Humans are filled with emotions, and those emotions can sometimes lead us astray. But when it comes to making business decisions, it can pay to follow your gut, or says the research in a a new paper by the University of Cambridge.
The researchers found that financial traders are better at reading their gut feelings than the general population, and the better they are at this ability, the more successful they are as traders.
Gut feelings, known technically as interoceptive sensations, carry information to the brain from many tissues of the body, including the heart and lungs, as well as the gut. They can report anything from body temperature to breathlessness, racing heart, fullness from the gut, bladder and bowel, and they underpin states such as hunger, thirst, pain, and anxiety.
Traders and investors in the financial markets frequently talk of the importance of gut feelings for selecting profitable trades. To find out the extent to which this belief is correct, researchers from the Universities of Cambridge and Sussex in the U.K. and Queensland University of Technology in Australia compared the interoceptive abilities of financial traders against those of non-trader control subjects. Their results are published today in the journal Scientific Reports.
The researchers recruited 18 male traders from a hedge fund engaged in high frequency trading, which involves buying and selling futures contracts for only a short period of time: seconds or minutes, a few hours at the most. The study took place during a particularly volatile period, the Eurozone crisis, so the performance of each trader reflected his ability to make money during periods of extreme uncertainty.
The researchers measured individual differences in each trader’s capacity to detect subtle changes in the physiological state of their bodies by means of two established heartbeat detection tasks. These tasks test how accurately a person, when at rest, can count their heartbeats. Each trader was given a score which, essentially, measured the percentage of right answers, and these scores were compared against data from 48 students at the University of Sussex.
The researchers found that traders performed significantly better at the heart rate detection tasks compared to the controls: the mean score for traders was 78.2, compared to 66.9 for the controls. Even within the group of traders, those who were better at the heart rate detection tasks also performed better at trading, generating greater profits.
“In economics and finance most models analyze conscious reasoning and are based on psychology,” researchers reported. “We’re looking instead at risk takers’ physiology: how good are they at sensing signals from their viscera? We should refocus on the body, or more exactly the interaction between body and brain. Medics find this obvious; economists don't.”