Wall Street Psychos

A typical employee on the trading floor

The March/April 2012 issue of the CFA Magazine has a nice piece about psychopaths in the financial industry. The main trait of a psychopath is his lack of empathy and lack of responsibility for the consequences of his actions. There are studies which show that in the financial service industry, 10% of the employees are psychopaths compared to 1% in the general population.

Trading is a high paced business, firms hire and fire and don't have time to care about sensitive employees.
A Trader is also always a risk taker, since he earns money by entering risky positions. But from behavioral finance we know that we usually get overconfident, especially after a period without any losses. Some traders even become compulsive gamblers. It is only a matter of time unitl gamblers dig their hole by making losses. hiding them and accumulating them until it is too late. Most recent examples are the rogue traders at UBS or at Société Générale. But in every financial institute there are cases of employees getting fired because of hiding losses. Those traders only wake up when it is already too late!

In order to manage this risk, banks need to invest heavily in systems and procedures to keep traders in check: The task is complex since there are many different communication channels, systems, databases and application. But to do nothing is even more costly!

I guess I have to watch "American Psycho" this weekend (the picture above is from the movie).