I watched a great program on Channel 5 here in the UK last night called ‘Daredevils’ – a program that looked at 10 individual extreme sports athletes performing a number of high risk ‘stunts’ including skiing extreme slopes, BASE jumping off Nelson’s Column in London, doing a forward somersault off a very high and dangerous waterfall in a kayak, skydiving out of one plane and into another without a parachute, and a kitesurfer jumping over Brighton Pier to name a few (http://www.youtube.com/watch?v=8ZE81zEy4uk)
What was really interesting was that none of the people filmed in the program really saw themselves as daredevils – they were not crazy risk seeking people with a deathwish, or even looking for some immense adrenaline buzz, but rather they saw themselves as simply pushing the limits of their own performance and in their sports and achieving specific goals that they had set for themselves. More than risk takers or seekers, they were fundamentally risk managers, with meticulous levels of planning, often great patience in picking the right opportunities, being able to decide not to perform if the conditions were not right, all underpinned by high levels of skill gained through thousands of hours of practice.
As I watched the program I noticed some parallels with trading in terms of what people are wanting or getting from their trading, their approaches to it, and successes from it.
When you are trading are you after adrenaline and excitement? Does the buzz drive you on?
At a brain level one of the key drivers of risk taking behaviour is dopamine. Dopamine is an interesting chemical because if you do not have enough of it you will feel less satisfied, engage less and be less productive; but with too much you can become too risk seeking, perhaps even reckless. A dopamine high (that immense feeling you get after a skydive or big winning trade) can become addictive and interestingly to get further dopamine highs you need to take greater risks – higher, lower, faster, bigger. An interesting study from the US (see below) suggests that dopamine in relation to trading performance may sit on an inverted-u curve with there being an optimum amount that produces best results for financial traders.
A Combination of Dopamine Genes Predicts Success by Professional Wall Street Traders
So, what makes a professional trader successful? Combining the personality analyses and genetic findings from the present study, reveals that our sample of traders are analytical, integrative, and can delay gratification. They have a genetic profile associated with balanced levels of dopamine, and also linked to moderate but not high risk-taking behavior. Thus, successful traders do not appear to take extraordinary risks and also appear to take a longer-term perspective. Our analyses indicate that these traits may have a genetic predisposition.
Steve Sapra, Laura E. Beavin, Paul J. Zak
1 Center for Neuroeconomics Studies, Claremont Graduate University, Claremont, California, United States of America, 2 Department of Economics, Claremont Graduate University, Claremont, California, United States of America, 3 Department of Neurology, Loma Linda University Medical Center, Loma Linda, California, United States of America
So what are the take outs?
- Trading successfully may be a function of your relationship with dopamine, which may be in part genetically predisposed.
- Too little, or too much dopamine will inhibit your trading performance.
- Taking ‘moderate’ risk may be a more successful approach than taking ‘very high’ risk.
- Being able to take a long term perspective and delaying instant gratification is also important.
What can you do?
1. Manage your risk appropriately so that you are emotionally, financially and chemically comfortable – again probably an inverted-u here with taking too little risk or too much leading to sub-optimum performance and returns.
2. Keep a longer term perspective on your trading outcomes – see the bigger picture – use a long lens to look at your individual trading outcomes in context.
It seems as though being a ‘Deathwish’ daredevil and a high risk taking trader may not be the route to success (especially in the long run) and that actually the common key to success in such potentially high risk environments is actually good risk management.
Remember the old adage ‘there are old traders, and there are bold traders, but there are no old and bold traders!’
Until next time…
Steve