Monday, April 09, 2007

Neurofinance and the Anthroscopic Measurement of Trader Performance

In past posts I've written about biofeedback and hemoencephalography as methods for monitoring one's physiological arousal and cognitive focus during real-time trading. By tracking such measures as heart rate variability, a trader can assess--and potentially extend--his or her self control under conditions of risk and uncertainty.

Indeed, this is just the tip of a much larger iceberg regarding the use of computers to aid decision making and performance. Research from Sandia Labs finds that real-time computer feedback about everything from perspiration, heartbeat, vocal inflection, and facial expression aids participants in team-based tasks. Their idea is to turn the computer into an "anthroscope": a measuring instrument of global human functioning. A particularly interesting application is defining those states that occur during "personal best" performance, so that these can be replicated.

Research that I recently cited from Andrew Lo found that biofeedback readings during real time trading distinguished between experienced and novice traders. The latter showed greater arousal during such market events as increased volatility. Might it also be the case that "anthroscopic" readings of traders would find signature patterns of personal best performances, distinguishing traders at their best from when they're at their worst?

David Edwards distinguishes neurofinance from neuroeconomics, defining the former as a direct application of cognitive neuroscience to trading practice. Citing the Sandia research, Edwards compares anthroscopic measurement of traders to the practice of assessing VO2 max among runners and cyclists. Zack Lynch argues that, as sophisticated trading organizations find diminishing returns from their data mining research, they will be drawn toward another source of competitive advantage: traders' computer-based management of their own decision-making performance.

If anthroscopic measurement can aid team-based performance, might it aid the performance of trading teams? Could biofeedback measures be linked to traders' screens to deliver pop-up alerts when traders are out of their optimal performance zones? Are there signature blood flow patterns in the brain or biofeedback patterns that distinguish successful traders from less successful ones, and could these be incorporated into realistic trading simulations to help firms hire promising candidates?

This, surely, is one of the great frontiers in trading psychology. In the near future, I will track my own biofeedback readings during a trading session and post here. Can simple desktop applications assist a trader in real time? Let's see if we can find out.