Financial traders found to be reflective risk-takers

Financial traders found to be reflective risk-takers


Financial traders have become the target for criticism following the credit crunch and financial crisis since 2008. One popular conception of their job is that of emotionally-charged operators driven by risky behaviour to make profit. In fact, so far academic studies suggest that traders are indeed showing signs of intuitive thinking, meaning that they are not as careful and considerate in their decision-making and risk-taking as they should be. For example, rather than evaluating as much information as possible and considering multiple options before making a decision on a transaction, traders may follow simple mental rules (or heuristics) such as “follow the trend”.

New research published in the journal PLoSOne by psychologists of the University of East London, however, has shown that this is only partly the case. Financial traders working in London were compared to bank employees (who were not working in trading roles) in terms of their propensity to take risks as well as their thinking style. Both groups in turn were compared to a third group of people not working in finance at all, and all three groups were comparable in age and levels of education. Using validated questionnaires on thinking-style and risk-taking, traders were shown to be more careful in their decision-making approach than people without a financial background. However, both bankers and traders were indeed more prone to financial risk-taking. Finally, in a performance test that measures whether people can solve simple but misleading math puzzles, traders outperformed both bankers and the control group.

Volker Thoma, the research leader, explains the findings:

“Unlike what is suggested in the research literature and appears to be common public perception, we find that the traders in our sample were more cautious in their decision-making style and also more successful problem-solvers than participants in the other groups. However, both bankers and traders appear to be taking higher financial risks, as would be expected from their jobs.”

The research team stresses that not enough is yet known about thinking-style and trading performance. For example, some aspects of trading jobs may rely on intuitive – rather than reflective – thinking, because traders may have to deal with a lot of information during their working day. One indication for this argument is that more intuitive thinking style correlated with years of experience. Thoma says that future research has to investigate whether certain thinking styles correlate with specific trading roles and tasks.

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Daniel Edgcumbe

I am studying towards my PhD in cognitive neuroscience at a leading London university

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