Taking risks and chasing losses can lead to ruin, but not doing so can make life more dull than a Birmingham vs Southampton midweek match. Nick Leeson explores the gambler’s quandary.
Playing in a couple of live poker games over the last few weeks has made me realise that I still have a long way to go to perfect the way that I play poker.
It may not have been so obvious to anyone else that was playing, but my game is massively one dimensional. I’m sure that Barry Hearn, bedecked in dark glasses sitting to my left, thought it would be harder than it was. He was probably waiting for me to bluff my way through hand after hand. After all, I spent three years bluffing anyone who walked through the door when I worked at Barings. Back then, I could have taken a donkey off of Blackpool Beach and sold it to Sheikh Mohammed as the next Derby winner.
Nowadays, I seem to have lost the knack. Up against Hearn and the others, all I did was wait for the cards – and if they didn’t come then I didn’t go. You can say I’m shell-shocked, gun-shy, they’re both probably true, and it wasn’t long before I was as skint as the bank and hanging on by the skin of my teeth. I ended up with nothing. . . again.
I’ve been known to chase a loss or two (or 862 million). It’s something that anyone reading this magazine has probably done at one time or another to a differing degree. Why do we do it? And why, more to the point, do we keep doing it?
What myself, Hamanaka, Iguchi, Rusnak, Bullen – and a lot of other people – have in common is that we all tried to buy ourselves some time in order to trade or gamble our way out of trouble. Riding the losses until they turn into gains is the same sort of Masters Of The Universe stuff that got us all into trouble in the first place. The lesson that should ring loud and clear to everyone is that risk is a four-letter word. But it’s a lesson that some people can’t help but ignore – after all, there are very few ways to make money and get rich without taking risks.
There is a difference between risk and uncertainty and it’s important for everyone to make the distinction. Some economists argue that risk is something that you can calculate. Flip a coin and you know for sure the chances of getting heads or tails. It might come up heads once, maybe twice or even three times but you know that it won’t keep happening. But if you add in an element of uncertainty – will someone pinch the coin in mid-air or will you drop dead before it hits the ground? – you can’t do it. Similarly, the performance of any share price, commodity or currency is driven by numerous factors, including political, economic, security, social, competitive, managerial and investment variables.
Markets also exhibit long-term trends – even if the average trader seems to have the memory of a goldfish and seldom acts on them – but dice, rolls, coin flips and decks of cards don’t. You can add to that investors who follow a trend just because everyone else is doing it.
The problem is not just that it’s impossible to quantify uncertainty – decision making is far from rational either. In a well known experiment, participants were first asked to choose between an 80 per cent chance of winning $4,000 (with a 20 per cent chance of winning nothing, of course) versus a 100 per cent guarantee of getting $3,000. Despite the chance of them picking up more with the gamble, they overwhelmingly went for the risk-averse choice of $3,000 cold.
The participants were then offered an 80 per cent chance of losing $4,000 versus a 100 per cent chance of losing $3,000. This time they wanted to gamble. In other words, the certain loss of $3,000 was so intolerable that they were prepared to risk losing more. The major driving force appears to be loss aversion. It’s not so much that people hate uncertainty, but rather that they hate losing. This has been called the ‘prospect theory’, a concept that showed how smart executives can make dumb decisions.
Fear has been seen to distort perceived probability and undermined the rigour necessary for rational decision making. Worse still, people don’t always necessarily understand what they are dealing with. But the real worry is that people don’t keep track of their bad decisions. They’re not investing the smallest amount in trying to actually figure out what they’ve done wrong and to learn from it. That’s not an accident – they probably don’t want to know. How many of us have made a loss, chased it… and then chased it again when it’s gone wrong again?
There’s a piece in Rogue Trader, the movie about my life, where I’m standing in front of a mirror and mouthing the words ‘I, Nicholas Leeson have lost $50 million in one day.’ It didn’t happen but I’m often asked how it felt. The fact is that no matter how bad it got I always thought it would get better. Gambling at its worst extreme! I’d like to say that I’ve learned from my mistakes but, do you know what? Next time I play poker, I’m going to start bluffing again. Who knows where that will lead?
