SIX years after the financial meltdown there
is once again talk about market bubbles. Are stocks succumbing to exuberance? Is real
estate? We thought we had exorcised these demons. It is therefore with something
close to despair that we ask: What is it about risk taking that so eludes our understanding,
and our control?
Part of the problem is that we tend to view financial risk taking as a purely intellectual
activity. But this view is incomplete. Risk is more than an intellectual puzzle —
it is a profoundly physical experience, and it involves your body. Risk by its very
nature threatens to hurt you, so when confronted by it your body and brain, under
the influence of the stress response, unite as a single functioning unit. This occurs in athletes and soldiers, and it occurs
as well in traders and people investing from home. The state of your body predicts
your appetite for financial risk just as it predicts an athlete’s performance.
If we understand how a person’s body influences risk taking, we can
learn how to better manage risk takers. We can also recognize that mistakes governments have made have contributed
to excessive risk taking.