Is It Risk On Or Risk Off As The Financial Markets Return To Working In The Office?

An interesting little conundrum for us here as users of, investors in, the financial markets. What's the risk appetite going to be like as working practices return to something more like normal? 

This might surprise but it's entirely possible that risk levels - as measured by what other market participants are willing to take a chance upon - will rise as people go back to the office. This might not be quite what we expect given what we've seen in the meme stocks but it is a reasonable and logical outcome.

Part of the story is here:

The widespread shift to remote working at City firms has prompted traders to take fewer risks, according to the world’s biggest interdealer broker.

TP Icap, which plays a central role in transactions in financial markets, said that clients had been playing it safe during the pandemic.

Bosses at the broker pointed to anecdotal evidence that some traders were shying away from complicated transactions involving multiple parties, because of worries that a poor internet connection at home could interrupt audit trails that record deals.

Well, yes, that could be so. That could also be just an explanation of why results - brokers like TP Icap thrive on people taking risks - weren't quite as exciting as some might hope.

Meme stocks

We have, of course, seen massive risk-taking with the folks from WallStreetBets over GameStore and all that. The usual explanation is that folks sitting at home with nothing to do have been making very risky punts on the latest fashion. Aided by the manner in which Robinhood enables such. There's even an argument being made that the absence of sports betting simply shifted the market for that pulse of excitement over to the stock market.

Much of which may well be true. But it's been very concentrated in just a few stocks which do catch that passing fashion. Yes, at least one hedge fund had to sell itself as a result but that's not been an issue for the market as a whole.

Behavioral economics

The thing is we do know something about how humans differ when alone and when in groups. Groups tend to be more risk taking than individuals. This is partly a result of just basic human dynamics. We all try to stand out from whatever group we're in. Risk taking, especially among males, is one of the ways we do this. "Hold my beer and watch this" really is a basic part of that male human nature.

But we also know more than that. Yes, women are generally more risk averse than men. Groups of women are generally more risk averse than groups of men. But mixed sex groups are also more risk-loving than single sex grouping.

Getting back into the trading rooms is going to mean, in the modern world, mixed sex groupings in a manner which trading from home just doesn't cause. 

The net effect

Yes, we probably will see less risk-taking of those meme stock types. Sports are back, those betting markets are open again. Folks are working again, leaving less time online perhaps. But then meme stocks were a very specialized thing in particular corners of the market.

The move back to the office will cure that connectivity problem TP Icap identifies. But rather more than that it will put traders back into those groups which are naturally more risk-loving.

That is, just as the economy finally and properly opens up again we should expect financial markets to become riskier.