Saturday, January 27, 2007

Interpreting the Personality Questionnaire for Traders

I recently posted a personality questionnaire for traders and explained related research into subjective well-being. In this post, we will take a more detailed look at the questionnaire results and what they might mean for your trading. If you haven't yet completed the questionnaire, you might want to fill in the ten items before continuing.

Before launching into the interpretation, let me emphasize the limitations of the questionnaire. First off, we're looking at the relative frequency of positive and negative emotional experience specifically as it pertains to trading. The questionnaire asks to rate these emotions over the past two week period. As a result, what we have is a snapshot of your trading experience. This is not a mental health questionnaire, and it is not intended to diagnose psychological disorders. Nor is it necessarily a picture of your trading experience as a whole. The past two weeks could be greatly influenced by situational factors, such as difficult trading markets, poor physical health, or stresses from your personal life impacting your trading. To obtain a broader picture of your trading experience, you'd need to take the questionnaire at different points in the year and look for common threads.

Notice, following the research of Ed Diener and colleagues, the emphasis is upon the frequency--and not the intensity--of emotional experience. Having very high highs in emotion tends also to be associated with very low lows; it does not guarantee an overall sense of well-being. Rather, it is the frequency with which we experience positive vs. negative emotions that contributes to our physical health and general sense of emotional wellness.

So when you look at your questionnaire results, you want to first focus on the summed scores for the odd items (subjective well-being, or SWB) vs. the even items (distress). Because there are five items for positive emotional experience and five for negative emotional experience, the minimum SWB and distress scores would be 5 and the maximum would be 25. In general, we can look at anything above 15 as indication of relatively frequent experience and anything below 15 as an indication of relatively infrequent experience. In general, it's ideal to see the positive item score meaningfully higher than the negative item score--a 2:1 ratio is quite favorable. If the negative item score equals or exceeds the score for the positive items, it suggests a relative imbalance in emotional experience.

Now let's think about what that means. What we're really looking at is the quality of your experience when you're trading. Do you have fun when you're trading, or is it stressful? Are you satisfied with your results, or are you discouraged? Do you find trading energizing or exhausting? Do you feel in control of how you perform, or do you feel that markets end up controlling you? Do you feel competent to succeed, or do you feel that your goals are beyond your reach? Each of these is a facet of positive and negative emotional experience. The questions don't tell us why you might be feeling positively or negatively; they merely take your emotional temperature. If your positive experience nicely exceeds your negative experience, you have a normal, healthy emotional temperature. If the reverse, you have a kind of emotional fever; trading, in such cases, is not contributing to your well-being as a person.

Why is this important? When we are operating at a feverish emotional pitch, with more frequent negative than positive experience, our state interferes with concentration, and it interferes with learning. Like the student experiencing test anxiety, we lose the ability to access the knowledge and skills that we possess. As I stress in my books, this is because, under conditions of negative emotional arousal, we are no longer activating the brain's executive center: the frontal cortex. If we are corporations, our brain's cortex is our CEO. When we are out of balance, we are operating without a CEO. Our ability to accurately perceive, judge, plan, and act becomes impaired. This burdens our trading performance.

Conversely, as Csikszentmihalyi's research suggests, we are most likely to perform optimally when we are in a state in which our skills are well-matched with the challenges we face, enabling us to become fully immersed in our activities. It is possible to sustain this sense of flow only when we are performing in a niche that enables us to experience ourselves positively. In a very important sense, psychological distress is anti-flow. It represents the inability to immerse ourselves positively and meaningfully in what we're doing. Such immersion typifies elite performers across fields as diverse as athletics, art, and chess because it represents an enhanced state of learning. Think about reading a book that bores you vs. reading a book that absorbs your interest. When you lose yourself in a book, you'll remember the details of the plot and characters. When the book is uninteresting to you, you'll skim over the contents rather than internalize them. So it is with markets and the learning of ever-changing market patterns.

Notice how I sneaked that last part in there. Markets are continuously changing. Their trends change, as do their patterns of volatility. Even the best-researched mechanical trading systems degrade over time. For this reason, traders are continuously learning, unlearning, and relearning market patterns. Their survival crucially depends upon their ability to sustain states of enhanced learning. Surely this is the great emotional challenge for traders: to sustain well-being even during those trading slumps when markets are shifting and playing havoc with our pattern recognition. How can we do this? That will be the topic of my final post in this series.