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Point of view: did big personalities make the financial crash worse?

August 24, 2015

Charisma is usually a good thing, but there are a place where it can become dangerous,” asks elesa zendorfer.

There are certain expectations that our confectioners place on great business leaders.

One of them remains the fact that the films are charismatic. But while corporate boards continue to prioritize charisma as the quality of their leaders, the data tells us that charismatic bosses are less effective. .

The attraction of a charismatic leader is strongest during times of uncertainty and crisis, which explains exactly how he can emerge with particular force in the financial markets. .

Markets are finally characterized by volatility, and it is this volatility that makes participants prone to a charismatic voice. Traders' performance is compared (sometimes every day) with their peers, and advisors "live or die on their profits and losses."

Both factors increase the likelihood of "herd behavior" (following the crowd). And "churning" (excessive trading in large volumes as the substance of obtaining higher financial incentives through markup on trades).

The disproportionately suave image of the stereotypical wall street trader is both criticized and mythologised. Stone's gordon gekko is still a role model for some novice traders.

The wolf of wall street, a biopic about https://vrhunter.net/tags/bizarre/ contemporary jordan belfort, is considered to be martin scorsese's highest-grossing film to date. Belfort has never gone famous as the wolf of wall st. His stratton oakmont firm no longer traded from a wall street account, but he proved to be something of a modern-day hero.

At the beginning of everything lies charisma. Charisma is at once seductive, fluid, and quite persuasive, yet it often overrides rational logic entirely.

To paraphrase the sociologist max weber, to share charisma one must leave it. World. Its course was more evident during the financial crisis of 2008.

In june of the 21st century, bloomberg markets devoted an issue ("toxic debt") to a special 36-page issue on the dangers of subprime mortgages. Loans — home loans made to users with very risky credit histories — and related valuable mortgage-backed documents.

But on july 17 of that year, federal reserve chairman ben bernanke delivered a speech designed to restore confidence in the markets. In the same factor, hedge fund frontpoint held a public call to warn otherwise.

Bernanke's rhetoric was misguided but effective, and bloomberg and frontpoint's warnings are deadpan.

In april of the 21st century, hedge fund managers jim chanos and linoleum singer warned the leaders of the g7 of impending financial instability that would soon devalue wall street. Toys produced were met with only "polite applause and stifled yawns."

Hedge funds rely to a certain extent on what your short opponent chanos called the work of a financial detective - the "back to basics" approach, which are based on detailed scrutiny of evidence and in a similar manner, remains relatively immune to the emotional contagion, charismatic rhetoric and arrogance so characteristic of the speculative investor in the broadest markets.

Hedge funds consistently outperform the market. Between 1994 and 2014, hedge fund returns were one.4 times (445%/314%) higher than the broadest stock market (for example, the us s&p 500 index) with half the volatility (7.2 %/15.1%.

Stressed hedge funds (specializing in companies in trouble) performed even better. They showed a 2.2 times higher return (695% / 314%) with a volatility of only 6.4%.

But the warnings of hedge fund experts were ignored. They ran counter to the powerful surge of over-optimism and euphoria so characteristic of charismatic authority—a tidal wave of euphoria so powerful that it demanded the destruction of any logical disagreement that came in its way.

History shows that charismatic rhetoric relies on demonizing the enemy to ward off guilt and continue to fuel the fires of emotion.During the financial crisis, those who predicted falling prices, short sellers (such as hedge fund managers such as chanos and singer) were illogically blamed by everyone from wall street executives to the archbishop of york as the key architects of the crisis. +>

Financial markets are prone to charismatic pride and sentiment. In the case of the 2008 crisis, this allowed a small circle of executives and traders to exploit the us housing bubble for their own benefit at the expense of other investors who trusted their findings .

The life of "financial porn" writer jane bryant quinn, the boom in 24/7 cable news networks, online investment sites, investment guides and financial spam further muddy the waters for investors, contributing to confusion and irrationality.

Take lehman brothers' annual meeting on april 15, 2008, where ceo dick fuld said, "the worst of the financial markets is behind us."

Such a bold announcement spurred further investment in subprime, candy reygaerts, which naturally exacerbated the aggressive nature of the crash that followed. His claims were built on sand - as could be seen from the data available at the time.

With $619 billion in debt, lehman's bankruptcy filing remains the largest in us history. Fuld made $34 million in the year before the bank closed.

Company boards of directors still prioritize charisma as the quality of the executives they hire, but data shows that charismatic executives are unlikely to be effective .

Ultimately, charisma, by its very nature, is seductive but volatile—a star that burns bright but fades quickly. In the case of the 2008 financial crisis, the price of this seduction was high, but it is a price one is always willing to pay.

You can listen to charisma and the 2008 banking crisis. On bbc radio 4 on monday 24 august at 13:45 pst, or read more on iplayer

Elesa zendorfer is the author of charismatic leadership: the role of charisma in financial markets.