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Biogically Everyone´s Wired to Gamble When Facing Loss

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Jérôme Kerviel. The man behing €4.9b SocGen loss in Y2008.

Recently Financial Times run an articleWhat makes a rogue trader?. In a nutshell: when facing loss, traders are biologically wired to gamble.

¨Rogue traders’ behaviour is financially stupid – traders are trained not to double their losses but to set risk limits and to retreat from risky positions when they face danger. Biologically, however, doubling is sound. Starving animals should gamble in search of a food windfall, even though each has only a small chance of success. Most will fail, but some will survive and reproduce.¨

Implications for system trading are that there is an extra risk to invest with trader who´s down and the benefits of pre-set risk-to-reward proportion goes beyond the dry performance stats.

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Written by A.S.

December 14, 2011 at 9:56 pm

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