Wednesday, September 24, 2008

Personality Traits and Trading Success

The research of Costa and McCrae suggests that personality traits fall into five broad categories, with each category displaying a number of facets. Their NEO-PI personality trait inventory labels these categories and facets as follows:

* Neuroticism - Anxiety, Angry Hostility, Depression, Self-Consciousness, Impulsiveness, and Vulnerability;

* Extraversion - Warmth, Gregariousness, Assertiveness, Activity, Excitement-Seeking, Positive Emotions;

* Openness - Fantasy, Aesthetics, Feelings, Actions, Ideas, Values;

* Agreeableness - Trust, Straightforwardness, Altruism, Compliance, Modesty, and Tender-Mindedness;

* Conscientiousness - Competence, Order, Dutifulness, Achievement Striving, Self-Discipline, and Deliberation.

I commonly hear questions about which personality traits distinguish successful traders. My leaning is to question the premise; success in trading is probably far more related to talents, skills, and effort than personality features. That having been said, it's no doubt the case that certain traits tend to help people make best use of their talents and skills in particular vocations.

One interesting case in point came from research that I conducted quite a few years ago. The literature had found that stereotypical masculine sex role traits (assertiveness, achievement-orientation) were more associated with happiness and success than stereotypical feminine sex role traits (caring, warmth, nurturance). I wondered if this was perhaps an artifact: since most research subjects in these studies were hapless Psych 101 students fulfilling their requirements, perhaps the findings were telling us more about what was successful in their academic worlds than in the world in general.

I repeated the studies but used subjects who attended a college of nursing. Sure enough, feminine sex roles were more associated with happiness and success in that population. It's not the personality trait, but the fit between the trait and one's environmental and work demands, that accounts for success. In the military, one set of personality traits might characterize success; in the worlds of sales, trading, or psychotherapy, we'd expect to see different traits come to the fore.

Similarly, different styles of trading--from market making in the pit and scalping to longer-term investing and pairs/spread trading--might be associated with different personality trait correlates of success. The search for a single set of traits to predict success is unlikely to bear fruit. In my next post, I'll offer a short personality self-assessment and discuss how the results might be related to trading success in various financial settings and strategies.


Assessing Trader Personality


dgoverde said...

Brett, you're beautiful. This is exactly the type of follow-up that I should have expected from you. The truth is that I didn't expect anything because I didn't ask myself how you would react. I just felt compelled to make my point. It needed to be made, even if it was going to offend you. I can see that you were slightly offended because of the way that you weighted "sharply worded projective identification" against, what was it "tightly reasoned, careful critiques?" Something like that.

But eventually, offended or not, you did see what I was trying to get at. But why am I making such a big deal out of this? I'll tell you why. I think that matching your trading style to your personality is the most important thing you can do. But I also know that markets can evolve away from trading styles. And if I am right about the dollar losing much of its value, then telling us to keep our heads might not be the most useful advice that you can give us. Shouldn't you be pointing out to us that this is the type of "paradigm shift" in which markets might move away from our trading styles-- even if they have been successful in the past?

(Hilarious. I just realized that the example that I have in mind comes from your book-- Enhancing Trader Performance. You talked about how a trader was successful for years trading one method, but then suddenly wasn't successful anymore, and not because his discipline had failed him, but because his strategy had become obsolete. You might have thought that I was just "talking my book" in the last couple of posts. But I wasn't. I don't place macro bets. I am a systems trader.)

Now your "projective identification" call is right on. Yes, I am projecting myself onto you, but I do so honestly. It occurred to me when I read your "Don't Panic" post, that you were almost certainly facing the same problem that I am, but that you weren't even aware of the problem. And why not? Precisely because it wasn't in your nature to see it. You are perhaps incapable of seeing it. That was what I realized. Now, I am a systems trader. I trade equity ETFs only. From what I can tell, you are basically a systems trader who trades ETFs only. Now let's not quibble over differences between trading styles here. I know that you use some discretion, but you are basically trading on patterns that could just as easily be recognized by a system. So what's the problem here? Assume that the dollar drops by 50% over the next two years. And assume that you are able to eke out a mere 20% per year trading your systems. What would that mean? It would mean that in real (purchasing power) terms, your P&L would be flat. Think about that for a second. It's not an insignificant point. What's worse? If you were a "buy and hold" investor, it would be entirely possible that both the S&P 500 and the dollar would plummet over the next year or two. What would that do to your retirement? If you're planning on being around to buy the 2020 generation of Chinese flat-screen TVs, it might make a difference as to which model you can afford.

So what's my point? Here it is: what I haven't seen from you recently is any discussion relating to how we can adapt our trading styles so that they both a) continue to agree with our personality type, and b) stay abreast of "paradigmatic shifts" in market conditions. The answer for me is to start developing commodities systems. If the dollar gets pummeled, both the dollar and the commodities will become much more volatile, and I think that I might be able to develop systems to capture that volatility. But what about you? And what about the rest of your readers? What should they do, Brett? Knowing that there is potentially going to be a massive "shift" into a world of slowing economic growth and simultaneously increasing prices, how can we adapt our trading styles to fit the reality of this new environment? I'd like to see more posts relating to such topics, and fewer posts telling us to just keep our head. If I'm right here, keeping my head and "sticking to my discipline" will do nothing for me. Nor will it do anything for you. Do you see now why my "projective identification" was so sharply worded? If you bring your knowledge to bear on this problem, you can make a difference in how we react to this situation. But unfortunately, in this case, you have to "see the trade" first. If you can't see that there is the potential for a massive collapse in the dollar, then you can't see that now is the time to start adapting your trading style-- away from short-term equity ETF strategies, and towards what?

I don't know. I thought you might be able to help us with that.


Brett Steenbarger, Ph.D. said...


A few points:

1) Projective identification is not the same thing as projection; the former refers to my experiences as a clinician;

2) I trade ETFs in my trading account, but the majority of my money is in separate personal accounts that include a variety of hedges;

3) The dollar weakness thesis is a very interesting one, but it is a consensus trade in the public arena, as evidenced by the run on gold coins. It's worth hedging a personal portfolio for inflation/dollar weakness, but it's hard for me to think of that as a paradigm shift in thinking.


dgoverde said...


Thanks for the taking the time to read and reply. Please know that I do respect you, and appreciate that you take the time to share your insights with us. Also, please keep my concerns in mind so that you can filter them through the prism of your head. I am hoping that you'll contemplate this stuff, and that, if the dollar does start to slide, you'll be the one who gives us the tools to adapt to the new environment.

Keep up the good work,