Risk Takers Anonymous

January 31, 2009

An eminent scientist who studies the brain and economics thinks that the financial industry in essence became addicted and insensitive to both risk and reward.

“The finance industry was adapting to the level or risk,” said Gregory Berns a professor at Emory University in Atlanta and a leader in the relatively new field of neuroeconomics.

“It is an insidious process, and you are not aware of it. You are addicted to returns, you are addicted to risk, you are addicted to cocaine – its all the same as far the brain goes.”

The part of the brain which is rich in dopamine is active in giving people a buzz when they do something they value. Getting money can give this buzz, as can taking risks. But sadly shortly after we reach a level of wealth we need more to get the same kick, just as we become used to the risk taking which formerly would have been exciting and might have caused us to trim our sails.

Berns describes the process of becoming habituated as like adjusting to a new level of light, at first it seems bright but then you adjust.

“You get used to it. The brain is constantly gauging relative amounts. The brain does not have a mechanism ever to be satisfied.”

The implication he said, is that the trader, banker or even small investor needs some structure from outside to impose limits.

In other words, regulation from on high.

And of course regulating banks to take the “right” amount of risk, enough to keep money flowing, is much more difficult than just telling them not to drink at all.

It’s as if governments were going to hold support meetings for alcoholics in bars, with the object being to just have one quick one.

A tough task.

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