April 25, 2013

But also beware of the much greater risk derived from excessive lack of testosterone and dopamine

Sir, the fundamental problem with good articles like Sarah Gordon´s “Call in the nerds – finance is no place for extroverts”, April 25, is that they tend to analyze risks from the perspective of when risk-taking goes bad, without caring much for when risk-taking goes right.

The problem we are facing now is that bank regulators, with too little testosterone, and too little dopamine, and too little understanding of what they were doing, gave the banks extraordinary incentives to lend and invest in what was perceived as “safe” and to stay away from what was perceived as “risky”… and so the banks did… and loaded up on AAA rated securities, Greece, Spanish real estate and others safes.

Indeed if regulators had incorporated more behavioral analysis then they would not have based the capital requirements for the banks based on perceived risk, like that in credit ratings, but based to how bankers react to perceived risk. And then, instead of more-risk-more-capital less-risk-less capital, they might have applied a somewhat inverse capital requirements, since bank crisis have never ever resulted from excessive bank exposures to something perceived ex ante as “risky.

PS. As gold is mentioned, just as a curiosity let me remind you that in the Report on Global Financial Stability 2012, of April last year, the IMF listed 77.4 trillion dollars in safe assets and therein gold represented 11 percent.