Newsflash: Trading is Very Addictive

Not that this is news to anyone who trades, but:

"A small group of scientists, including some psychologists, say they are starting to discover what many Wall Street professionals have long suspected — that people are hard-wired for money. The human brain, these researchers say, responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them.

French prosecutors have likened Mr. Kerviel’s trades to a drug habit. That is no surprise to Brian Knutson, a professor of psychology and neuroscience at Stanford University and a pioneer in neurofinance, an emerging field that combines psychology, neuroscience and economics, to examine how the brain makes decisions."

As someone who started on a trading desk, I can tell you from personal experience it is absolutely true.  And my transition from trading to research reminded me the period of time when I gave up speedballing heroin and cocaine years ago — the longing, that sense of emptiness, that yearning for the sweet, sweet high . . . hmmmmm.

Where was I?

Oh, yes, trading addictions.

In all seriousness, there is a definite adrenal rush to trading, and the highs and lows  not all that different from what gamblers experience. The difference is casino gambling is nearly entirely random, whereas markets have some degree of non-random behavior, thanks to mean reversion and human behavior. Then there are the advantages of compounding.

The full article is worth a read . . .


Craving the High That Risky Trading Can Bring
NYT, February 7, 2008

Category: Psychology, Trading

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Real Estate, Speculation & “Occupancy Fraud”

Today’s WSJ had a run of Real Estate related articles that quite frankly, were rather surprising in their gentle naiveté.

The first is the somewhat surprised acknowledgment that speculators were involved in the run up and subsequent deflation of Housing prices.

Of course, every asset class attracts speculators when prices rapidly rise. Its why every big boom ends in a final blow off top — that’s the impact of late-to-the-party speculators — followed by the inevitable spectacular collapse.

The latest after-the-fact revision (see our discussion on "predatory borrowing") has a new name: occupancy

This new nonsense word is a way to duck responsibility for failing to do appropriate due diligence prior to lending out money. Here are the details:

"As lenders pore over their defaulted mortgages, they
are learning that the number of people who bought homes as investments
is much greater than previously believed. Such borrowers turn up frequently in analyses of loans
that defaulted within months after origination. In many cases, these
speculators lied on loan applications, saying they intended to live in
the homes in order to obtain more favorable loan terms or failed to
provide the requested information.

Roughly 20% of mortgage fraud involved "occupancy
fraud," or borrowers falsely claiming they intended to live in a
property, according to an analysis by BasePoint Analytics, a provider
of fraud-detection solutions in Carlsbad, Calif. Another study, by
Fitch Ratings, looked at 45 subprime loans that defaulted within the
first 12 months even though the borrowers had good credit scores. In
two-thirds of the cases, borrowers said they intended to live in the
property but never moved in."

Speaking of fraud — I am curious about these lenders, now claiming they were defrauded by speculators. How many of them asked the following questions, and then did the due diligence to verify the data:

- Do you presently own your primary residence?
- Is your home currently listed for sale?
Or, are you in contract ?
- What is the asking price? Who is your real estate agency?
- RE Agent name? What’s their phone number?

Of course, none of these questions were asked, and no due diligence was performed, as these lenders were whoring clerking out loans as fast as they could process them. After the fact, this lack of due dilly has become "Occupancy Fraud."

If there was any genuine interest in not lending to speculators, its easy enough to verify . . .

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