Societe Generale SA (SCGLY.PK) is a prime example of how a corporate culture can lead people to make extremely poor financial transactions. Jerome Kerviel was the name of the futures trader who helped cover up some very large trading positions that led to a $7 billion loss. Kerviel’s trading results for the year had a direct correlation to his bonus.
As any rational investor would know, a one-year performance by itself is not highly correlated on average to one’s long-term performance. In addition, the way one makes returns is just as important as the returns themselves. This is the reason many funds who make triple digit returns on high leverage tend to do poorly or blow up in the years to come. The average fund by definition must perform by the mean performance of all funds.
One could also assume with high certainty that the mean return going forward will be in single to low double digits and certainly much lower than triple digits. Therefore, you could be 99% confident that if you take all the funds that use excessive leverage to make abnormal returns, a reversion to the mean will take place. This is why a corporate culture that rewards for excessive short-term returns are only asking for disaster ahead. In Kerviel’s case, he succumbed to human emotion and not some sort of money laundering, which many thought to be the case originally.