High risk discount factors

This is interesting throughout. Insider Trading Isn’t What You See in the Movies by Tyler Cowen. Insider trading:

Kenneth R. Ahern, a professor at the University of Southern California's Marshall School of Business, examined hundreds of Department of Justice and the Securities and Exchange Commission cases from 2009 to 2013, with an associated 5,423 pages of documentation. What emerged was some fascinating detail on the crime and its practitioners (both alleged and convicted).

Looks robust.

Stereotypes are confirmed.

Some aspects come pretty close to what we see in the movies. The average insider trader is 43 years old, and nine out of 10 are male.

Particularly personality stereotypes:

The practice also seems correlated with some features of recklessness: Insider traders are younger than their associates, less likely to own real estate, and have fewer family members on average. More than half have criminal records, with almost all charges stemming from traffic violations.

Insider trading is ultimately a trust-based social activity.

Of the known pairs of people who provide and act upon private information ("tipper and tippee"), 64 percent met before college, and 16 percent met in college or graduate school. Another 23 percent are family relations -- more siblings and parents than aunts and uncles, despite the added capital that the latter might have provided. Tips are also commonly shared among people with ethnically similar surnames: Of 24 tips coming from people with Celtic surnames, for example, 14 went to individuals who also had Celtic surnames.

Next set of findings mirrors what I have noticed over the years about commercial and governmental corruption - it is often over small stakes. I don't intend to diminish the magnitude of a $10,000 bribe but when it is in the context of a lifetime's earnings and even in the context of annual salary which is often on the order of $75,000 - $150,000, that is chump change. Why would you put an income of $150,000 at risk over what might be a family week at the beach in Hawaii say?

I see it all the time in the local paper, and $10,000 tends to be on the high end. School principals sacked for dipping into an account for $2,000 over the years, a city councilman indicted for a $6,500 payoff to sway a contract decision, etc.

The insider trading study reveals a similar dynamic, people already greatly compensated in the national scheme of things but undertaking criminal activity to achieve just that little bit more.

The tight circle of trust -- and the associated lack of capital -- appears to limit perpetrators' ability to take full advantage of a highly profitable activity. Returns averaged about 35 percent, realized over an average holding period of 21 days. Yet despite the nearly certain gains available, the median insider trader invested only about $200,000 per tip and received $136,000 in profit. That's hardly enough to retire on. Granted, the much higher average profit of $2.3 million indicates that some investors hit it big -- and maybe the smartest, wealthiest and best-connected insider traders aren’t included in the data because they don’t get caught.

The insider traders in the sample are hardly rich. The median value of their homes is $656,300, not a lot given that they tend to live in relatively expensive metropolitan areas. Arguably many of them are upwardly mobile enough to have seen real wealth, without quite yet having it themselves.

The average source waits about 12 days between receiving valuable information and providing a tip. This could reflect either indecision about breaking the law or the difficulty of finding a trustworthy tippee. Nearly half, though, pass on the information the same day they receive it, suggesting that a significant group has greater experience and preparation. Repeat offending is also common: The average source gives 2.36 tips, and those who both give and receive tips do even more.

Part of the explanation is likely that only the smaller fry get caught and prosecuted. The bigger fish work out deals which keep their numbers out of the court system. Still, the same dynamic of huge risks to secure relatively small improvements.

Is it simply just a symptom of insiderdom such as we currently see in politics where individuals with long standing in the public eye still pursue grubby increments of money for favorable trade decisions, speeches, exemptions from the rules that apply to everyone else?

I don't know but I wish we knew enough to stamp out the criminal behavior.