At the University of St. Gallen in Switzerland, researchers have investigated the behavior of a group of traders and found them to be extraordinarily ruthless and destructively malicious. Most remarkably, a control group of actual psychopaths was not as bad as the traders! Whatever one thinks of this particular research project, there are some lessons to be learned here.
A total of 28 stock market traders played a simulation game that investigated their ability and willingness to cooperate, and other aspects of their behavior. A control group comprised of 24 "real" proven psychopaths from a Swiss jail, with comparable intelligence, also played the game for comparative purposes. The behavior of the traders turned out to be the lesser of the two evils. That is, the traders behaved considerably worse than the control group.
The head researcher, Thomas Noll, stressed that this does not mean the traders are mentally ill, but rather that trading on the stock exchange is dominated by the wrong group dynamics. However, the results are alarming and do not bode well for the financial world, or indeed the broader planet earth.
The impact of such dysfunctional egocentricity at both individual and societal levels is grave. Such trading is often not even rational. The desire to do in other traders financially and to make money right now, at all costs, ultimately drags everyone down into a financial abyss, including the traders themselves. Furthermore, the profits earned by such rogue traders are generally not even higher than those with ethics and more rationality.
The essence of the problem is that such traders sub-optimize their own performance, because their priorities are wrong. They are more interested in knocking out the competition than in conducting the best possible transactions and adopting the appropriate strategies.
Such self-destructive behavior is more common than one might think. In many aspects of life, people's psychology gets the better of them. Short-sighted impulsiveness, resentment, anger and pointlessly excessive competitiveness leads to actions that benefits no one, at least not in the long run. This research project indicates that traders may be particularly prone to such psycho-traps.
How do Investors Feel About the Research?
When this research was published, it created quite a stir and yielded some remarks that are as interesting as the study itself.
For instance, one cynic, or should one say realist, argued that "of course they behave like psychopaths. Unregulated, law-of-the-jungle organizational/social structures are like a theme park for these personalities."
Even more cynical was this one: "so what you are saying is that we should invest with psychopaths as opposed to stockbrokers." However, one might comment that the issue is whether the two are not often one and the same.
Yet another critic of the "system" concurs that "they (traders) are the perfect model of our society and what we have become. All over the world, nations are struggling financially, because their governments felt compelled to bail out their banks after a reckless round of speculation came crashing down. We bend over backwards to reward this kind of behavior. Why should we be surprised that the world is in a mess and getting worse?"
One anonymous commentator explained that his "previous broker made a number of wild trades without permission, lost money and as a result lost his client and his credibility. His personality matches the characteristics outlined in the study".
And there is this one: "This is why I have nothing in the stock market any more. I'll take my chances with real estate".
More coldly and dispassionately, however, one commentator drew attention to potential flaws in the research methodology. "Reporting on anecdotal evidence and one microscopic study, and then making generalizations is careless … This study (even combined with a few others) does not mean that one can draw some of these slanderous statements about an entire profession."
The Bottom Line
Controversial as this study may be, it certainly provides food for thought. Trading behavior can be not only ethically bad, but also psychologically twisted, irrational and dangerous. The consequences for all participants and the broader economy can be severe.
Trading should be a rational business activity, with the sole objective of maximizing profits though understanding the nature of markets and of the other traders. It should also be conducted fairly and ethically. There is no legitimate place for emotionally charged game-playing that undermines the efficiency and viability of the market processes for all participants.
Active Trading FundamentalsSometimes your largest financial hurdle is our head. Learn about the common mind-traps that trip up investors.
Active Trading FundamentalsThere are human tendencies that can block the road toward achieving our financial goals. Here's how to get around them.
Options & FuturesDiscover what on-balance volume, accumulation/distribution and open interest can tell you about the market mood.
BudgetingRaise your returns or lower your losses; these often misunderstood specialists can help guide you.
Options & FuturesThis important investment decision happens before you pick your first stock. Find out how to get it right.
Active Trading FundamentalsJim Cramer's spirited recommendations are a case study in irrational market behavior.
Investing BasicsIn specie describes the distribution of an asset in its physical form instead of cash.
EconomicsCross elasticity of demand measures the quantity demanded of one good in response to a change in price of another.
Investing BasicsWhen stocks rise or fall, the financial fate of investors change, as well. There are certain signs that can reveal a stock’s course, and investors don’t need to be experts to spot them.
Investing BasicsA look at two different trading strategies for ETFs - one for investors and the other for active traders.
Mutual funds split in the same way that individual stocks split, but less often. Like a stock split, mutual fund splits do ... Read Full Answer >>
In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
In statistics, regression analysis is a widely used technique to uncover relationships among variables and determine whether ... Read Full Answer >>
The modified duration gauges the sensitivity of the fixed income securities to changes in interest rates. To calculate the ... Read Full Answer >>
In finance, the rule of 72 is a useful shortcut to assess how long it takes an investment to double given its annual growth ... Read Full Answer >>
In statistics, the standard error is the standard deviation of the sampling statistical measure, usually the sample mean. ... Read Full Answer >>