On the Trading Flaw
Is excessive stock market speculation another form of addictive gambling?
Posted Feb 28, 2014
"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.
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).
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:
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."
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.