Rogue traders, rogue burritos, and mothers of two

I was always struck in college, watching people head off into the field of finance, by the mismatch between the demographics of the folks who’d go be bankers and the stated desire to manage risk. If I’m conjuring up in my head a vision of a prudent risk manager, I’m thinking maybe a mother of two. Someone smart, of course, but also someone who’s cautious. Someone who sees the whole field. Someone who juggles. I’m not thinking “young smart arrogant dude with limited practical experience and a burning desire to get ahead.” That to me sounds more like a rogue trader!

From Matt Yglesias, here is more.


Incentives drive behavior. Get-rich-quick is the wrong incentive set for a stable banking system.

Sometimes bankers get criticized for being too uptight. I'm guessing we aren't quite there yet.

If you don't get a speeding ticket once every couple of years, then you're simply not going fast enough.

Funny how the get called rogue when they lose and brilliant when they win.

Have you ever heard of a rogue winner?

Sarah Palin?

Stupid comment tool left off my bracketed note stating this was sarcasm...

No, they call them managing partners

The fact they are backstopped, bailed out, the bodholders protected, and no convictions probably has nothing to do with it...ahem. Where is that sarcasm button...It's around here somewhere...

The way the system is set up, there are huge rewards to being the guy in the market that is on top of everything and makes it their life. I'd rather have one guy working 60-80 hours a week with "the edge" then two semi committed 40 hour people. Mother's of two don't want to work 60-80 hours a week in a cutthroat environment, narcissistic asshole young men do.

Being a rogue has nothing to do with hours logged. It has to do with recklessness.

Not sure I go along with you at all, tenthring. Who says the 40 hour people are semi-committed and the guy with the edge any good? Compare the hypothetical prudent housewife and the 25 year old with an "edge", alternating between boasting to his friends about his income, jerking off, and booking squash courts, and doing his job. Have I loaded the dice rhetorically? Yes, why yes I have. But you get the point.

Isn't there a ton of evidence suggesting that people are less productive/make more mistakes when they work more than 50 or 55 hours a week

No mention so far of cocaine use on Wall St.?

I haven't lives in NYC for a few years, but over-indulgence in cocaine was one of the defining factors of Wall St. But, according to this article, they've recently traded in the blow for pot and pills:

I believe the classic WWII British study found peak total productivity was at 60 hours. People working 65 produced less overall than those working 60.

Enough conjecture! Let's run a randomized controlled trial pitting mothers of 2 vs eager young men in charge of running hedge funds.

This has been looked at. The mothers of 2 do better.

That link leads to a 404 page.

>> I’m not thinking “young smart arrogant dude with limited practical experience and a burning desire to get ahead.”

Yeah. Those people should only be elected President.

Ouch. Very, very ouch!!

All the problems people see with banking (excessive risk taking, disproportionately large paydays, large fees, etc.) is all fault of investor leniency towards these behaviors.

Just look at John Meriwether... even after two huge failures and billions lost, there are people making wire transfers to his bank account for him to manage money?

As long as people don't pay attention to survivorship bias in fund returns and accept paying 2/20 fees and always be results-oriented and never evaluate the method of how profits were obtained (is there value-added by the trader?), then the bankers are selling what the investors/customers want. But I think there is little dishonesty, most traders I know are self-illuded gamblers and believe they really have an edge and deserve to be paid millions because they timed the market correctly

Most traders yes, but maybe I'd treat the algorithmic ones a bit differently. They sure seem to have an ace up their sleeve.

Oh sure but they don't take clients money! For instance, Renaissence Tech bought back all their clients shares and closed the fund to outside investors, all the money they manage is employee-owned. Behaviour predicted by the EMH of someone who had true alpha no?

Which money market funds are definitely free from the excessive risk taking like making bad loans that can't be repaid to Greece? Spain, Ireland, Italy, France,...?

The US Treasury and Fed are engaged in currency swaps to keep the dollar stable as all US money market funds try to shed their exposure to the bad EU debt.

And the easy money in the EU came from millions of small US investors seeking higher returns in "safe" bank accounts just called money market funds to get around regulations that limit interest rates.

I've just been re-reading Liar's Poker. It's all in there. It was published in 1989.

Liars Poker, honest guys never get the girl.

What's with the American obsession with mothers? The simplistic suggestion seems overused that if only we had a mother at this job......There are a hundred other ways of running a bank into the ground besides rouge trading. If you put a sweet innocent mother on the job she'd find one of those.

Mothers I'd Like to Finance

Boom. Thread winner, no more entries.

"rouge trading"
Women would definitely have a comparative advantage

Since when are mothers sweet and innocent?

Why do we insist on calling traders "bankers"? They may be working for companies that are now bank holding companies, but they aren't "bankers".

They're called bankers because they are bankin'

Yes it is the engineers and accountants that are conservative.

BTW that is why we need a fail safe system where the failure of one bank strengthens all the others.

Distribute all the still-performing assets to other banks at a discount?

I know a lot of people would hate this solution. But, the simple answer for excessive risk taking at banks is for them to be completely owned by individuals (only billionaires need apply). Of course, even companies owned by billionares can screw up, but there would be no better incentive to control risk then having your own fortune on the line. Not even regulators have that kind of incentive to control risk.

The Yglesias blog needs the subtitle: "A college sophomore blogs about the issues of the day."

"A college sophomore blogs about the issues of the day, and people inexplicably take it seriously"

Well, not really THAT many people.

Is Matt going for a second undergrad degree?

"young smart arrogant dude with limited practical experience"

What makes this so hilarious is the author. Some mocking just writes itself.

Would you rather be: An old dumb humble dudeless person with too much practical experience.

Is that you?

Too bad blogging wasn't a career option twenty years ago. One could always begin today, I suppose, now that there's all this practical experience to apply to a blog.

Bill you are describing a father of two. The one who pays for the mother of two.

These trades are zero-sum games. If the banks and hedgies are in the game they must be making money on it and thus some must be losing. Who are they? My guess is that its state governments and private pension plans who want to be in 'alternative' investments. As soon as they wake up then rogueing won't be possible.

Further, how come the hedge funds who trade the same as the banks aren't afflicted with rogues?

They are but hedge funds can quietly close shop while banks report to the SEC.

If the banks and hedgies are in the game they must be making money on it and thus some must be losing. Who are they?

Mothers of two....

Investment bankers, at least the product/coverage people heavily recruited from elite colleges that Yglesias seems to be talking about...don't...manage...risk. They are salespeople first and foremost, which somewhat changes the calculus of young smart arrogant dude with a burning desire to get ahead vs. mother of two.

reminds me of warren buffets first rule of money management:
dont lose money!

Norman isn't far from the answer.

UBS lost $2bn.

Some other bank or banks profited by $2bn.

Get over it.

This is actually quite wise. But it is based on the assumption that firms are hiring smart cocky MBAs over MBAs with more practical life experience and wisdom. I just don't think that's true. A manager will hire someone who can perform, and will consider more than his or her charisma when making a hiring decision. Ultimately, if the young cocky MBA loses people's money, he or she will not keep his or her job. This actually speaks more about how the bloggers over at Think Progress think businesses are oriented. In my experience, it just isn't so.

It's important to realize there are different fields within finance: there's trading, M&A, underwriting, institutional investment management and retail brokerage and then within most of these fields there are some who spend all day writing computer programs and staring at Excel spreadsheets and others who are always on the phone or in meetings with clients.

The cocky guys Yglesias has in mind are probably going to get sales or client-facing jobs (or they will once they pay their dues by working 80 hours a week putting together Powerpoint presentation and making photocopies) and that's not necessarily a bad thing. Firms seek these kinds of people out for a reason. I don't know much about what goes on at trading desks, though, so I have less of a sense of whether these people wind up as traders

Doesn't this come down to the point being "managing risk", not "eliminating risk". My understanding of cognitive psychology is that most people are risk averse, and prefer to avoid losses than make wins. But, over a very large system, you might prefer to srlf-insure and take more risk individually for a higher average return.

To give an example, wouldn't we like employers to be more risk-loving about hiring people who have been unemployed for a long time? Don't we want more inventors for the odd one who comes through with a brilliant new product, despite the high rate of failure?

In the case of traders, perhaps what the banks want is someone who is willing to tolerate more of a risk of failure. Yes, there's the risk that you will hire some scam artist, but hiring only the risk adverse has its problems too.

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