It is good to hear that research is ongoing on the link between brain chemistry, biology and genes on risk taking behaviour (see “The American Banker”, 18 August 2012). I have often wondered why courses on risk management discuss models, complex mathematics, markets, operations etc. at length but stay silent on the topic of what, in an individual’s chemical make-up, triggers extreme risk-taking behaviour and how to address this. (Surely this has to be among the most obvious and directly related of factors.) Perhaps the science has not been sufficiently developed to be made useful in practice – we hope some time in the future it will be.
In “The Hour Between Dog and Wolf” – by John Coates, reference is made to the question asked, “why do bankers (traders) take such stupid risks?”, and the reply was along the following lines – “we get a thrill from risk….a hot streak releases a chemical high….this is where the Master of the Universe feeling sets in. It’s euphoria”. It is quite the opposite of euphoria for those who suffer the widespread consequences when things don’t go so well. One suggeston put forward there is for more ‘biological diversity’ among traders – something we hope the ongoing research will help ascertain the benefits of. As alluded to in the ‘American Banker’ article, appropriate compensation design is also critical, to curb extreme risk taking for short term results.