Beware the winning traders, says neuroscience – Fund Forum

Research at Cambridge University linking neuroscience with finance has suggested traders who experience winning streaks should instead take a lie down – or indeed be removed from the trading floor – to let their adrenalin-doped bodies re-set before something bad inevitably happens.

Animal evolution dictates that the testosterone generated from extended success will lead to failure, as it causes overconfidence which blurs judgement of self-interest and even self-preservation, says John Coates, senior research fellow in neuroscience and finance at Cambridge University’s Judge Business School.

Coates, who is also a former Wall Street trader himself, told delegates at the Fund Forum event in Monaco yesterday “your body is profoundly involved in how you take risk”.

He said chemical changes in one’s body – brought on by successful risk-taking – would lead to over-confidence, lack of clear judgement, and failure.

Coates said risk managers overseeing trading floors should be aware of this, and take appropriate action.

“I do not think risk managers do not understand how traders’ risk appetites are shifting, and that means they are feeding the process. The risk manager should not be following the losing traders, they should be following the winning traders and pulling them off the trading floor for three weeks, to allow their bodies to re-set.”

Speaking from experience, Coates said: “Trading, I realised my body was fully involved in how excited I was getting, and it was chemically driven. Traders get onto a winning streak, it is neurological and you change.”

Medicine, or indeed finance, has not studied this link, in Coates’ view because of the Platonic separation of mind and body. According to this view, trading would be an act of mind, not body. But he added in fact the brain and body are intricately linked, indeed the human brain and its complex circuitry had developed for the very reason to control complex movements of the body and learn new actions.

“Our body and brain rev up, and down, together, and your body is intrinsically involved in every bit of information you are sifting,” Coates said.

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