The Criminology of the “Sure Thing” Portrayed as “Risk”
By William K. Black
John Coates, a former derivatives trader at Goldman Sachs is now a researcher. He wrote a column in the New York Times entitled The Biology of Risk that I hope will be widely read.
In this column I explain why his most important conclusions cannot follow logically from his own description of his research finding. While he relies on blood tests, his account of trading when it goes horribly wrong is curiously bloodless and disingenuous. As a Goldman and Deutsche Bank refugee he knows better, but he presents a sanitized version of the crisis portraying the controlling officers and traders at the largest banks as helpless victims of raging hormones rather than fraud perpetrators and facilitators.
Coates description of the crisis as triggered by a biologically-induced excessive risk-aversion on the part of traders rests on a failure to understand why varieties of financial risk are vastly different. More fundamentally, he fails to even consider the facts (and relevant literature) demonstrating that the key financial participants were engaged in a series of sure things accomplished through accounting control fraud and cartels.
Risk, particularly Coates false implicit assumption that risk is a single concept in the financial sphere, has almost nothing to do with the current crisis, any more than it had to do with the Enron-era crisis or the second (and vastly more destructive) phase of the savings and loan debacle. Further, but for the recognition of S&L regulators that we were dealing with an epidemic of accounting control fraud and the resultant sure things the S&L debacle would have grown to resemble closely our most recent crisis in terms of its magnitude and damage.
Coates work is not flattering to finance in the conventional form of flattery. He essentially says Michael Lewis description of the culture in Liars Poker is correct traders are males who act crazy because they are selected by crazy male bosses. Coates reports that traders have raging hormones and that these hormones vary and tend to be convergent. It is a measure of finances desperate search for praise that Coates work is warmly received by big finance. The attraction is that it serves as an apologia for their culpability. Were not crooks were perpetually pubescent prisoners of our pituitaries. White-collar defense attorneys are already seeking to present behavioral finance and neuroscience defenses to prosecution.
http://neweconomicperspectives.org/2014/06/criminology-sure-thing-portrayed-risk.html