Rogue Trader Intrigue

Why do They Continue to Gamble?

By Richard Hurley, Ph.D., J.D., CFE, CPA; Tim Harvey, CFE, JP

richard-hurley-80x80.jpg   tim-harvey-80x80.jpg    Global Fraud Focus 


What do rogue traders Nick Leeson (Barings Bank), Kewku Adobli (UBS AG) and Jérôme Kerviel (Société Générale) have in common with sparrows? According to the conclusions of Financial Times chief business commentator John Gapper in his Dec. 2, 2011, FT Magazine article, "What makes a rogue trader?" these traders — when faced with financial losses — would gamble additional losses if there was a chance to bring in big money.

MarchApril-gambling-sparrowGapper explained that this "loss aversion" behavior was also observed among yellow-eyed junco birds during an experiment. The sparrows, after having been deprived of food for four hours, would fly directly to a feed dish that only sometimes had an abundance of food, versus a dish that always had two seeds. Gapper wrote, "To know what goes on in the mind of a Nick Leeson or a Jérôme Kerviel — and that of every reckless gambler — it helps to be a bird-watcher." 

Researchers and psychologists Daniel Kahneman and Amos Tversky, in their experiments with students and faculty at the University of Stockholm and the University of Michigan and with Israeli subjects, concluded that "… a person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise." Their findings, which were published in the March 1979 issue of Econometrica as "Prospect Theory: An Analysis of Decision Under Risk," reaffirmed "the well-known observation that the tendency to bet on long shots increases in the course of the betting day."  

This seminal article and others written by Kahneman in the field of behavioral economics lead to him winning the Nobel Prize in economics in 1992. In 1979, Kahneman and Tversky asked their subjects questions like: Which of the following would you prefer: a) 50 percent chance to win $2,000 or b) a guaranteed $1,000? Given this choice, a majority of people (80 percent) in the study would take option b.


Kahneman and Tversky's research revealed that when a person had already lost $2,000 and was faced with a choice of the sure gain of $1,000 or an even chance of winning $2,000 or nothing at all, that person tended to take the even chance of winning $2,000 or nothing at all thus avoiding the sure gain of $1,000. Kahneman and Tversky concluded those individuals still hadn't yet adapted to the existing loss. In other words, that person flies toward feed dish No. 2 and becomes a sparrow or rogue trader.  

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