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‘Gut feelings’ contribute to the success of financial traders

A Cambridge study found that the better a trader is at reading their gut, the more successful they are as traders.

New research indicates that financial traders are generally better than the general population at interpreting their ‘gut feelings’ – a trait the study says influences how successful they are as traders.

Financial market traders frequently emphasise the importance of intuition when selecting profitable trades. According to a recent study, led by the University of Cambridge, the better a trader is at reading their gut feelings, the more successful they are.

Interoceptive sensations: listening to the inner voice

Technically known as interoceptive sensations, ‘gut feelings’ denote the sensations that convey information from a variety of tissues — including the heart, lungs, and gut — to the brain. These sensations can signal everything from the changes in body temperature to a racing heart, shortness of breath, as well as bladder, gut, and bowel fullness. They also stimulate states such as pain, thirst, hunger, and anxiety.

High-risk decisions often go hand-in-hand with subtle yet rapid physiological changes that send feedback to the brain, influencing our choices and guiding us away from bets that may result in a loss and toward bets that are likely to result in a profit. 

Although this provides valuable insight into risky decision-making, we are frequently not conscious of it or are only vaguely aware of it. Due to this, many individuals may be able to make critical choices even prior to being able to rationalise the reason behind their decisions. 

To determine the degree to how accurate this belief is, researchers from the Universities of Sussex and Cambridge in the United Kingdom and the Queensland University of Technology in Australia carried out a comparative analysis on the interoceptive abilities of financial traders and those of the study’s control subjects, who were not traders. The results of their findings were published in Scientific Reports.

The study subjects consisted of 18 male financial traders from a hedge fund that specialises in high frequency trading. This type of trading entails buying and selling future contracts in seconds, minutes, or a few hours at most.

It necessitates the capacity to absorb and process large amounts of information from news sources, recognise price patterns swiftly, and make crucial, risky decisions in split seconds. This area of the financial markets is especially unforgiving and harsh; while successful traders can make more than £10 million a year, unsuccessful traders do not last long and are quickly eliminated.

Successes of the traders employed by a particular firm can set it apart from the crowd and make it a trusted destination for investment managers. One of such companies is Vantage, a multi asset broker with over 10 years of market experience.

More about the study findings

The researchers tested the traders to see how accurately they could count their own heartbeats, and thus recognise small changes in their physiological state. They were compared against 48 University of Sussex students (the control group), who were also tasked with counting their own heartbeats.

Interestingly, the researchers discovered that the traders greatly outperformed the control group in the heart rate detection tasks; the average score for the traders was 78.2, whereas the average for the control subjects was 66.9. Among the traders themselves, those who excelled at heart rate detection also excelled at trading and generated higher profits.

Remarkably, it was possible to determine whether a person would survive in the financial markets based on their interoceptive capacity. After graphing pulse detection scores against years of expertise in the financial markets, the researchers discovered that the counting score of the heartbeat of a trader matched the number of years of experience they had as a trader.

John Coates, a former University of Cambridge research fellow in neuroscience and finance who once oversaw a trading department on Wall Street, said financial traders frequently “speak of the importance of gut feelings for choosing profitable trades.” From a variety of prospective trades, they often choose the one that just “feels right”.

“Our findings suggest they’re right — they manage to read real and valuable physiological trading signals, even if they are unaware they are doing so,” said Coates.

The importance of gut feelings for choosing profitable trades… Our findings suggest they’re right. They manage to read real and valuable physiological trading signals, even if they are unaware they are doing so.

Dr John M. Coates, University of Cambridge

Dispelling lingering contradictions and misunderstandings

The findings are consistent with prior studies, which demonstrate that heartbeat detection abilities predict more successful risk taking. However, the researchers warn to avoid suggestive interpretations.

For instance, one study indicates that the correlation between heartbeat detection skills and years of survival in employment at hedge funds is due to the fact that experienced traders who take greater risks experience greater stresses. However, the authors of this study believe that this is improbable since, as in many other professions, accomplished, successful, and experienced people are typically less anxious than newcomers because they are more in control.

These findings also seem to conflict with the widely accepted “Efficient Markets Hypothesis” of economic theory, which proposes that the market is random and that no investor or trader’s skills or traits — whether intelligence, education, or training — can enhance their performance any more than these abilities could enhance their performance when tossing a coin.

“A large part of a trader’s success and survival seems to be linked to their physiology. Such a finding has profound implications for how we understand financial markets,” adds Dr Mark Gurnell from the Wellcome Trust’s Medical Research Council Institute of Metabolic Science.

The majority of the models used in finance and economics to evaluate conscious reasoning are based on psychology, argued Dr Coates.

“We’re looking instead at risk takers’ physiology — how good are they at sensing signals from their viscera? We should refocus on the body, or more exactly the interaction between body and brain.”

We’re looking instead at risk takers’ physiology — how good are they at sensing signals from their viscera? We should refocus on the body, or more exactly the interaction between body and brain.

Dr John M. Coates, University of Cambridge

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Reference

Kandasamy, N., Garfinkel, S. N., Page, L., Hardy, B., Critchley, H. D., Gurnell, M., & Coates, J. M. (2016). Interoceptive ability predicts survival on a London trading floor. Scientific Reports, 6(1). https://doi.org/10.1038/srep32986  

Chidirim Ndeche

Chidirim Ndeche is a reporter at Breakthrough.

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