Measuring Gut Feeling Is Profitable Advice For High Stress Professions

The body sends signals that may be more accurate - and prescient - than those in financial and operational data. JL

David Gelles reports in the New York Times:

When traders and other employees in high-stress professions were able to listen to their bodies, they made better decisions. Signals from the body such as muscle tension, stomach distention pick up on things the rational mind was missing. There’s a part of our brain that sends signals to our body, and it’s smart. It doesn’t succumb to the mistakes of behavioral finance: the better a trader (is) at sensing his own heart rate, the more successful he (is) at high-frequency trading.

What attributes make for a successful trader? Is it comprehensive knowledge of an industry? The ability to read the markets? Luck?

Or might it be something subtler and seemingly unrelated — namely, an awareness of one’s own heartbeat?

In a study published in the journal Scientific Reports, a group of researchers suggest that high-frequency traders who were more sensitive to their own bodies routinely made more profitable trades, and had longer careers in a notoriously unforgiving profession.

The team, which included professors from universities in Britain and Australia, was investigating a theory developed by John Coates, a former trader who until recently was a researcher at Cambridge University.

Mr. Coates set out to try to identify whether “gut feelings” were merely the stuff of myth, or something real and measurable.

“I always knew when I was trading on Wall Street that there was something extra to making it,” said Mr. Coates, who traded fixed-income derivatives at Goldman Sachs and then Deutsche Bank in the late 1990s. “There were times when something just felt right.”

Mr. Coates moved on from Wall Street to become a researcher and author. In a previous study, he demonstrated that traders demonstrated physiological signs of stress during market volatility, even when they did not rationally believe they were at risk of losing much money.

And in his 2013 book, “The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind,” Mr. Coates relates how George Soros, the hedge fund billionaire, relied on so-called animal instincts. When Mr. Soros was actively managing his fund, he would suffer from backaches, and said that he “used the onset of acute pain as a signal that there was something wrong in my portfolio.”

Building off that work, Mr. Coates wondered whether traders who were more sensitive to their own bodies might perform better at their jobs.

To investigate his hypothesis, Mr. Coates and his colleagues worked with 18 traders at a hedge fund in London in 2012. The subjects, all men, were high-frequency traders, buying and selling bond futures and other products.

Using heart rate monitoring equipment, Mr. Coates and his colleagues assessed the traders’ ability to silently count their own heartbeats without touching their chest or any pulse point. A control group of 48 men who were not traders was also tested for their ability to monitor their heart rates.

Over all, the hedge fund employees were substantially more accurate than the control group, suggesting that on balance, the high-frequency traders were more attuned to their own bodies than the general public.

The hedge fund, which was not identified, gave Mr. Coates and his colleagues access to the traders’ employment history, including their profits and losses, and tenure in the industry.

And among the traders, more accurate heartbeat awareness was correlated with profitability. That is, the better a trader was at sensing his own heart rate, the more successful he was at high-frequency trading.

What is more, the longer an employee of the hedge fund had been working as a trader, the more accurate he was at counting his heart rate.

“What we’re realizing more and more is that these things are doggone complicated,” said Bruce S. McEwen, a Rockefeller University professor studying how stress affects the brain, who was not involved in the research. “There is no simple explanation of them, but we have to be aware of the phenomenology. Coates and colleagues are making people aware of possible factors that are ones other than those we normally think about.”

In the paper, Mr. Coates and his colleagues suggest that acute awareness of heart rate might somehow contribute to traders’ profitability.

“Traders in the financial world often speak of the importance of gut feelings for choosing profitable trades,” the authors wrote. “By this they mean that subtle physiological changes in their bodies provide cues helping them rapidly select from a range of possible trades the one that just ‘feels right.’ Our findings suggest that the gut feelings informing this decision are more than the mythical entities of financial lore — they are real physiological signals, valuable ones at that.”

Yet the researchers stop short of establishing any direct causal link between heart rate awareness and trader profitability. “Our study, being field work, could not establish causation,” they wrote.

For example, it might be the case that working in a high-stress job like trading somehow makes people more sensitive to their heart rates. Mr. Coates and his colleagues also found that people with lower body mass index and lower heart rate variability had better heart rate awareness.

“They are trying to suggest a link, but then they acknowledge that we don’t really understand cause and effect,” Professor McEwen said. “It’s a delicate balance.”

In an interview, Mr. Coates acknowledged that the results did not prove any direct correlation. “It’s a starting point for more controlled science,” he said.

Yet he remained intrigued by the possibility that when traders and other employees in high-stress professions were able to listen to their bodies, they made better decisions. He said that in addition to the pulse, other signals from the body such as muscle tension, colon distention, stomach distention and immune reactions might be picking up on things that the rational mind was missing.

“There’s a part of our brain that sends the signals to our body, and it’s really smart,” Mr. Coates said. “It doesn’t succumb to the mistakes of behavioral finance.”