How to Lose Money in the Financial Markets: Examples from the Recent Financial Crisis

27 Pages Posted: 10 Aug 2014

See all articles by Sebastien Lleo

Sebastien Lleo

NEOMA Business School

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business; Systemic Risk Centre - LSE

Date Written: August 9, 2014

Abstract

What makes financial institutions, banks and hedge funds fail? The common ingredient is over betting and not being diversified in some bad scenarios that can lead to disaster. Once troubles arise, it is difficult to take the necessary actions that eliminate the problem. Moreover, many hedge fund operators tend not to make decisions to minimize losses but rather tend to bet more, doubling up, with the hope to exit the problem with a profit. Incentives, including large fees on gains and minimal penalties for losses, push managers into such risky and reckless behavior. We discuss some specific ways losses occur. To illustrate, we discuss specific cases from the recent financial crisis, including Société Générale and subprime mortgages. We also list other hedge fund and bank trading failures with brief comments on them.

Keywords: hedge fund trading disasters, over betting, rogue traders, 2007-2009 financial crisis, subprimes

JEL Classification: G01, G21, G23, G33

Suggested Citation

Lleo, Sebastien and Ziemba, William T., How to Lose Money in the Financial Markets: Examples from the Recent Financial Crisis (August 9, 2014). Available at SSRN: https://ssrn.com/abstract=2478252 or http://dx.doi.org/10.2139/ssrn.2478252

Sebastien Lleo (Contact Author)

NEOMA Business School ( email )

Reims
France

William T. Ziemba

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-261-1343 (Phone)
604-263-9572 (Fax)

HOME PAGE: http://williamtziemba.com

Systemic Risk Centre - LSE ( email )

Houghton St, London WC2A 2AE, United Kingdom

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