Article by Steven Goldstein, trader performance coach at Alpha R Cubed.
Imagine an aspiring sprinter who is physically tall, slim and wiry. The sprinter may train and practice hard, developing the skills and tactics required for sprinting success, however he was one major disadvantage, he is not built for sprinting. His physique would be more advantageous if he was a distance runner. Thus when competing at a higher level, he would start coming up against sprinters who have a defined ‘edge’, they are physically built for sprinting. In athletics, having the appropriate physique for a discipline provides a clear edge: Sprinters are powerfully built, distance runners are thin and wiry, whilst jumpers and throwers possess various physical attributes relevant for their disciplines. In financial markets, the equivalent to athletics physique, is ‘Risk Personality’, the characteristic patterns of thinking, feeling and behaviour that people display in how they perceive, tolerate, and show propensity for risk-taking. In the same way that people are built differently for different athletic disciplines, so people possess varying personalities, which favour different approaches to engaging with risk. In my work as a performance consultant and coach working with traders and investment professionals, I have found that certain personality types have a distinct ‘edge’ when taking and managing financial market risk in certain different contexts. Rather like there is a field of athletics that favours each and every body shape, there is a form of financial market risk taking that works for each and every personality type.
There is a growing body of research that is starting to focus on how understanding risk personality can have a profound impact on the performance of individuals in financial markets and on the collective performance of financial market businesses. A couple of months ago the Financial Times ran an article with the following headline:
This related to a fascinating piece of research carried out by a group of senior academics that highlighted the degree to which personality affected ‘Risk Taking’ performance of senior bankers. One of the starkest findings from this research paper, was that “Style”, a category which included personality, talent and work ethic, accounted for as much as 72% of the difference in banker’s risk behaviour. On the other hand, aspects that are traditionally considered relevant, such as remuneration, accounted for only 4%, and education and age accounted for just 5% of the differences. In this article, I will explore ‘risk personality’ and introduce some private research that myself and my colleagues have been doing around risk-taker personality. I will explain how and why understanding and being more aware of your risk personality can help you improve how you take and manage risk, and how this can be the start of a further development of your capabilities as a risk-taker which leads to improved and more consistent performance. Personality testing is more than just about helping assist employers in their hiring decision, they can be used in many ways to help improve performance, enhance working practices, and support teams and businesses to improve how they work and function.
Read the full article on the Behavioural Trading website here.