Kuta Beach

Kuta Beach

Saturday, 31 October 2009

Risky Business (Catalyst)

Link: Risky Business (Catalyst)

Risky Business, from the ABC science show Catalyst, shows how poor payment systems for fund managers may have incentivized managers to take high risk.

The show also explains that human behavior (and the behavior of many other animals) is influenced by biochemistry. When a man fails, cortisol is produced in his body, which causes him to become risk averse. Conversely, if a man wins, testosterone is produced in his body, which causes him to become risk loving. This may explain why stock prices moving in one direction (up or down) can be exaggerated. In a bull market, traders win money, which increases their appetite for risk, which increases stock prices even further. Conversely, in bear markets, traders lose money, which increases risk aversion, which decreases stock prices even further.

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