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Everybody relax. It looks like the credit crunch can be
solved. Don’t worry about complex ways to move assets
back onto balance sheets, or swap one kind of collateral
for another. Just curb your sex drive.
Brian
Knutson, a professor of neuroscience at Stanford
University in Stanford, California, and Camelia Kuhnen,
a finance professor at
Northwestern
University
in Evanston, Illinois, scanned the brains of 15 men who
were asked to make financial decisions. They were shown
images ranging from a couple in an erotic pose to
neutral objects such as household appliances.
The
finding?
The guys
were more likely to take a high-risk decision when
looking at the picture of the raunchy couple than they
were while ogling a vacuum cleaner. Women weren’t tested
because it’s harder to find an erotic image that all
respond to.
“Incidental reward cues can influence financial
risk-taking,” the study concluded.
It isn’t
hard to figure out what may be going on there. The men
are driven to take more chances in the hope of
accumulating greater wealth to attract women. When they
are thinking about sex, they are more likely to take
financial risks.
Of
course, the research may not be valid: The experiment
involved only 15 men, who may just spend all their time
thinking about women. Then again, it is unlikely many
people sitting around at hedge funds will shake their
heads and mutter, “Er, no, that doesn’t sound right at
all.’’ It certainly sounds right.
John
Coates, a research fellow in neuroscience and finance at
Cambridge University’s Judge Business School in England,
reported the results of a two-week study of 17 traders
in the publication Proceedings of the National Academy
of Sciences.
Crazed
decisions
A former
derivatives trader at Deutsche Bank AG in New York,
Coates found that when traders were on a winning streak,
their testosterone levels kept rising until they made
crazed, irrational decisions. It wasn’t a huge sample,
but, again, no one who has ever worked on a trading
floor will say, “Well, we’ve never seen anything like
that happen.”
The more
we learn about how financial markets work, the more we
see they are driven by feelings such as greed, fear and
desire. In reality, wild swings in stock prices are
caused more by human nature than by mundane economic
forces or regulatory shortcomings for banks and ratings
companies.
People
come up with new products, investments and trading
strategies. Once they have been created, they are tested
to destruction. The markets rise until the bubble
bursts. Underlying that, there is the desire to impress
people, to accumulate a fortune, or just to prove your
own acumen.
G-7 Plan
So how
can you tame that?
Of
course, if traders are mostly thinking about sex when
making decisions, the banks could always try and
mitigate that.
At the
meeting of the Group of Seven finance ministers in
Washington last weekend, a 100-day plan was cooked up to
calm financial markets. It included new rules to force
banks to disclose their holdings, as well as boosting
their capital. Regulators will have to come up with new
ways of accounting for off-balance-sheet units and
revise risk-management rules.
It all
sounds very worthy—and completely unconvincing.
The G7
should learn the lessons of countless studies that
demonstrate the markets are primarily driven by the
chemicals inside us and the emotions they create. We can
come up with policies that alleviate the impact of
volatile markets. But eliminate the price swings through
regulation? You might as well try and regulate away the
wind and the rain.
Waste of
time
Maybe
the G-7 should insist that banks display calming
pictures of fridges and ironing boards on their office
walls to keep all their dealers a little more rational.
Perhaps hedge funds should be compelled to add something
to the coffee to sedate their staff. Or even better,
banks could be encouraged to get more women on the
trading floor.
More
seriously, it would be better if G-7 finance ministers
accepted that while you might be able to limit the
aftershocks of financial volatility, you will never be
able to abolish it. They needn’t waste time on yet
another tier of regulators who will look in the wrong
direction when the next bubble appears.
Volatility is part of human nature. And there isn’t much
point in trying to regulate that out of existence. |
