By Mike Turner, Investment Solutions, Aberdeen Asset Management
This article expands on the seventh of Mike Turner's Seven Deadly Sins, which was first published in booklet form in January 2014.
Frankfurt, March 1995. German police officers pace up and down the tarmac of Frankfurt Airport. Disembarking from a plane, Nick Leeson is immediately arrested and extradited to Singapore to face criminal charges. The fall from grace is extraordinary. Leeson was once a star-trader for Barings Bank, Britain's oldest merchant bank. He headed the derivatives trading team in Singapore, earning the bank millions. But in secret, he was found to have put the bank's own money at risk in a series of highly speculative and unprofitable trades. Aiming to cover prior losses, Leeson's risky wager of a Japanese stock market recovery backfired spectacularly when the Kobe earthquake hit in January 1995. As Barings folded with more than £800m of losses he fled, but the game was now up.
More than 20 years on, Leeson's single-handed role in Barings' downfall continues to shock. It provides a valuable lesson in how excessive confidence in one's abilities and a refusal to acknowledge one's mistakes can lead to tragedy. Unfortunately, Leeson's behaviour is far from rare. Overconfidence is such a common affliction that it has been used to explain wars, strikes, litigation, entrepreneurial failures and stock market bubbles.