Denise Shull is President of The ReThink Group, a consultancy providing advanced market, risk and behavioural intelligence. She holds a Master’s degree in Neuropsychology from The University of Chicago.Prevailing Wall Street wisdom dictates that money managers be relentless, self-controlled and unemotional.
Tales abound of the pressure to fight for every tick, never let fear into your calculus and to turn yourself into something mimicking the Connecticut Terminator.
Unfortunately this macho approach to generating returns flies smack in the face of cutting edge brain research on how to make the best risk decisions.
First, if anyone really could totally remove emotion from their trading, they would find they couldn’t make a single move. It’s indisputable in brain science that emotion makes meaning and without it, you can’t even decide what fleece jacket to wear – let alone whether or not to buy another 100K shares of Apple!
Furthermore, brain research also shows that humans are only capable of about a couple of decisions in a row before they suffer from what the academics call “ego-depletion” or more easily, “decision-fatigue”. In other words, good judgment is looking a whole lot like muscle strength – you can only lift so many reps before the weight falls.
Net, net? Attempting to impersonate the Terminator by fighting for every tick is actually reducing hedge funds returns.
So what does work? Would you believe the diametric opposite of what most people are doing?
The smartest among us are catching on but everyone should be actually encouraging their PM’s to manage to the realities of their moods.
Bad trade? Get away from the markets – at least long enough, and with the right activity – to come back in a better mood. Yep, a better mood.
In other words, encouraging billion dollar batters to leave their spaceships and take a nap, take a run or even watch piano-playing cats on YouTube will absolutely increase the absolute return.
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