Gut feeling works for financial traders – tigers in action!

“The study of 18 hedge fund traders found those with greater “interoception”, which is the ability to sense the state of their body, made more money and survived for longer in hectic financial markets. Results are published in the journal Scientific Reports

This work was led by John Coates, a Cambridge medical practitioner and former New York financial trader.

traders

In this extract from my book, “Risky Strategy” now available on Amazon and in certain Waterstones outlets, I talk about John’s work in the context of how “tigers” work with risk.

EXTRACT:

We learn from John Coates in his intriguing book on the “Hour between Dog and Wolf” (Coates, 2012) that risk is a ‘whole body’ experience.   Coates was formerly a financial trader in New York, and then switched careers to become a medical practitioner based in Cambridge in the UK.   His extensive research looks at how humans respond to risk physiologically, ie through the production and delivery of hormones.

It appears that three hormones play slightly different roles when we are confronted with situations involving some element of risk: cortisol, adrenaline and testosterone.  These hormones respond to variable inputs to the body:  visual input through the eyes, a sound, a smell or even some kind of impact to our skin’s sensory nerve endings.   What is interesting then is the role that the brain has in processing this information, and how the hormonal system is tied into that response.

Coates observes that in sport, for example, the speed of response needed by a player reacting to an approaching tennis or cricket ball, and making a skilful connection with that ball suggests that normal brain-based analytical processes can’t be too heavily involved.  There isn’t the theoretical time for the information to be sent to the brain, processed and sent back to the muscles that need then to respond.   It would appear that some kinds of pre-conscious and rapid communication between brain and muscles are what actually keeps us alive in fast-moving situations.  Hormones have some kind of role in facilitating this, even though the hormones themselves don’t move that fast.  Separately, conscious reflection shows up later, to analyse what has happened.

From this, we have the concept of muscle memory.   I am a keen tennis player, and am only too aware of the importance of muscle memory.  It works for you and against you.  Against in the sense that for most of my life I have not been hitting shots with a top spin action, which requires a loose wrist.  My muscles remember a firmer wrist flatter shot, and my mind is trying to convince them otherwise.   But it works for me in that once I have practised it a few thousand times, my mind doesn’t have to keep reminding my muscles what to do when I am playing in a match.  And that’s important when the ball is hurtling over the net onto my end of the court, and I need to react both quickly and accurately.

In the case of tennis, you wouldn’t typically refer to this kind of muscle memory as ‘intuition’.  But Coates observed something very similar, and quite mystifying, on the financial trading floor. Traders, it would appear, seem to develop muscle memory for responding to situations, even before they have very much information, and certainly before they have much time to analyse it.   He tells stories of traders sensing a buzz on the trading floor, or even change of tone of voice here and there, or the speed at which information was appearing on the screen … and issuing a “buy” or “sell” order immediately.

Speed, once again, in financial trading is of the essence.  Being even a couple of minutes slower in executing a trade can make huge differences in financial returns.  The trading floor is really a place for tigers – elephants need not apply!

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