The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind

by John Coates

The fable of the two traders is simple enough, yet the strategic calculation underlying Hare’s choice of trading style has acted like an acid eating away at the integrity of our financial system. Anyone taking risks soon realizes that his interests lie in maximizing the volatility of his trading results and the frequency of his bonus payments. This strategy increases his chances of being paid at “high-water marks,” like the years when Hare made the bank $100 million. And what works for traders also works for their managers, and even the bank’s CEO: all have concluded that to maximize their long-term wealth they should focus on short-term profits. Besides, if next year all the Hares blow up, then all the banks blow up together, and no single person or bank looks bad. Perhaps most dangerous of all, though, is that with the backing of management, traders opting for Hare’s strategy are given the freedom to increase their risk just when the system least needs it, during bull markets. In this way risk-management and the insidious logic of bonus calculations work to amplify the destabilizing biology of risk taking. One way to tame these tidal waves of risk taking and keep life on the trading floor safely between the tidelines is to institute a bonus scheme that pays traders once a business cycle (approximately four to five years), instead of once a year. If traders are profitable over a few years, they can begin to draw on their bonus pool. But if, like Hare, they lose all their ...