Many shall be restored that now are fallen and many shall fall that now are in honour.

One who has not made peace with their losses is likely to accept gambles that would be unacceptable to them otherwise. This is how rogue traders are created. And it applies to a variety of situations, particularly when investing. Traders go rogue because risk aversion reverses in the face of losses. Once down, the investor mindset can swap to believe that one good bet or trade is all that's needed to turn bad fortunes around. At Daiwa Bank in New York, Toshihide Iguchi took a loss of $200,000 in 1984 and spent the next 12 years trying to work his way out of it. After executing more than 30,000 unauthorised trades he instead grew it into a loss of $1.1 billion. And in 1995 Nick Leeson attempted to recover a loss of £20,000, which snowballed into a loss that was orders of magnitude higher: “as the spring wore on, I traded harder and harder, risking more and more,” wrote Leeson in his memoir, Rogue Trader. “I was well down, but increasingly sure that my doubling up and doubling up would pay off…” In each instance, their undiluted fraud led them to make Martingale bets. A system where investors (or gamblers) continually increase after losses - doubling down to get out of a financial hole. A key piece of the psychological puzzle is the mental trap that a rogue trader finds him or herself in once the losses start stacking up and they face an impending deadline at which point the game will be up: confess the losses or double the bet in the hope of quickly making back the loss before being discovered. The problem for the bank is that beyond a certain point the trader's losses are in effect capped: they know that the worst that can happen is the loss of a job and faces criminal charges. In the first scenario - confess - the worst-case happens with 100% probability; in the second it is only 50%. Rationally iniquitous. In Leeson's case he had been brought in to run operations for Barings, a bank that had financed the United States’ purchase of Louisiana; had members of the Royal Family as clients; and was once dubbed, “the sixth great European power”. His role wasn’t to make huge bets by trading outright, it was to facilitate orders on behalf of clients. In 1992, one of his colleagues made an operational error – she sold futures instead of buying them – leading to a loss of £20,000. An account numbered 88888 was set up to harbour the loss so the books would balance. Rather than let it sit or make it known, Leeson attempted to recover it by trading outright. He repeatedly called the market wrong and within a day the £20,000 loss turned into a £60,000 loss. By October 1993, it was a £32 million loss sitting in the 88888 accounts. By January 1994: £50 million. By December: £80 million in the red. In February 1995, Leeson placed a bet to reverse his predicament once and for all. The fates could not have been more malevolent. He bought Japanese contracts valued at £11 billion. In total, he owned 49% of the entire March market for Nikkei futures contracts and 24% of the June contracts. The next day, Japan was hit with an earthquake lasting 19 seconds. There was no way to unwind the positions with any kind of profit. He scribbled a note on his desk, “I’m sorry,” picked up his wife from home and fled the country. After a near 400 year run, Barings Bank was gone. Rogue trading is a peculiar type of fraud because it doesn’t offer a direct payout. Rather, it's a behavioural mindset anchored in ego, status and cognitive dissonance. It's a physiological river Rubicon that once crossed, justifies (in the mind of the perpetrator) greater and greater subterfuge with little chance of redemption. For even after Leeson had recouped his initial losses, something remained that kept him dishonest. Similarly, in 1996, Sumitomo Corporation revealed a rogue trading loss of $2.6 billion. Trader Yasuo Hamanaka began in an effort to close out a small loss, like Leeson, but after his successful - but deceitful - trades grew his stature, so too his rogue trading activity ballooned. He was known in the market as “Mr Copper” and “Mr 5%” because at one point he had direct control over 5% of the world’s physical copper supply. For traders, low risk leads to low return; low return leads to low status. By definition a trader is someone whose focus is on achieving short-term profit. For many traders, their sense of self-worth is defined almost uniquely by their P&L - the profit and loss they make for the bank - and, by implication, the size of their bonus. They are more successful when they are high on their own hormones, including adrenalin, cortisol and testosterone. It physically gears them up for battle, making them more persistent and more willing to take risks. Success in trading then leads to higher hormone levels and even more risky behaviour. It becomes a feedback loop, called the "winner effect". Fifty years ago, the best investors were the ones with an informational edge, today it's the investors with a behavioural edge. So why do banks recruit these gamblers in the first place? Because it is a thin line between Saturday night and Sunday morning.