Here's The TRUTH About The Psychology Of A Rogue Trader

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The recent $2.3 billion loss at UBS believed to be caused by a series of rogue trades from Kweku Adoboli, has raised the question “what makes a rogue trader go rogue?” 

There are some interesting ideas, theories and psycho analysis out there as to why a trader would be willing to commit unauthorised risky trades.

Some say the urge to rogue trade is inherent in traders and others says it has to do with hormones, but it appears that no one really knows exactly what the cause is.

The truth is that the same qualities and the same qualities that make them successful are exactly what will make them go rogue.

The same qualities that get them hired...

According to a Reuters report, the same traits banks look for in their traders are ironically the same ones that put the traders at risk for going rogue.

It's not surprising because banks look for people who can thrive in highly competitive environments, remain calm under intense pressure and have the ability to take risks.

Source: Reuters

They're motivated by money.

One thing that makes traders vulnerable to going rogue and committing unauthorised trades is the money incentive.

Source: Reuters

Then it turns to greed

'The starting point is the desire for personal advancement because successes are rewarded with bonuses ...'

Source: Reuters

And they're not the only ones standing to gain, it's their bosses too.

Even traders' managers will gain from them making risky trades if they pay off, occupational psychologist and writer Kim Stephenson told Reuters.

Source: Reuters

Then, uh-oh! The transaction goes wrong.

'...but at the point the transaction goes wrong...'

Source: Reuters

Then there's a frantic cover up.

'...whatever the initial motivation was, it is quickly overtaken by the very rigorous efforts to either cover up or reverse,' Karolos Seeger, partner at law firm Debevoise & Plimpton, told Reuters.

Source: Reuters

Why did they go rogue? Because their reputation is on the line.

Traders don't profit directly from their rogue trade because they're not keeping all the money earned on a trade. What they do receive though is a reputation.

'With rogue trading ... there is also an issue of recognition and reputation and very often it is the fears of reputational loss which lead people to actually try to cover up vigorously rather than coming clean and owning up to what they have done,' Karolos Seeger, partner at law firm Debevoise & Plimpton, told Reuters.

Source: Reuters

Another thing to remember is these guys are cut from the same mould: trader.

According to occupational psychologist and writer Kim Stephenson, it's difficult to manage risk because the traders and the managers are both 'cut from the same mould.'

It makes sense going back to the qualities that banks look for when they hire traders.

Source: Reuters

Their job can be intense and stress hormones can cloud their judgment.

When traders start to accumulate losses it can create stress hormones, which ultimately affect their ability to think clearly, Coates, a former Deutsche and Goldman Sachs trader, told Reuters.

'Stress hormones exert fundamental changes on your brain and the way you think,' he said.

Source: Reuters

And some people think testosterone hormones can make them go rogue too.

Male traders' testosterone levels rise when they are profiting from trades.

High testosterone levels can impair judgment and cause traders to take on too much risk, John Coates, senior research fellow in neuroscience and finance at the University of Cambridge told Reuters.

Source: Reuters

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