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