The most successful traders are acutely in touch with their emotions
In the male-dominated world of financial trading, emotions have long been regarded as surplus to requirements. Until recently, only those with nerves of steel and hearts of stone were thought fit to climb aboard the money market rollercoaster.
However, an LSE study challenges this macho mindset by concluding that the most successful traders are acutely in tune with their emotions. Instead of suppressing their feelings, they try to keep a distanced, critical eye on how they are reacting to the market in order to control their emotions rather than being controlled by them.
The research, jointly carried out with London Business School and Open University Business School, analysed interviews with 118 traders and ten senior managers at four City of London investment banks. It found marked differences between high and low performing traders in how they engage with their intuitions and emotions. While most traders spoke about using 'gut feel' in their jobs, top paid groups tended to reflect critically about the origins of their intuitions and combine them with more objective information.
The research, published in the Journal of Organizational Behaviour, explains that when they are making losses on the markets, the most successful traders are in touch with their emotions, become more cautious and take fewer risks. The least successful tend to ignore their anxiety and continue to go with 'gut feelings' rather than rationally weighing up pros and cons.
At the same time, the more successful traders were able to handle their emotions better and not let losses destroy their confidence or affect their mood. The least successful were more stressed by big losses, which meant they were unable to reflect critically and rationally.
The research explains: "The findings suggest that one characteristic of higher performing traders may be a greater willingness to reflect critically about their intuitions and feelings about trading. These traders often reported relying on intuition, but they tend to weigh their feelings critically alongside other evidence and to reflect about the provenance of those feelings.
"Lower performing traders may rely on feelings alone, and show less propensity to think critically about the source of hunches."
Participants were sampled from four leading investment banks with offices in the City of London. Three banks were American and one was European. Managers were asked to select a representative sample of traders from a range of markets, trading in stocks, bonds and derivatives. The average age was 32 and their experience ranged from 6 months to 30 years. Of 118 traders, only two were women. Four earned less than £100,000, 41 earned £100,000 to £299,999, 34 earned £300,000 to £499,999 and 38 earned more than £500,000. One declined to reveal his income.
The report illustrates its findings with quotes from the traders, such as:
"People get a bit arrogant when they have good times, but this can be dangerous because they stop thinking as much." (medium experience, medium pay)
"I tend to feel more cautious when losing money…If I am having a down month, I'll look at trades, which I would do if I was having a good month, and say I don't like it enough to take the risk on it. I become more selective, more risk averse and to do a trade I need to see more than one reason why a trade will work and then might put it on, but not in a huge size. When making money, I can be more slack." (high experience, high pay)
"I think what a trader has to have is not necessarily this gut feeling but this nose for opportunities. If an opportunity comes along you have to be able to spot it and see it and sometimes people you typically find in this business – an opportunity is there and they can't see it and then it's taken by someone else and it's like oh yeah, that was a good idea but it is gone." (high experience, low pay)
The researchers, Professor Paul Willman and Dr Emma Soane of LSE's Department of Management, Nigel Nicholson of London Business School and Mark Fenton-O'Creevy of Open University Business School, concluded that their report contains some potentially important implications for those who work in the City. They say: "First it points to the importance of learned strategies for emotion regulation and the need for effective support for their development. Second, our data directly and indirectly point to the key role of management in this process. Our findings suggest that there may be considerable benefits to skilled managerial interventions that help to steer effective emotion regulation and support inexperienced traders in developing emotion regulation skills."
They add: "Our evidence suggests that many high performing traders deploy a reflective and critical approach to the use and development of intuition, well-founded in experience. Managers could help guide this process through coaching."
Thinking, feeling and deciding: The influence of emotions on the decision making and performance of traders
For more on research by Professor Willman and Dr Soane