions of the Royal Society of London. Series B, Biological sciences, 365(1538), 331-43. doi: 10.1098/rstb.2009.0193.
Coates, J. M., & Herbert, J. (2008). Endogenous steroids and financial risk taking on a London trading floor. Proceedings of the National Academy of Sciences of the United States of America, 105(16), 6167-72. doi: 10.1073/pnas.0704025105.
Coates, J., & Gurnell, M. (2009). Second-to-fourth digit ratio predicts success among high-frequency financial traders. Proceedings of the National Academy of Sciences of the United States of America, 106(2), 623-628. Retrieved November 2, 2010, from http://www.pnas.org/content/106/2/623.full.
