September 1987 was an inauspicious moment to begin a career in the financial markets, but that was the first time I found myself in the centre of the dealing operations of one of the world’s largest commodity operators. I had recently emerged blinking from an ivory tower and found this new environment fascinating, exhilarating, totally incomprehensible. After scarcely four weeks on the job global stock markets crashed.
Although the firm was not directly involved in the equity markets, the panic in the office was widespread. Many managers were desperately trying to unload their personal stock holdings at the same time as managing commodity, fixed-income and currency engagements for our employer. The office was woefully understaffed as there had been a dreadful storm in London on the previous evening. Power lines had been brought down and transport services had been severely interrupted. So even though I was still wet behind the ears, everyone called on me to lend a hand. Mine was the coolest head in the office – I naively thought that it was like that all the time.
In the years that followed, I discovered that I was always anxious about holding stocks; I felt infinitely more comfortable with a short position. I blamed the tendency on this early experience. The same applies to the US-dollar, which fell sharply from October 1987 onwards (until the major central banks notoriously surprised the dozing markets with co-ordinated intervention). Throughout my career, I have invariably been more comfortable selling dollars than buying. I always believed this to be a purely idiosyncratic trait, individual to me only. However a recent research has revealed it be much more general than I had thought. Malmendier and Nagel, researchers at the UC Berkeley posit that individual experiences of economic shocks in one’s formative years affect risk-taking for as long as thirty years. It really takes that long before we stop wrongly attaching high probabilities to such extreme outcomes.
This result confirms what psychologists have known for some time about our perception of extreme outcomes: whereas the psychological impact of most of our experiences diminishes rather quickly with the passage of time, extreme experiences tend to remain vivid in the psyche regardless of when they occurred. This means that when we reflect on our past experiences, what we perceive is not a historical average of those experiences. This retrospective evaluation is heavily influenced by the most recent experience and by the most extreme, because this is all that we still perceive. So when I think about my entire stock market experience, the only things that I bring to the evaluation are the current disappointing performance and the stock market crash of 1987. This is hardly the basis for an aggressive equity engagement today. In fact, for me, there is hardly ever a basis for an aggressive equity engagement. My only consolation is that, after 2017, I might finally be able to chase my stock market demons away.