Jul

21

C MI've been thinking about whether there's a correlation between trading success and intelligence. Do people with high IQs do better at the trading game than those with low IQs? I wonder if high intelligence is a prerequisite for trading success, or if it even fits into the equation.

Are traders in some markets smarter than those in other markets? Are the index or currency guys smarter than the grain crowd, for instance? Are the upstairs guys smarter than the floor guys? Does higher education really matter, or even have a correlation with trading success? Has any of this ever been measured before? An interesting thing to ponder is if there might be a correlation between juvenile behavior and trading success. Perhaps the most important traits for traders are balance, emotional intelligence, the ability and discipline to execute a plan successfully, and courage. Some of the smartest people I've ever known have been really bad traders, whereas I've known very successful ones who don't exhibit outward signs of extra intelligence.

Newton Linchen adds:

This is a great issue. How many times we sit and shout "why oh why didn't I trade the way I said (plan)?" This happens despite our intelligence — one thing is to be able to "understand" or predict markets — other is to be able to translate this view into action. Perhaps the best strategist is not the best fighter — and it's very unusual to see a strategist-fighter or fighter-strategist.

Generals plan their moves at night, in the tents, but they send the soldiers to do the job the next day.

GM Nigel Davies replies:

Even in a supposedly intellectual game like chess, character plays a much larger part than intelligence. A major part of it is in whether someone can bring himself to falsify his ideas or instead uses what intelligence he has to justify them.

Steve Ellison observes:

I suspect that practical intelligence (synonyms: business savvy, street smarts) is more important to trading success than the type of intelligence measured by IQ. Ben Green, in the preface to Horse Tradin', noted that horse dealers had to know about many factors such as demand, climate, crops, and soils, but then went on to say:

For a big dealer in a central market to be successful he also had to acquire a keen understanding of human nature… None of the knowledge needed by a high-class horse and mule dealer could be learned from books or schools, and it would be well understood that these men were usually middle age or over.

Last but not least, he had to be a man with a lot of nerve, who was willing to back his own judgment and that of his buyers and to face the risks involved in shipping, loading, and unloading (together with the possibility of various shipping diseases) that were a hazard of the business… It is easy to see that with money going out in both directions it took larger amounts of capital, accompanied by a good nerve and judgment, to be a successful central market dealer.


Comments

Name

Email

Website

Speak your mind

6 Comments so far

  1. Gangineni Dhananjhay on July 21, 2009 10:34 am

    This question keeps me awake as a trader of Indian Markets having undergone post graduate education in finance and doing research on microstructure of Indian capital markets. Markets depend on Knowledge and Information. If Markets cannot nurture intelligence , how to understand market ecology. I wonder whether some type of trading demands higher level of intelligence ( like Options, Long term vs Short term ). I believe higher education hones traders feel and market intution but some times it may slow down the trader from taking decisive actions because he is enamoured with trying to avoid Black Swans. As Chairman points out ” Extraordinary returns can be earned only by taking big Gambles ” . If I try to avoid big draw downs with respect for risk my results adjusting for Vig, opportunity cost,Bench mark returns, Short term penumbras turning out to be mediocre. Is it possible for a trader of high intelligence / education to see the markets more clearly after initial struggles ( aha moment ) compared to players who are not grounded in basics. I routinely come across large number of traders in Indian brokerages with surprisingly no basic knowledge of Market Micro structure, Properties of Instruments used to express their opinion, Lack of respect for risk or even grasp of possibility of extreme events. I think here the Talebian question of Skill vs Luck comes into Play. Are these uneducated traders easy fodder to the market ecology. Education may not guarantee success in Markets but what is the alternative. The educated trader has to believe he has an edge. Education and strong base of operations may give the trader better chance of survival. My daughter Gangineni Hita often asks after a strenuous trading day, what is the P/L as you talk about lot of complicated market jargon .

  2. Jason on July 21, 2009 3:08 pm

    I enjoy doing mathematics proofs (number theory,analysis etc.) and classical piano (currently Bach Partita no. 2) as a hobby. Trading makes me dumber. I simply cannot concentrate well on anything else while trading and after trading. If it’s buy and hold, no problem. If I’m putting on a new position it’s always unsettling until I have realized some gain or closed out at a small loss, then I can relax. The day is shot to hell and I can’t do other things I enjoy when trading gets in the way. It’s a personal thing. Trading lowers my IQ by at least 30 pts. for a few days.

  3. Michael Jackson on July 22, 2009 10:42 am

    When I worked in the S&P pit @ the Chicago Mercantile Exhchange, I met several sucessful local traders who had no idea how to use a computer.

  4. hh on July 22, 2009 12:17 pm

    there’s an old paper around where the authors compare fund performance with SAT scores, MBA, graduate levels,… They found a strong correlation between strong performance and the former factors although correl is not causal as we all know. Maybe it’s just the other way around: Strong funds attract high educated people…?

    “Are Some Mutual Fund Managers Better Than Others? Cross-Sectional Patterns in Behavior and Performance ”

    also:

    Still, Chevalier and Ellison find that there are substantial differences between funds managed by managers from low- versus high-SAT schools that cannot be explained by differences in behavior, expenses, or survivorship. For example, a manager who attended Princeton (the school with the fourth highest SAT score in the sample) would be expected to outperform a manager who attended the University of Florida (with an SAT score close to the sample mean) by 60 basis points per year. But Chevalier and Ellison caution that this result could reflect a tendency of high-SAT managers to work for funds which have lower unreported expenses, better support staff, or superior compensation packages that induce greater work effort.

  5. Jeff Watson on July 22, 2009 2:29 pm

    @hh
    you describe the performance of guys at funds. What about the guys that just trade their own accounts? Guys (who spent their time in the pit) that are successful trading their own accounts usually blow away the numbers of the fund guys…and don’t mention scalability, either.
    At both exchanges where I grew up, Ivy grads did not have an edge. In fact, I found Ag majors made good traders, and after learning the game could migrate to other products with ease.

    Jeff

  6. HH on July 27, 2009 2:08 am

    @ Jeff

    I couldn’t agree more with your view. I just mentioned the paper as it seemed a bit related to the topic.

    regards
    HH

Archives

Resources & Links

Search