Friday, December 28, 2007

The Brain's Role in Trading Performance

Consider the following behaviors:

* Planning, setting goals, and initiating action
* Monitoring outcomes and adapting to errors
* Mental effort in pursuing difficult goals
* Motivation, willingness to engage in action
* Regulating emotional impulses
* Active thinking
* Sustained attention in the face of distraction
* Decision-making, switching attention and changing strategies
* Planning and sequencing actions
* Resolving competition between plans

These sound like a veritable who's who of sound trading behaviors. In fact, however, they have been taken from a list of common functions of the brain's prefrontal cortex provided by Elkhonon Goldberg and Dmitri Bougakov in their chapter "Goals, Executive Control, and Action", which is part of an excellent overview text on the brain called Cognition, Brain, and Consciousness and edited by Bernard J. Baars and Nicole M. Cage.

The brain's frontal lobes are involved in impulse control, judgment, and the planning, coordinating, and executing of behavioral plans. Among frontal lobe disorders are schizophrenia, dementia, and attention-deficit disorders. When individuals fail to live up to their New Year's resolutions and other intentions, we commonly attribute their failure to a lack of motivation. Research, however, finds that the ability to follow up on such plans is significantly related to frontal lobe performance on neuropsychological tests. It may well be that traders who have problems with following trading rules have much broader neuropsychological deficits, not merely temporary lapses in motivation or discipline.

Dr. Goldberg, co-author of the aforementioned chapter, suggests that engaging in tasks that require use of the frontal lobes may in fact strength their function. This has profound implications for the treatment of dementia and attention deficits and may also play an important role in improving performance at such cognitive tasks as trading.

Interestingly, the research cited in Dr. Goldberg's chapter indicates that the prefrontal cortex is most involved in tasks that involve novelty. Familiar tasks that are routine do not require the same kind of attention, concentration, planning, and judgment. It may well be that tackling new, unfamiliar challenges is most stimulating to brain development, whereas routine (consider the lifestyles of many retired people) is least likely to enhance cognitive functioning.

This strikes me as one of the exciting frontiers of performance psychology.


Inside the Trader's Brain

Finding the Zone

Biofeedback for Performance Enhancement

Lessons From Neuroeconomics


Gary said...

More fascinating still, studies have shown that meditation increases the thickness of the prefrontal cortex and the right anterior insula. According to one article, accomplished musicians and athletes also exhibit growth in relevant areas. These studies were kicked off when the Dali Lama started collaborating with scientists in a series of "Mind and Life" dialogues. I propose that constant study of the market will also physically alter the geography of the brain.

Brett Steenbarger, Ph.D. said...

Hi Gary,

I suspect you're right, given brain plasticity; thanks for the background!


Anatrader said...

What a marvel our brain is, Brett.

With each passing day, we hear new insights into the brain's capabilities.

Thank you to Gary for bringing to our attention the extra benefits of Meditation, which is enlightening to me and most readers, I am sure.

Speaking for myself, I need all the kicks to prevent my loss of memory !

Gary said...

On a little bit of a tangent, you may be interested in what DANIEL GOLEMAN had to say in's yearly question- "What Have You Changed Your Mind About?"
NASSIM TALEB also pens and entry.

I think you'll find the whole site absorbing.