December 12, 2011
The Financial Times in its December 3, 2011 Week-End edition published a very insightful article entitled “What makes a rogue trader” by John Gapper. The writer analyses the behavior of a number of rogue traders in the recent and not so recent past. The losses were astronomical. Toshihide Iguchi from Daiwa Bank lost $1.1 billion, Kweku Adoboli from UBS, lost $2.3 billion and Jerome Kerviel of Society General lost $7.6 billion.
Mr. Gapper writes: “Rogue trading it is now clear is not an aberration but integral to the banking system. Like the cycles of financial speculation and crashes that have occurred throughout history, rogue traders are always with us.”
One could point out that had those unauthorized trades made a profit for the banks that employed them, the rogue bankers would have been forgiven their breach of authority and most likely promoted if not named “banker of the year.”
It is interesting to note that none of the traders profited personally from their fraud. Also of interest is that they all started to gamble to cover initial losses.
Psychologists Daniel Kahneman, of Princeton University, Nobel laureate and author of the current bestseller Thinking Fast and Slow and Amos Tversky of the University of Tel Aviv developed in 1979 the Prospect Theory. According to this theory, we all have an irrational tendency to be more willing to gamble with losses than with profits. Apparently, we do not heed to the proverb that says: “when in the hole, stop digging!”
Yet we all have to take risks. That is part of life. There are very few decisions we make that do not involve risks because of life’s many uncertainties. Getting up in the morning is taking risks, we might fall, be run over by a bus or be the victim of unforeseeable negative event.
However there are some risks we should not take. How can we determine the risks that are acceptable, and those that are not? Can ethics help? I think it can.
Let me list three questions I suggest we ask ourselves before making that determination.
Is the risk I am about to take:
- Involve breaking the law or my company’s code of ethics?
- Affect others negatively?
- Involve the violation of some of my basic values such as truthfulness, honesty, fairness, respect and honor?
If we answered “yes” to anyone of those questions I would highly recommend we abstain.
As Nick Dandolos, a famous gambler who won and lost over $500 million in his lifetime, once wrote:
“The only difference between a winner and a loser is character.”