The Psychological Aspects of Human Interactions Through Trading and Risk Management Process

Abstract

The “Copernican Revolution” in psychology performed by Sigmund Freud brought bright light to the phenomenon that a human being’s behaviour is strongly driven by forces of his/her unconscious. Risk management is no doubt a discipline that is extremely affected by human unconscious-driven decisions. Here the author proposes a theoretical psychological approach based on a personal 10-year practice as a market risk manager in top Russian banks, an investment company and the MICEX Derivatives department. Ideologically and instrumentally, this approach uses such theories and concepts as transactional analysis (ego state model, transactions and scripts), fixation, psychological defence etc. To verify the applicability of the main concepts, the author performs a psychological study. Its results illustrate that a risk manager strongly shifts to formal, criticizing selfstyle in professional interactions with a trader, and emphasize the keen importance of increasing risk managers’ self-awareness. Moreover, the author provides an ideological framework with practical recommendations for the risk manager, trader and risk manager’s professional society. It includes various psychological tests for traders, a comprehensive investigation of the trader’s unconscious personal life script (by synthesizing the statistical and psychological methods), and “Know Yourself” as the new principle (the building block of enterprise-wide risk management). A risk manager should be brightly conscious of his/her inner scenarios driving his/her reactions in decision-making. Otherwise risk management itself is under the high risk of becoming financial industry brake.