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Gut feeling is a better guide for financial traders: Univ of Cambridge

Financial traders are better at reading their ‘gut feelings’ than the general population – and the better they are at this ability, the more successful they are as traders, according to new research led by the University of Cambridge.

business Updated: Sep 20, 2016 15:09 IST
Prasun Sonwalkar
Photo of the Bombay Stock Exchange. Financial traders are better at reading their ‘gut feelings’ than the general population says a study by the University of Cambridge.
Photo of the Bombay Stock Exchange. Financial traders are better at reading their ‘gut feelings’ than the general population says a study by the University of Cambridge.(PTI)

Financial traders are better at reading their ‘gut feelings’ than the general population – and the better they are at this , the more successful they are as traders, according to new research led by the University of Cambridge.

‘Gut feelings’ – known technically as interoceptive sensations – are sensations that carry information to the brain from many tissues of the body, including the heart and lungs, as well as the gut.

The study by researchers from Cambridge, Sussex and the Queensland University of technology, Australia has been published in the journal ‘Scientific Reports’.

Traders and investors in the financial markets frequently talk of the importance of gut feelings for selecting profitable trades. The study compared the interoceptive abilities of financial traders against those of non-trader control subjects.

The researchers recruited male traders from a hedge fund engaged in high frequency trading, which involves buying and selling futures contracts for only a short period of time – seconds or minutes, a few hours at the most.

The study took place during a particularly volatile period: the Eurozone crisis. Each trader was given a score which, essentially, measured the percentage of right answers, and these scores were compared against data from 48 students at the University of Sussex.

The researchers found that traders performed significantly better at the heart rate detection tasks compared to the controls: the mean score for traders was 78.2, compared to 66.9 for the controls. Even within the group of traders, those who were better at the heart rate detection tasks also performed better at trading, generating greater profits.

Strikingly, an individual’s interoceptive ability could be used to predict whether they would survive in the financial markets. The researchers plotted heartbeat detection scores against years of experience in the financial markets and found that a trader’s heartbeat counting score predicted the number of years he had survived as a trader.

“Traders in the financial world often speak of the importance of gut feelings for choosing profitable trades – they select from a range of possible trades the one that just ‘feels right’,” said John Coates of the University of Cambridge, who also used to run a trading desk on Wall Street.

“Our findings suggest they’re right – they manage to read real and valuable physiological trading signals, even if they are unaware they are doing so.”