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'Gut feelings' help make more successful financial traders

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Staff Writer | October 10, 2016
Financial traders
Traders   There is more to it than just numbers and stocks

Financial traders are better at reading their 'gut feelings' than the general population, and the better they are at this ability, the more successful they are as traders, according to new research.

'Gut feelings' are sensations that carry information to the brain from many tissues of the body, including the heart and lungs, as well as the gut.

They can report anything from body temperature to breathlessness, racing heart, fullness from the gut, bladder and bowel, and they underpin states such as hunger, thirst, pain, and anxiety.

We are often not conscious of this information, but it provides valuable inputs in risky decision making, the more successful they are as traders, according to new research led by the University of Cambridge.

High-risk choices are accompanied by rapid and subtle physiological changes that feed back to the brain, affecting our decisions, and steering us away from gambles that are likely to lead to loss and towards those that are likely to lead to profit.

This can enable people to make important decisions even before they are able to articulate the reasons for their choices.

Traders and investors in the financial markets frequently talk of the importance of gut feelings for selecting profitable trades.

To find out the extent to which this belief is correct, researchers from the Universities of Cambridge and Sussex in the UK and Queensland University of Technology in Australia compared the interoceptive abilities of financial traders against those of non-trader control subjects.

The researchers recruited 18 male traders from a hedge fund engaged in high frequency trading, which involves buying and selling futures contracts for only a short period of time – seconds or minutes, a few hours at the most.

This form of trading requires an ability to assimilate large amounts of information flowing through news feeds, to rapidly recognize price patterns, and to make large and risky decisions with split-second timing.

This niche of the financial markets is particularly unforgiving: while successful traders may earn in excess of £10 million per year, unprofitable ones do not survive for long.

The study took place during a particularly volatile period – the Eurozone crisis – so the performance of each trader reflected his ability to make money during periods of extreme uncertainty.

The researchers measured individual differences in each trader's capacity to detect subtle changes in the physiological state of their bodies by means of two established heartbeat detection tasks.

These tasks test how accurately a person, when at rest, can count their heartbeats. Each trader was given a score which, essentially, measured the percentage of right answers, and these scores were compared against data from 48 students at the University of Sussex.

The researchers found that traders performed significantly better at the heart rate detection tasks compared to the controls: the mean score for traders was 78.2, compared to 66.9 for the controls.

Even within the group of traders, those who were better at the heart rate detection tasks also performed better at trading, generating greater profits.

Strikingly, an individual's interoceptive ability could be used to predict whether they would survive in the financial markets.

The researchers plotted heartbeat detection scores against years of experience in the financial markets and found that a trader's heartbeat counting score predicted the number of years he had survived as a trader.

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