By Denise Shull
Given the size and returns of his funds and his reported
personal net worth, it doesn't make sense that Raj
Rajaratnam-who is on trial for insider trading and mounting a
vigorous defense-would commit the crimes being alleged to earn
a mere $45 million. From the point of view of any sort of
rational model of decision making, a billionaire risking prison
for that type of reward would be nutty.
But those who study behavioral finance have known for some time
that people rarely make numerically logical bets. It doesn't
take a quant with a Ph.D. in physics to know humans have other
Now, the world loves a bad guy. We get to point our fingers and
say, "You greedy no-good billionaire," and somehow that makes
us lesser net-worthers feel better about ourselves. But does it
do anyone-investors, the SEC, the purported perps or even the
average disgusted observer-a bit of good if it misses the real
What if it isn't greed? What if it is something else?
By all accounts, Raj had it all-a spectacularly successful
fund, a Sutton Place home, a wife and three children, and
outsize respect in his home country. He clearly also had lots
of friends. Yet the New York Times quoted him as saying he felt
as if he came into the office every day to fight Muhammad Ali.
Could it simply be that some people want to win the fight
regardless of the reward?
First of all, it may come as a surprise to the MBAs of the
world, but any decision requires an emotion. Neuroscientists
have proven this beyond a shadow of a doubt, and even our
latest phenom computer, Watson, simulates a feeling when it
adds a confidence level to its potential Jeopardy answers. This
means we can take the inverse question-what emotion drove the
decision?-and analyze that angle for a plausible answer.
Deborah Tannen, the linguist who quantified the realization
that men don't like to ask for directions in her 1990 book,
"You Just Don't Understand," wrote in Scientific American Mind
magazine last spring that after 30 years and thousands of
examples, she has found that men's talk leans toward hierarchy
and competition. She says that men usually evaluate an
interaction from the vantage point of "Am I one up or one
down?" She illustrates with taped conversations of young boys,
who will typically respond to a comment with some version of
"I've got one better," whether it be how many days they got to
spend at Disney World or how far they can hit a baseball.
There is another theory about human choice that rarely gets any
airtime on Wall Street but that fundamentally speaks to the
choices all of us make. That is regret theory, first published
by two different authors in the early 1980s. It matches up much
more closely with what traders really do and how they really
talk about their market decisions.
In practical terms, it amounts to a fear of missing out (that
is, fear of feeling regret in the future). No one wants to look
back and know "I could have made that money" or "I was right
about that trade, but I got out too early." In my work with
sophisticated traders, I often hear their postmortem reviews of
trades, and I can tell you this perceived avoidance of feeling
bad motivates more market decisions than any other type of
In retrospect, titans of finance who were caught behaving badly
often didn't need the money they made through their illicit
activities. They needed to keep winning the fight, and to avoid
feeling that they'd had a chance and blown it. It's easy for
traders to predict and work to avoid regret. A fear of jail is,
for most traders, an abstract concept that's harder to
In 2005, Colin Camerer of the California Institute of
Technology and two colleagues published an article titled
"Neuroeconomics" in the prestigious Journal of Economic
Literature. One of their statements was "It is not enough to
'know' what should be done; it is also necessary to 'feel' it."
In practical terms, their declaration should be taken one step
further. The latest neuropsychoanalysis suggests that their
statement extends not only to the feelings we would expect,
such as a desire to create a top-performing fund, but to the
insidious and almost always more compelling ones, like a
supersize need for and enjoyment of being "one up."
As investors discover anew every few years, it's difficult to
predict and avoid the traders who will risk it all for
seemingly irrational gains. We all want our money managers to
be clever and aggressive, but it's crucial to figure out
whether their motivation is for something as rational as money
or as irrational as winning in all contests, regardless of the
Denise Shull is CEO of the ReThink Group, parent company of
TraderPsyches and SportsPsyches, organizations that counsel
traders and athletes on improving their performance.