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>We monitored these traders during a particularly volatile period (the tail end of the European sovereign debt crisis) so the performance of each trader reflect

by Dwolb 10y ago

>We monitored these traders during a particularly volatile period (the tail end of the European sovereign debt crisis) so the performance of each trader reflected his ability to make money during periods of extreme uncertainty. Shouldn't the market state be a pretty big experimental control? If we're coming out of a downturn and the market is going up, on average anybody taking a financial risk would be rewarded for doing so. It would be interesting to see the same group in a financial situation in which the market is at a peak and headed down. Are these traders who have greater interoceptive ability able to take the right risks since, on average, those who take on risk before a downturn lose money?

swyman 10y ago
This is a great question. Bull markets (in retrospect) select for aggressive risk-takers without much regard for their sophistication, and bear markets the reverse. You'd basically want to perform this analysis on everyone doing this type of trading over a period of like 25 years. Therein is the issue with a lot of social and behavioral science: the really really interesting stuff is just so hard to actually measure and experiment with.
mfjordvald 10y ago
My gut feeling says it depends on the trading strategy of the firm they used for the testing. Traders don't need a bull market to make money, they just need market volatility. If the market is going up they can bet on the value of stocks increasing, if the market is going down they can bet on the value of stocks going down. If the firm has a policy of being long only and traders have to hold their trades for a long time then yes, the direction of the market is going to affect the performance of traders. More information about trading strategy and limitations are necessary to really tell.
mortehu 10y ago
These guys were trading futures contracts. Unlike stocks, when you are long a futures contract, someone else is necessarily short, so it won't be the case that "anyone taking financial risk would be rewarded".
- nickff 10y ago
  There is always someone 'short' on a trade, and another party 'long', but nobody is necessarily 'shorting' a future for someone else to be buying it (as the seller may be a producer selling future production).
- dubhrosa 10y ago
  Not necessarily - for stock index futures, the seller of the contract can simultaneously buy the index of stocks. When the future contract reaches maturity the seller has to "deliver" the basket of stocks to the buyer. Banks and market makers make money writing (selling) such index futures by buying a smaller basket of stocks than are strictly in the index to get the same hedge effect (using principle component analysis, yay!), consolidating an entire portfolio of contracts and having a single hedge, and also by having lower transaction costs to buy/sell the underlying stocks than the clients buying/selling the future would, because they already have all the expensive exchange memberships, they also may have inventory, and they have dark pools, in which their own traders get first priority.

by Dwolb 10y ago

swyman 10y ago

This is a great question. Bull markets (in retrospect) select for aggressive risk-takers without much regard for their sophistication, and bear markets the reverse. You'd basically want to perform this analysis on everyone doing this type of trading over a period of like 25 years. Therein is the issue with a lot of social and behavioral science: the really really interesting stuff is just so hard to actually measure and experiment with.

mfjordvald 10y ago

My gut feeling says it depends on the trading strategy of the firm they used for the testing. Traders don't need a bull market to make money, they just need market volatility. If the market is going up they can bet on the value of stocks increasing, if the market is going down they can bet on the value of stocks going down. If the firm has a policy of being long only and traders have to hold their trades for a long time then yes, the direction of the market is going to affect the performance of traders. More information about trading strategy and limitations are necessary to really tell.

mortehu 10y ago

These guys were trading futures contracts. Unlike stocks, when you are long a futures contract, someone else is necessarily short, so it won't be the case that "anyone taking financial risk would be rewarded".

nickff 10y ago
There is always someone 'short' on a trade, and another party 'long', but nobody is necessarily 'shorting' a future for someone else to be buying it (as the seller may be a producer selling future production).
dubhrosa 10y ago
Not necessarily - for stock index futures, the seller of the contract can simultaneously buy the index of stocks. When the future contract reaches maturity the seller has to "deliver" the basket of stocks to the buyer. Banks and market makers make money writing (selling) such index futures by buying a smaller basket of stocks than are strictly in the index to get the same hedge effect (using principle component analysis, yay!), consolidating an entire portfolio of contracts and having a single hedge, and also by having lower transaction costs to buy/sell the underlying stocks than the clients buying/selling the future would, because they already have all the expensive exchange memberships, they also may have inventory, and they have dark pools, in which their own traders get first priority.