The Brilliant Blog

Successful Traders Are In Touch With Their Feelings

Thursday, August 2, 2012

Really interesting study carried out by researchers at the London School of Economics:

“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.’” Read more here.

This stance—of being aware of your emotions, and able to reflect critically on them—is important to every kind of performance. Emotions can be a useful source of information, but they shouldn’t crowd out deliberate analysis.