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Study finds what makes best financial traders
Source: Agencies |
November 26, 2009, Thursday
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BRITISH scientists say a combination of testosterone, experience and a hunger for a share of profits can produce financial traders who outperform the market.
Cambridge University researchers who studied 53 traders in London found that years of experience, the right kind of hormones and profit-sharing incentives made profitable, prudent risk takers.
The study looked at male "high-frequency" traders, who buy and sell financial products but only hold positions for only a few seconds, and the "Sharpe ratio" performance measure - a ratio between trading profit and the level of risk taken.
"A trader making US$100 million would normally be considered a star, but not if the trader could just as easily have lost US$500 million. A trader's Sharpe ratio is a better measure of skill than profits alone because it would expose this trader as reckless," said John Coates, a Cambridge research fellow in neuroscience.
Comparing traders' Sharpe ratios with those of the DAX German stock market index, it was found that more experienced traders scored significantly higher. The traders' Sharpe ratios also increased markedly with the number of years they had been trading, they wrote in the Public Library of Science journal.
"The traders in our study received no bonus, only profit shares. They had therefore a strong incentive to lower, not raise, the variance of their profits," Coates said.
Previous studies suggested that testosterone plays an important role, with evidence male traders will make much more aggressive trades on days when their testosterone is high.
Coates said this trait was important, but only counted when combined with training and the right incentives.
Cambridge University researchers who studied 53 traders in London found that years of experience, the right kind of hormones and profit-sharing incentives made profitable, prudent risk takers.
The study looked at male "high-frequency" traders, who buy and sell financial products but only hold positions for only a few seconds, and the "Sharpe ratio" performance measure - a ratio between trading profit and the level of risk taken.
"A trader making US$100 million would normally be considered a star, but not if the trader could just as easily have lost US$500 million. A trader's Sharpe ratio is a better measure of skill than profits alone because it would expose this trader as reckless," said John Coates, a Cambridge research fellow in neuroscience.
Comparing traders' Sharpe ratios with those of the DAX German stock market index, it was found that more experienced traders scored significantly higher. The traders' Sharpe ratios also increased markedly with the number of years they had been trading, they wrote in the Public Library of Science journal.
"The traders in our study received no bonus, only profit shares. They had therefore a strong incentive to lower, not raise, the variance of their profits," Coates said.
Previous studies suggested that testosterone plays an important role, with evidence male traders will make much more aggressive trades on days when their testosterone is high.
Coates said this trait was important, but only counted when combined with training and the right incentives.
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