Monday, 25 April 2011

To Be A Better Trader, Try Being Happier.

In my Money Week column this week, I'm looking at how you can become a better trader - just by being happier. Here's a taster.

What makes a successful trader or fund manager? An all-encompassing view of how the global economy is developing? An instinct for a bargain? A fleetness of foot, and the confidence to take bold positions? A willingness to ignore the herd, and buy the stuff everyone else is selling? Or the patience and perseverance of a tortoise?
They are all perfectly reasonable suggestions, and there are many great traders and investors who have made fortunes through one or other of qualities.
But actually the answer may be a lot simpler.
Just try being a bit happier.
According to research released this month by the French business school Insead, the happier people are, the better they are at predicting the future – and the more depressed they are, the worse they are.
The implication is clear, both for banks and fund managers. Just make sure your traders and stock-pickers are cheerful and positive, and their performance will improve. The trouble is, however, they are caught in a classic Catch-22. Everything about the way most people in the financial markets work is guaranteed to make them miserable – and therefore to make them worse at their jobs.
The Insead research provided a fascinating insight into what makes people good at predicting future events – and what makes them bad at it as well. It has long been noted that more cheerful people tend to have a more optimistic view of the future, whilst the more miserable, not very surprisingly, are usually more pessimistic. In the markets, the optimists are usually bulls, while the pessimists are bears.
The Insead study went a lot deeper than that. It took 1,100 people, and asked them to predict the results of games during the 2010 World Cup. They weren’t particularly being optimistic or pessimistic – they weren’t making predictions for their own nations - they were just forecasting what was likely to happen. As an incentive to try and get it right, there was a cash prize for getting it right.
Interestingly, the more depressed the people were, the less likely they were to make accurate predictions. Indeed, many of the most down in the dumps did worse than they would have done just by picking winners from a hat. And they were significantly more likely to make ridiculous predictions, such as forecasting that North Korea would win the whole tournament.
The Insead team is now taking the same methods, and applying then directly to the emotional states of stock and commodity traders. But the implications are already clear enough. If being happy or depressed has a bearing on your ability to forecast the outcome of events, then it follows that happier fund managers or traders will be better at their jobs than their more morose colleagues.
The snag is, how do you influence the happiness of your staff?
Well, in truth, it isn’t that hard.
We have a fairly good understanding of what makes people feel good about life, and what make them depressed. Most of the key points were summarised by the ‘Action for Happiness’ campaign launched earlier this month by Professor Richard Layard, the guru of happiness economics, among others.
Happiness, it turns out, comes down to a few fairly simple things. Do things for other people. Take care of your body. Notice the world around you. Keep learning new things. Be part of something bigger. Have goals to look forward to. They may sound fairly like being in favour of motherhood and apple pie, yet, despite sounding platitudinous, they are certainly likely to make people more balanced and positive, and significantly less likely to suffer bouts of depression.
Here’s the catch, however.
They are not the kind of values promoted within the average bank or fund management firm.
If anything, the financial markets do precisely the opposite of what is likely to make people happy.
They concentrate on paying out huge cash bonuses, usually tied to demanding performance criteria, even though there is very little evidence to suggest that beyond a certain minimum level having more money actually makes people any happier.
They promote a ruthless competition between staff, and between companies, constantly benchmarking their performance against their peers. In fund management, for example, you have failed if you haven’t managed to beat the guy doing the same job at the next fund, even though you may have made plenty of money for your investors. And yet that is only likely to make their staff feel anxious and insecure.
And they promote a relentless short-termism, continually shortening the time to come up with results, even though it is usually far better to concentrate on medium-term performance, and more satisfying for the staff as well.
In short, if they were deliberately setting out to make their traders and stock-pickers depressed, it is hard to see how they could be doing a better job.
But, of course, the more depressed their staff are, the worse they will be at their jobs. In fact, it is a classic Catch-22. To trade well, you have to be happy, but everything about the work is likely to make you depressed, so you’ll end up being a very bad trader – the kind of person who thinks North Korea will win the World Cup, or that oil will be trading back at $20 a barrel by the end of next year.
Is there a way out of that? Perhaps.
Maybe investors should stop looking at all those charts that banks and fund managers love to produce showing how they out-performed their peers over the last there months. And maybe they should stop listening to all those boastful adverts about how the pay of staff is linked to performance.
Instead, just ask if the traders and stock-pickers are cheerful, feeling good about themselves, and are well looked after. Who knows, over the medium-term it might even produce better results.

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