Recent research finds that traders looking at prices use parts of the brain associated with reading other people.
A stock's price is ticking up and down on a screen in front of you. Do you rationally evaluate the probabilities that the price will rise before you pull the trigger on a trade? Or do you go with your gut?HT: Crossing Wall Street
You may prefer to think superior ability—that mysterious X-factor some traders appear to have—is rooted in the former scenario. But a few years ago, researchers at the California Institute of Technology went to the trouble of taking pictures of people’s brains while they were evaluating trades. Surprise: As rational as you are, you probably opt for that gut feeling a lot.
Using fMRI scans, neuroscientists can identify which brain structures are associated with particular activities. To do so, they might put a subject in a machine and have him solve a math problem so they can watch the fireworks go off. Those math-related structures aren’t what lit up in the Caltech experiment. Instead, the activation occurred in parts of the brain associated with something psychologists call “theory of mind.”
That’s essentially the ability to read other people. “It’s a viewpoint on what another person is thinking and feeling and what they’re likely to do,” says Denise Shull, founder of the ReThink Group, a New York research and consulting firm that coaches financial professionals and athletes. You unconsciously use theory of mind all the time to process experiences in the world, says Shull. It’s what helps you navigate a busy Manhattan sidewalk: You can tell that the guy in front of you is about to veer to the right, so you step to the left. It’s also what enables some traders to look at the tape, she says, and see that “someone’s slamming the bid.”
In the Caltech experiment, detailed in “Exploring the Nature of ‘Trader Intuition,’ ” a paper published in the Journal of Finance in 2010, researchers set up a stylized market. They had participants trade two “stocks” in a series of sessions. The payoff from the two stocks together was fixed at 50¢, but the portion of the payout that would come from each stock was revealed only after the session ended. One might pay 49¢ and the other would pay 1¢, for example.
In some of the sessions, none of the participants had any additional information about the payoffs. In other sessions, some participants were given a hint about what the payoffs would be. Based on that hint, those participants might bid up one of the stocks.....MORE
