In this clever Financial Times op-ed, John Gapper lucidly explains why the business world will always be dealing with risk-takers such as JÈrÙme Kerviel, the alleged ìrogue traderî at SociÈtÈ GÈnÈrale whose trades are responsible for the $7 billion plus hit that the bank took earlier this month.
According to Gapper, it’s because Kerviel went crazy like actor Tom Cruise, except there was a method to Kerviel’s madness. Although Kerviel’s trades were bizarre and risky, they had a certain crazy logic because traders have big incentives to risk everything for stardom:

In recent days we have witnessed two men taking leave of their senses. In one case, however, there was method to the madness.
The first is Tom Cruise, the Hollywood film star and devoted Scientologist. In a clip made for members of the cult-like religious movement, Mr Cruise can be seen laughing manically and claiming special powers to help the victims of road traffic accidents because of his faith. He seems utterly deluded.
The second is JÈrÙme Kerviel, the ìrogue traderî at SociÈtÈ GÈnÈrale accused of losing his bank Ä4.9bn. Mr Kerviel did not make money for himself by his trading. Instead, as Jean-Claude Marin, the Paris prosecutor, said this week: ìHe wanted to show that he was worth as much as the others around him. He truly believed that … everyone would recognize his financial genius.î
Crazy, right? That is what Mr Kervielís former bosses, most of whom are either out of a job already or soon will be, think. Rather than sticking to his assigned role as a lowly arbitrage trader, Mr Kerviel tried to become a star. ìI think that he is completely mad,î says one banker.
Well, not completely. Actually, there is a good argument that Mr Kerviel acted in a financially rational manner, although he broke both his contract and ñ allegedly ñ the law. He had as firm a grasp of superstar economics as Mr Cruise, one of the worldís best-paid film actors.
The basic principle of superstar economics, which applies to both entertainment and investment banking, is that a few people take most of the rewards. If you can establish yourself as a top talent either on screen or on a trading floor, you gain status and get rich.

In Mr Cruiseís case, his ability to ìopenî any film by drawing an audience means studios will bid for his services and he gains a share of gross revenues, amounting to tens of millions of dollars. He over-stepped himself when negotiating a contract with Paramount Pictures in 2006 and now heads United Artists, the starsí studio formed by Charlie Chaplin and Mary Pickford in 1919.
The banking equivalents of film stars are the financial traders who have such a strong record that they can demand huge bonuses or raise capital from investors to form their own hedge funds. Hedge funds are like films: investors have the confidence to risk money in them only when there is a star name attached.
But there are only a few stars in Hollywood or at banks.
This is not because stars have a monopoly on talent. Marko Terviˆ, a University of California economist, has found that stars hog the rewards in such industries because talent is displayed only on the job and employers are unwilling to take risks on the untested. Stars get paid a lot because they are proven talents.
The imperative for traders and film actors is therefore to draw attention to themselves and persuade those with capital to take a chance on them. If they fail, they are no worse off than they are already (perhaps better). If they succeed, they get a chance to become a star and earn far more.
In fact, the incentives are so distorted by the star system that people are often driven to take extreme risks, or to act madly, in pursuit of stardom. Reality television programmes rely on the fact that surprisingly many people will eagerly make fools of themselves in order to become national celebrities.
When Mr Kerviel was given a routine job by SocGen executing arbitrage trades, it was only natural for him to look across the trading floor to the stars trading complex over-the-counter derivatives and structured products and to wish he was one of them. He toiled obscurely for Ä100,000 a year while they got 10 or 20 times that sum.
He knew he was unlikely to get a shot at stardom. He had already been promoted from the bankís back office and the Delta One arbitrage desk was as far as he was likely to go. So, he told prosecutors, he tried to prove himself by taking unhedged bets on futures markets and hiding his trades.
Consider the rewards and risks of this strategy. On the upside, Mr Kerviel was hoping to triple his bonus (now unpaid) between 2006 and 2007 and might well have turned himself into a star by continuing, as Nick Leeson did at Barings in 1994 by shifting from low-risk arbitrage to fraudulent risk-taking.
On the downside, there was a high risk that he would get caught, as Mr Leeson was ñ too late ñ in 1995. Even then, he would become a celebrity and his employers would get most of the blame for not catching him. Mr Kerviel has already acquired Facebook fan clubs, name recognition and many sympathisers in France.
In short, although his behaviour was bizarre and risky, it had a certain crazy logic. That is why rogue traders keep on popping up at banks from Barings to Sumitomo and Allied Irish banks. No matter how carefully institutions try to guard against them, traders have big incentives to risk everything on stardom.
In contrast, Mr Cruiseís behaviour is baffling because he is already a star. Babbling about Scientology and displaying manic intensity on camera serves little purpose when you are famous. The time to act extravagantly and take extreme risks with your reputation is when you seek to be a celebrity, not when you are one.
I suppose that performers become so used to doing anything to grab the limelight that they find it difficult to stop even when they ought to tone down the eccentricity, as Britney Spears is proving. Rogue traders have a better record of self-control. Mr Leeson became famous, went to jail, and runs an Irish football club. Let that be a lesson to you, Mr Kerviel.

Validating Gapper’s thesis, this Wall Street Journal ($) article reports today that Kerviel is well on his way to cult star status in France. And Larry Ribstein points out that the mainstream media’s infatuation with Kerviel has its roots in cultural antipathy toward wealth.