High frequency traders whose ‘gut feelings’ guide their split-second decisions make more money and last longer in high-risk financial markets, a QUT and Cambridge University study in Scientific Reports has found.
Professor Lionel Page from QUT’s School of Economics and Finance, and Australia’s Young Economist of the Year, said the study Interoceptive Ability Predicts Survival on a London Trading Floor proved ‘gut feeling’ had a physiological basis.
“Gut feeling is the term used to describe interoceptive signals, which are almost imperceptible changes in the body’s physiology underpinning motivational states such as hunger, thirst, pain, or anxiety that guide behaviour,” Professor Page said.
“Interoceptive information, even if unconscious or at the fringes of awareness, provides valuable inputs in risky decision-making.
“Other research on interoceptive information and gambling showed gamblers can make optimal decisions on gambling tasks before they can articulate the reasons for their decisions.
“People vary in their ability to generate and sense interoceptive signals, but we can measure it with physiological tests, the most common being heartbeat detection.
“Traders often report they go by gut feeling when making their high risk decisions to buy and sell.”
Professor Page said to test how much traders’ interoceptive signals or gut feeling influenced their decisions, the researchers recruited 18 high frequency traders from a City of London mid-level hedge fund.
“Their job is to buy and sell futures contracts, holding their trading positions for only seconds, minutes, or a few hours at most,” he said.
“These traders must be able to assimilate large amounts of information from news feeds and rapidly recognize price patterns to make large, risky decisions with split-second timing.
“Empirical evidence of a trader’s success is captured in their daily profit and loss statement.”
Professor Page said the researchers used the ability to accurately detect their own heart rate as a proxy for ‘gut feelings’.
They asked the traders to silently count without touching any pulse point how many heartbeats they felt in six short intervals.
They also collected data on each trader’s average daily profit and loss over the previous year.
“We found that the traders’ scores on the heartbeat detection test predicted their relative trading performance,” Professor Page said.
“The heartbeat detection scores not only predicted how much traders earn, but also how long they survived in the financial markets.
“We found traders’ mean heartbeat detection scores rose from 68.7 per cent accuracy for beginners to 85.3 per cent for experienced traders and the latter figure differed significantly from our control group of non-traders.
“While this study, being field work, could not establish causation, it has overturned the prevailing hypothesis that the market is random, that no trait or skill of a trader could improve their performance.
“These findings have profound implications for the understanding of financial markets, specifically by reorienting attention away from risk takers’ psychological traits towards their physiological ones.”
Media contact: Niki Widdowson, QUT Media, 07 3138 2999 or n.widdowson@qut.edu.au
After hours: Rose Trapnell, 0407 585 901 or media@qut.edu.au
