Bad market? Blame it on testosterone

The other day a friend was venting about her husband.
She was not referring to his peccadilloes but his financial maneuverings that were turning out to be a potential fault line in their relationship. She swore that if he had only followed her suggestions, they would have been much wealthier. When she did cite specific examples, I could not help but agree.  

At that time, I recollected a statement made by Jonas Ridderstrale when he wondered what the state of the world would have been if Lehman Brothers was instead Lehman Sisters and founded, not by Henry, Emanuel and Mayer, but Henrietta, Emanuelle and May. While the names are an original, he was actually echoing Christine Lagarde’s statement that if Lehman Brothers had been Lehman Sisters the crisis would have had a different complexion. 

Which makes me wonder, is too much of testosterone bad for investing? 

Doug Hirschhorn, a trading psychology coach, wrote a piece in Forbestitled Think like a woman and make more money. He once said to a journalist, that at his workshops on Wall Street, he has to “literally deconstruct a lot of their testosterone”. Hirschhorn believes that significant behavior, which can be classified as dominant male traits, is actually counterproductive to success in trading such as being too aggressive, stubborn or ego driven which results in not knowing when to cut losses and sell. 

Remember Ralph Cioffi and Matthew Tannin, once heavyweights of the hedge fund world? During the trial, the prosecution referred to their internal emails.
"The subprime market looks pretty damn ugly," Tannin wrote to Cioffi. He added that if the report was "anywhere close toaccurate," they should close their hedge funds immediately, because "the entire subprime market is toast."
"I’m fearful of these markets," Cioffi wrote to a colleague in March 2007. "Matt said it’s either a melt down or the greatest buying opportunity ever. I’m leaning more towards the former." 
Why did these Bear Stearns hedge fund managers go on to lose immense sums of money despite the fact that they expected the worst?

Or take the case of Michael Steinberg. He is fabulously rich, good looking and happily married. He was arrested last month for insider trading. What was he thinking? Over the past 3 years, Preet Bharara, the federal prosecutor in Manhattan, has claimed 71 insider trading convictions. Did Steinberg think he was never going to get caught? Was it not inevitable? 

What about Richard Fuld? The Lehman Brothers chief executive overplayed his hand and refused offers until the very end, either out of stubbornness or ego. Who can forget his pretentiousness: “As long as I am alive this firm will never be sold. And if it is sold after I die, I will reach back from the grave and prevent it.”The theatrical lyrics continued when Alistair Darling, British MP and then Chancellor of the Exchequer, apparently toldthe Americans that “we are not going to import your cancer”. He vetoedthe deal for Barclays to buy out Lehman Brothers, which worked out well since Barclays picked it up later for “next to nothing”. That obviously ticked off former US Treasury Secretary Henry Paulson who accusedDarling of "grin-f***ing" America over the bankruptcy of Lehman Brothers (I did not know such an expletive existed!).

Anyway, back to the subject at hand. 

Source

A few years ago, two neuroscientists undertook an experiment on the trading floor of a major investment bank in London. Over eight consecutive business days, at 11am and 4pm, samples of saliva were taken from the mouths of 17 traders. The results revealed that the traders performed much better on days in which they registered higher morning levels of the testosterone. The researchers also found that on days when traders beat their previous monthly average, their testosterone levels would go through the roof. 
In other words, better traders produced more testosterone and testosterone made them better traders. 

That’s what interesting about testosterone; it not only influences the environment but can be influenced by it too. It tends to go up in certain instances, such as when looking at the Sports Illustrated swimsuit issue. Or, when participating in a highly competitive environment such as a tennis or football match, or the trading floor of a large firm. Levels rise in preparation for the competition and then go up in winners and down in losers. In one experiment, 5 men were confined on a sail boat for 14 days. Towards the end of the trip, the higher ranking men (a social hierarchy was formed with 15 days on a sail boat in the middle of the ocean!!) had higher testosterone levels than the rest. 

In an absolutely bizarre case in 2007, Andrew Tong, a junior trader at SAC Capital, sued a trader Ping Jiang. The sexual harassment suit claimed that Jiang told Tong to take female hormones to prevent him from being too aggressive on the trading floor. Tong stated the repercussions of taking the supplements as causing him emotional distress, wanting to wear women's clothes and unable to perform sexually. As far as I remember, Tong lost the case and Jiang was sacked. But Jiang must have been an ardent believer in the too-much-of-testosterone theory. 

John Coates, initially a trader at Goldman Sachs and Deutsche Bank, now a neuroscientist, is convinced that physiology plays a driving role in markets. After all, market participants are biological organisms with neural and physiological apparatus. 

Source

He remarked that during the dot-com bubble, the markets were running on something deeper than dispassionate reason. The traders, normally "sober and prudent" were becoming "euphoric and delusional" and "overconfident in their risk taking, placing bets of ever-increasing size and ever worsening risk-reward trade-offs". Incidentally, he went on to state that traders were not upset with his observation. "Every trader knows when you're on a winning streak you act like a d*** and then you end up giving back all the money you made on the way up. I got a lot of emails from traders saying it was good to know where this odd behaviour comes from."

Last year, physicist Mark Buchanan, wrote an interesting piece in Bloomberg. He spoke about the "winner effect" which is a testosterone-driven dynamic. If 2 male lions fight over a potential mate, the level of testosterone in the winner skyrockets. By boosting confidence and risk appetite, the testosterone priming makes that winner more likely to win again until successive winning backfires. The animal becomes so aggressive and overconfident that it takes stupid risks - eg: standing in open ground where it can be seen and attacked by several rivals together. 

According to Buchanan, "a good part of the giddy energy and aggressive excitement that spills over during a long bull run must reflect a surge in general testosterone levels. The more the market rises, the more confident and risk-seeking traders and investors become. The ultimate outcome is a market of people largely convinced of their own invincibility and read to take irrational risks." 

To reinforce what was said above, better traders produced more testosterone and testosterone made them better traders. But what makes a better trader for a day or week can in the long term lead to disastrous mistakes. 

Source

So basically, testosterone turns the traders and investors into a herd of overheated animals and there is nothing anyone can do - except live with the market volatility and perhaps hire more women for the job. 

If only it was Lehman Brothers & Sisters, the world might have been a different place!
Meanwhile, I second Buchanan: It's time to launch a testosterone index.  

Why do men lie?

My friend has been dating this really nice guy but harbours a peculiar grouse against him. She claims he is lying when he says he loves her.

And her logic for his blatant lie: He wants to seduce her.

To which another friend had an observation: “If he has to say he loves you to get sex, his seduction capabilities leave much to be desired”. Frankly, I could not figure out whether this was to compliment my friend or insult the boy friend (maybe both).

Source

She ended up with: “To profess love to get sex is disgusting”.

Now on this sentiment, I am completely in sync. But don't we all lie, even if we don't profess love?

Right now, George Soros drives home the point that men say many things when dating, not all of which are true.

Soros is the most famous hedge fund manager in the world, not to mention probably the richest (ranked 30 on the Forbes Billionaire list with an estimated wealth of $19.2 billion). The octogenarian finds himself in the news either for his currency bets, his philanthropic ways (in 2010 he donated $100 million to Human Rights Watch) or his sexual dalliances.

Source: NY Post

When Soros was 80, he was dating 27-year old Adriana Ferreyr and promised her an apartment in Manhattan which was worth around $2 million. One day, when lying in bed, she asked him about the apartment and he coolly told her that his “other girlfriend” Tamiko Bolton was living in it and very happy there. Soros obviously believed in hedging all his bets. And the fight began!

Ferreyr claimed that he slapped her and attempted to hit her with a lamp which completely traumatized her. She then filed a $50 million suit against him for reneging on his promise to buy her the house.

Soros filed a countersuit of defamation and assault stating that it was she who picked up the lamp to hit him and struck him on his (80-year old) forearm. After it crashed on the floor, she cut her foot on the shards of glass when she got out of bed.

Now in this quintessential 'he-said, she-said' saga, I am not pondering on which one of them is lying about the lamp. The point here is that Soros probably lied when he promised her the apartment (the crux of the lawsuit). His lawyer William Zabel saidit well: “If every promise to a girlfriend was an enforceable contract, I’d be in court every day”.

When I asked a colleague in Singapore if he believes that men lie for sex, his answer: “Of course men lie for sex and women lie for marriage”.

Basically, all of us liars. Isn't it true? Don't we all lie?

If not all the time, most of the time?

If not most of the time, some of the time?

If not some of the time, at least very occasionally?

But it’s not just love (or lust or sex) that brings out this side of us. 

Don’t bosses lie? I am not addressing you if you are having sex with your boss and he said he loves you :) :) :) 

Seriously, don’t tell me you have never ever heard such statements.......

“I truly want to see you successful”

What was meant: “Your job is to make me successful so you better grovel to get me there”.

 “Your raise is above average”

What was meant: “Your wounded puppy look is grating my nerves. Obviously I could not give you more; it would have been taken out of my raise.”

“I’m your friend”

What was meant: “I need you to be the office mole and inform me about all the office thievery, gossip and sexual exploits so that I can use the information to further my cause.”

“We are one big family”

What is NOT said: The family is full of dysfunctional upstarts who are either belittlers, slackers, finger pointers or conniving back stabbers. Technically, this may not qualify as a lie but the boss was certainly economical with the truth.

This is where I need to clear the air since all MY bosses read this blog.
This post is NOTabout them (really, am not lying!).

But, hey, let’s be fair. Are employees themselves not great liars?

If I continue to elaborate I could find myself in really hot water, so let’s move on to more neutral territory.

Amongst the merry band of liars, most politicians stand head and shoulders above all other mortals. This is no revelation; everybody and their dog knows that politicians lie. Latest has been David Cameron talking about the national debt. The Independent questioned whether he can qualify as a liar. Fraser Nelson of The Spectator called it "astonishingly dishonest". In fact, it forced Robert Chote, head of the Office of Budget & Responsibility, to write a public letter to UK's prime minister. And did Greece not admit to lying in 2009 on its borrowings and huge deficits forcing a multi-billion euro bailout? But the most honest statement came from Luxembourg PM Jean-Claude Juncker who quipped "when it becomes serious, you have to lie". 

Though he was referring to meetings being held by the Eurogroup, this quip could be valid for any issue - politics, business, relationships or love. 

While some are born liars or pathological liars, others are moulded into one. A study done last year showed that studying economics has the high propensity to turn you into a liar. The researchers designed an experiment on students that gave its subjects every conceivable incentive to lie, and none to tell the truth. Though a large portion of students lied from every field, economics and business students beat the competition.

Source

There is an even more racy side to economists. According to a survey done in the UK covering 100+ universities, students studying economics were found to be most promiscuous, measured as the number of sexual partners since starting university. In case you are interested, students studying theology were at the bottom (they have more spiritual matters on their mind) proceeded by the environmental science students (they are too busy trying to save Mother Earth).  

So if you are dating an economist, chances are that s/he is one promiscuous liar. Don’t easily fall for the “I love you” line. Ask for evidence (the apartment in your name is adequate proof of love). Oh by the way, Soros has publicly expressed his desire to marry Bolton who actually did get the apartment.  

Why I will read Taleb's Antifragile

Photograph taken from Business Insider

Soon after my post Are economists idiots?, I read that Nassim Nicholas Taleb in a speech at London School of Economics said “before we had economists, the world was functioning very well.”  
Trust the fearless 21st century Confucius to make this declaration on the very bedrock upon which economists are bred. 
But then, one should not be surprised. 
Taleb would not be Taleb if he did not cloak himself in controversy. 

Taleb has made a reputation and a fortune (he got $4 million as an advance for his last book) by bashing conventional economics and finance. Even though monetarists and Keynesians seem to arrive at no consensus on the methods of dealing with the financial crisis, they probably cringe at his thinking. He was quoted in Macleans.ca as saying that the prescription lies in "discarding the entire discipline of modern finance and portfolio theory." He goes on: "There is a class of people in economics who are very good but the establishment is rotten. Financial economists hate me because I come from the field of derivatives. I do practical applied mathematics. Asking academics about that is like asking nuns about sexual positions."

His earlier book on Black Swans (see list below) gained traction after the financial collapse.

At that time, in an interview to Bryan Appleyard in The Sunday Times, he said that it was his greatest vindication. He went on to say: "But to me that wasn't a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke. I wouldn’t use him to drive my car. These guys are dangerous. They’re not qualified in their own field.” 

Need it be said that bankers too are at the receiving end of his wrath? 
He wrote a piece called End bonuses for bankers in the New York Times. In this article, he says that the essential problem with the bonus system of bankers is its asymmetric nature, meaning that there is an incentive for success without a corresponding disincentive for failure which causes hidden risks. He draws a comparison to the homeland security and military personnel who are trusted. They get promotions and honor of a job well done if they succeed but the severe disincentive of shame if they fail. Bankers, on the other hand, make short-term profits and get a bonus. If they go bust, they get a bailout. 
He then drew a parallel to Hammurabi's code written in Babylon 4,000 years ago and arrives at the solution on why banning bonuses addresses the principal-agent problem in economics: the separation between an agent's interests and the client. 

Naseb's talent lies in his stimulating exposition of ideas. He puts forth seductively provoking thoughts in a kinetic writing pattern as he laterally presents seemingly non-related issues by delving into a deep repository of knowledge. While I admire his brilliance, his thought process and ability to package his ideas in a narrative driven by passion and reason, I cannot say I am a die-hard fan. But I am waiting to get my hands on his latest book even though it apparently fails to invoke the same adulation that his earlier two books got. 

The blogger in Scientific American called him a pain in the ass and said that from all the speakers he invited to Stevens Institute of Technology, none agitated him as much as Taleb who made all kinds of demands about where, when and how the event should or should not be publicized. But he goes on to recommend the book because it is entertaining and provocative and the author, brilliant, despite his prima donna tactics. 

The Economist says that "antifragile" is an interesting idea and the book makes for an ambitious, entertaining and thought-provoking read. However, the writer believes that the book has its flaws and Taleb overstretches the argument and is not as iconoclastic as he likes to think.

Christina Lamb in The Sunday Times, wrote that for a thinker who reckons we all need a bit of randomness in life to make us stronger, he was surprisingly bothered that his usual table in his usual restaurant in Brooklyn was occupied when they met for an interview. 

The Guardian, in an extremely well written critique, says that the idea is neat but the book is a big, baggy, sprawling mess. 

In Antifragile, he speaks of all the people of the world being composed of Triads: 

• The Fragile: You avoid disorder and disruption and want to be safe. Wrong! You are actually making yourself more vulnerable to the shock that will make everything fall apart.

• The Robust: You stand up to shocks without flinching or changing who you are.

• The Anti-Fragile (he coined this word): The shocks and disruptions make you stronger and more creative and better able to adapt to each new challenge you face. 

According to Taleb, the opposite of fragile is not robust but anti-fragile. Bureaucrats are fragile while entrepreneurs are antifragile. Politicians are fragile, a truck driver is robust and an artist is antifragile. Debt is fragile, equity is robust and venture capital is antifragile. 

I am curious to read his musings on the upside of unpredictable upheavals probably because I seem to gravitate towards a secure habitat.  Though I am not sure if people stick to one label all their life or shift between categories. The book should enlighten me. I shall surely gift it to myself this Christmas (if nobody does me the honor, that is). 

Taleb's books

Dynamic Hedging: Managing Vanilla and Exotic Options

The Bed of Procrustes: Philosophical and Practical Aphorisms

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

The Black Swan: The Impact of the Highly Improbable

Antifragile: Things That Gain from Disorder

All the investing advice you ever need

Everyone is always looking for investing advice (whether they follow it or not is another issue). Here are some assorted quips which should leave you wiser. Don't take it too personally if what you respect is being ridiculed. Even if they are just witty sound bites to you, there is no denying the quality of the vitriol and the art with which it is thrown. So enjoy & smarten up!

On where to invest....

Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it.

- Peter Lynch, asset manager & author

Never invest in anything that eats or needs repainting.
- Billy Rose, American impresario, theatrical showman and lyricist

On how to invest....

Don't try to buy at the bottom and sell at the top. It can't be done except by liars. 

- Bernard Baruch, American stock investor, financier and statesman

Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. 

- Will Rogers, American vaudeville actor & humorist

On relying on the brains of the intelligent on Wall Street...

Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it.
- Peter Lynch, asset manager & author

Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.
- Warren Buffett, American investor & philanthropist

There are two kinds of investors: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor -the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know.

- William Bernstein, American financial theorist

On crappy predictions & tips from the experts....

Every day, self-proclaimed stock market "experts" tell us why the market just went up or down, as if they really knew. So where were they yesterday?

- Anonymous

If stock market experts were so expert, they would be buying stock, not selling advice.
- Norman R Augustine, American aerospace businessman & ex-Under Secretary of the US Army

The stock market has forecast nine of the last five recessions.

- Paul A Samuelson, the first American to win the Nobel Prize for Economics

When asked what the stock market will do, J P Morgan once replied: "It will fluctuate."

On the respectable stock market & stock brokers....

With an evening coat and a white tie, anybody, even a stock broker, can gain a reputation for being civilized.
- Oscar Wilde, Irish writer & poet

The United States have developed a new weapon that destroys people but it leaves buildings standing. It's called the stock market.

- Jay Leno, American stand-up comedian & television host

Derivatives are financial weapons of mass destruction.

- Warren Buffett, American investor & philanthropist

Bulls make money. Bears make money. Pigs get slaughtered. 

- Anonymous 

Ever wonder why fund managers can't beat the S&P 500? 'Cause they're sheep, and sheep get slaughtered. 

- Gordon Gekko (character played by Michael Douglas) in the movie Wall Street

On buying & selling......
If you hear that everybody is buying a certain stock, ask who is selling. 

- James Dines, investor & author 

One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.

- William Feather, American publisher & author

I made my money by selling too soon. 

- Bernard Baruch, American financier & investor  

If I have missed some good ones, send them across........

Crazy mind games that mess with your money

A friend of mine once asked me to loan him cash to clear his mother’s medical bills. He promised to pay back from his salary over the next three months. When I reminded him about the money tucked away in his bank account, his reply: “That is for the down payment for a bike, I cannot touch it.”

What my friend possessed, besides oodles of chutzpah (and a good heart, I must add), was a case of bad mental accounting.

Let me make my point by narrating a famous story known as the “Legend of the Man in the Green Robe”.

A newly-wed couple head to Las Vegas for their honeymoon. They set aside $1,000 as play money for gambling. They predictably lose all of it. On the last night, the groom notices a $5 gambling chip on the table. Unable to sleep, he gets up, puts on a robe (a green one, of course) and heads to the roulette tables. 

Roulette is a game in which a ball is dropped onto a revolving wheel (known as the roulette wheel) which has numbered compartments. The players bet on the number at which the ball will come to rest.

The groom bets on 17 and bingo, that’s where the ball lands. He gets $175 (the odds are 35:1). He lets it ride, which means that the winning chips remain on the table. His lucky streak continues and he gets $6,125. This goes on till he has a few millions credited to him. Virtually delirious with exuberance and optimism oozing out of every pore of his being, he decides to take one more chance thinking his luck will never run out. He bets his millions.

He loses.

Everything!

In a daze, he stumbles back to his room dejected.

“Where were you?” his bride asks.

“Playing roulette,” he says.

“How did you do?”

“Not bad. I lost just $5”.

Talk of being delusional! 

He logically avoided the horror of his loss by believing that he began with $5 (which he paid for) and since he returned to his room with nothing, he lost just $5.

He might have tricked his wife but that’s not true, is it? The millions he lost was real money. If he stopped and cashed his earnings, he would have been a millionaire (even after the IRS was done with him). 

You may think this story as strange, but you cannot deny that it is bang on as far as a reality check goes. A dollar is not always a dollar (or rather rupee, in our case). Money is always viewed differently depending on the source.

Not convinced?

Take a look at your own behaviour. 

Have you not noticed that you view an unexpected bonus at work, a sudden investment windfall, a tax refund, a gift from a relative, a surprise inheritance or a lottery win with a different perspective from how you would view your earnings? 

Or, if you got a freelance assignment which did not interfere with your work and the remuneration not clubbed with your monthly salary, you would tend to be more liberal in spending it?

Yet again, if you made a killing in a rampant bull run, chances are you would be more than enthusiastic to put some of the earnings in a stock tip or a volatile sector fund which you would have shirked in your regular monthly investing plan. 

John Allen Paulos in his book A Mathematician Plays The Stock Market says that we categorise money in odd ways and treat it differently depending on what mental account we place it in. He goes on to give an example.

Let’s say someone lost a $100 ticket on the way to a concert. He is much less likely to buy a new one, unless he is desperate to watch the show.  

Let’s say he did not lose the ticket but lost $100 on the way to buying the ticket. Chances are he would still buy the ticket.

Why? In both scenarios he lost $100.

In the former, he would tend to think that $200 is too large an expense for entertainment. While in the latter, $100 is for entertainment, $100 just turned out to be an unfortunate loss.

Paulos sums it well: Personal accounting can be plastic and convoluted.

I remember reading an anecdote by psychologist Hal Arkes. Employees of a firm were taken to the Bahamas on a retreat and each were given a cash bonus for bagging a contract. I don’t remember how much but I think it was $50. Almost all of them headed to the casino to blow it up. What was interesting was that none lost more than the allocated amount ($50). The moment it crossed that, they got more cautious and slowed down or stopped altogether because they felt they were playing with their “own” money rather than the “free” money.

Ironical is it not? The $50 was their “own” money too.

In Why Smart People Make Big Money Mistakes & How to Correct Them, authors Gary Belsky and Thomas Gilovich talk about an experiment conducted where 24 students of Harvard University were told they were receiving $25 windfall as part of a research project and could spend as much as they wanted at a particular store. The unspent amount (from $25) would be sent to them by cheque.

Here’s the clincher.

• 12 of them were told that $25 was a bonus
• 12 of them were told that $25 is a rebate 
• 84% of them who were told it was a bonus, spent some or all of the amount
• From the group that was told it was a rebate, only 21% spent any money at all

The authors conclude: Like it or not, mental accounting is a powerful driver of our actions.

Mental accounting is a psychological phenomenon that causes us to mentally separate money into different accounts. So lottery winnings, refunds and surprise bonuses are invariably counted as “free money” while our salaries is what we must be frugal and most responsible about. In actuality, we must be responsible for all our money, irrespective of the source. 

Along the same lines, a vacation allowance is presumably treated with less gravitas than the same amount of money socked away in a retirement account. And this need not be a bad habit. In fact, if used wisely, it could prevent you from being illogical and irrational. Because even die-hard spenders will tend to halt themselves from recklessly poaching from their retirement kitty. 

The way forward? Don't be a slave to your thought process. Use the ability to corral money into different mental accounts to effectively save for future goals. In the end that is what will give you the biggest kick.