What Makes a Trader Go Rogue?

Rogue trading, or the act of independently making, and often obfuscating, reckless losses in a firm's accounts, has become so common that the uncovering of these situations has lost the shock factor it had in the days of Leeson. This is despite the fact that the dollar figures involved in such scandals have become increasingly mind-blowing.

However, despite the rising frequency with which rogue traders make the headlines in the financial press, the fundamental question of why they have done what they have done often goes asked and unanswered. This is no simple question of greed; traders would usually have very little chance of personal financial gain even if their trades were to go right. And, even if the potential for a big bonus is the lure, it is clear that the downside of jail time and public humiliation far outweighs the upside of pecuniary gains in the minds of most rational observers.

Over the weekend, John Gapper of The Financial Times outlined an interesting theory that might do a better job of explaining rogue behavior than simple financial incentives; biology. In his article What makes a rogue trader, Gapper identifies research suggesting that many species will take bigger chances when they are already in a hole (whether the deficit is made up of seeds or dollars) than they would otherwise. And, since this risky type of behavior often leads to survival in the case of, say, food shortages or droughts, risk genes are more likely to be passed down through the generations. In other words, we might be genetically predisposed to go double or nothing.

Who knew that sparrows and bumblebees could provide such insights into market behavior? If what Gapper suggests it true, it would seem that we are less Homo economicus and more Bombus pennsylvanicus, not necessarily a happy thought for all the neoclassical microecononomics holdouts in the audience...