Is the risk turned on or off as the financial markets return to work in the office?
An interesting little conundrum for us here as users, investors in the financial markets. What will risk appetite look like as work practices return to something more normal?
It may come as a surprise, but it’s entirely possible that risk levels – as measured by what other market participants are willing to attempt – increase as people return to the office. It might not be quite what we’d expect given what we’ve seen in memes stocks, but it’s a reasonable and logical result.
Part of the story is here:
The widespread shift to remote work in city businesses has prompted traders to take less risk, according to the world’s largest interprofessional broker.
TP Icap, which plays a central role in financial market transactions, said clients have played it safe during the pandemic.
Bosses of the broker have reported anecdotal evidence that some traders avoid complicated transactions involving multiple parties, fearing that a poor internet connection at home could interrupt the audit trails that record transactions.
Well, yes, it could be. It might also explain why the results – brokers like TP Icap thrive on people taking risks – were not as exciting as some might hope.
We have, of course, seen massive risk taking with the folks at WallStreetBets on GameStore and all that. The usual explanation is that people sitting at home doing nothing made very risky punts in the latest fashion. Helped by the way Robinhood allows it. There is even an argument made that the absence of sports betting has simply shifted the market from that impulse of excitement to the stock market.
Which may well be true. But it’s been very concentrated in a few stocks that catch this passing fad. Yes, at least one hedge fund must have sold as a result, but that hasn’t been a problem for the market as a whole.
The point is, we do know something about how humans differ when they are alone and in a group. Groups tend to take more risks than individuals. This is in part the result of basic human dynamics. We all try to stand out from the group we belong to. One of the ways we do it is taking risk, especially for men. “Hold my beer and look at this” is really a fundamental part of this masculine human nature.
But we also know more than that. Yes, women are generally more risk averse than men. Women’s groups are generally more averse to risk than men’s groups. But mixed groups also like risk more than single-sex groups.
Coming back to the trading rooms is going to mean, in the modern world, mixed groupings in a way that door-to-door trading simply does not provoke.
The net effect
Yes, we will likely see less risk taking from these types of even stocks. Sport is back, these betting markets are open again. People are working again, perhaps leaving less time online. But then, memes stocks were a very specialized thing in particular corners of the market.
Returning to the office will resolve the connectivity issue identified by TP Icap. But more than that, it will put traders back into the risk-loving groups.
That is, just as the economy is finally opening again properly, we should expect financial markets to become riskier.