Investors better-attuned to physiological signals could have the edge over their intellectually-based rivals, a new scientific study suggests.
According to the study recently published in Nature magazine, “interoceptive ability” – or awareness of their body’s physiological state – was a strong predictor of market traders “relative profitability, and strikingly, how long they survived in the financial markets”.
“Traders in the financial world often speak of the importance of gut feelings for choosing profitable trades. By this they mean that subtle physiological changes in their bodies provide cues helping them rapidly select from a range of possible trades the one that just ‘feels right’,” the study says. “Our findings suggest that the gut feelings informing this decision are more than the mythical entities of financial lore – they are real physiological signals, valuable ones at that.”
The study titled ‘Interoceptive Ability Predicts Survival on a London Trading Floor’ tested 18 male futures dealers “engaged in high frequency trading”.
“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,” the Nature paper says.
The findings were based on how the traders performed in a “heartbeat detection” task, which served as a proxy for interoceptive ability.
High scores in the heartbeat detection test were strongly correlated with both trader profitability and longevity in the markets, the study found.
Furthermore, the experiment ruled out any link between traders’ self-assessed confidence they had performed well on the heartbeat test and their actual results.
“This disjunct between the traders’ heartbeat detection accuracy and their confidence in their accuracy may seem contradictory but, as with many physiological measures, objective performance and subjective appraisal often diverge,” the paper says.
The study says self-consciousness about physiological signals may have seen traders dismiss them “as ‘merely’ physical and distracting”.
“Alternatively, self-consciousness may impair risk taking in much the same way that focusing self-consciously on, say, your tennis stroke can impair your game,” the paper says.
The results also call into question some of the assumptions of the “influential Efficient Markets Hypothesis”, the Nature paper says.
At its extreme efficient markets hypothesis claims that “no trait or skill of an investor or trader – not their IQ, education, nor training” can lift their performance, the report says.
“We find on the contrary that the physiological state of traders does have large effects on their success and survival,” the study says. “Such a finding has profound implications for the understanding of financial markets, specifically by reorienting attention away from risk takers’ psychological traits towards their physiological ones.
“More generally, our results suggest that economics and the behavioural assumptions upon which it rests, will benefit from a greater involvement with human biology.”