They may they need to introduce drug testing to Wall Street. To regulate the ups and downs, not of the market, but of human beings natural risk-driving hormones.
In the pinnacle of worldwide competition concluding this past summer, an oversight of ‘regulation’ against all forms of cheating from not passing the baton in time to fouling a player are part of the Games. And one of the most insidious forms of cheating is performance enhancing drugs. Yet, right wing businessmen rail against regulation in the competitive arena of the free market. Like the Olympics would be more effective if there no drug testing and no referees. Paul Kiser’s blog this week has a pretty powerful refutation of that tired conservative argument with the case study of his home state of Nevada. Where the ‘business favourability’ (ie. lack of regulation) ranks top of the USA, and yet the economic prosperity ranks at the bottom of the USA.
But my point about drug testing and ‘regulation’ isn’t about cheating, but ‘regulating’ a balance. It turns out that research isn’t the only domain affected by the neuroscience of risk taking. “Our prosperity is at the mercy of animal urges swirling through the City” by John Coates in the Sunday Times (paywalled) explains,
- · Adrenalin – “It is common to speak of greed as the force driving investors during bubbles such as this, but as an explanation for financial folly it misses something important — that investors naively and fervently believe they are buying into the future. As a rising market validates investors’ beliefs, the profits they make translate into a lot more than mere greed: they bring on powerful feelings of euphoria and omnipotence…Through a scientist friend, I came across some research conducted by Rockefeller University, in New York, on “the winner effect”. It looked at how the hormone testosterone affects animals’ willingness to take risks. Two males, say, may get into a fight for turf or a mate and, in anticipation of the competition, experience a surge in testosterone. This is a moment of transformation, what the French since the Middle Ages have called “the hour between dog and wolf”. After the battle has been decided, the winner emerges with even higher levels of testosterone, and the loser with lower levels, that may linger for days or even weeks. The next time he gets into a fight, this gives him an edge, helping him to win yet again. But then it all starts to go wrong: after a while, animals experiencing this upward spiral of testosterone and victory have been found to start more fights and to spend more time out in the open, and as a result they have an increased mortality rate. Confidence and risk-taking morph into overconfidence and reckless behaviour.”
- · Cortisol – “If rising testosterone levels lie behind irrational exuberance, another hormone seems responsible for the irrational pessimism that drives market downturns — the stress hormone cortisol. On a losing streak, traders struggle with fear, reliving the bad moments over and over again, so that stress hormones linger in their brains, promoting a pathological risk-aversion and even depression. Cortisol works in tandem with adrenaline, but while adrenaline is a fast-acting hormone, taking effect in seconds and having a half-life in the blood of only two to three minutes, cortisol kicks in to support us during a long siege. If you are hiking in the woods and hear a rustle in the bushes, you may suspect the presence of a grizzly bear, so the shot of adrenaline you receive is designed to carry you clear of danger. If the noise turns out to be nothing, you settle down and the adrenaline quickly dissipates. But if you are in fact being stalked by a predator and the chase lasts several hours, cortisol takes over the management of your body. Like testosterone, cortisol at first has the beneficial effects of increasing arousal and sharpening attention. But as levels of the hormone rise and stay elevated, it comes to have opposite effects, promoting feelings of anxiety, a selective recall of disturbing memories and a tendency to find danger where none exists. Chronic stress among traders and asset managers may thus foster a thorough and perhaps irrational risk-aversion.”
Maybe financial regulators or boards of directors need to issue regular drug testing for adrenalin and cortisol in their bloodstream.
Leaders pump adrenalin, Managers pump cortisol.