Monday, May 21, 2007

Decision Making and Risk: Fascinating Research From Dr. Itiel Dror

As part of my recent post on trader psychometrics, I reviewed a number of research studies dealing with risk taking and personality. One of the happy outcomes of my search was coming across the research of Dr. Itiel Dror, who teaches at the School of Psychology at the University of Southampton in England. His work on decision making is particularly relevant to trading.

Among the interesting findings from his research:

* Time Pressure Affects Risk Taking - Under time pressure, individuals are more conservative when they face less risk, but more risk-taking at higher levels of risk.

* Emotions Affect Pattern Recognition - Increased negative emotionality led raters to identify more patterns in ambiguous situations.

* Contextual Information Affects the Judgments of Experts - When you provide leading information to experts, their subsequent judgments change to fit the prior information.

* Perception is Far From Perfection - What we perceive is greatly influenced by our mental states, the information we've already stored and organized, and the meanings we impose upon ambiguous situations.

* Primacy Effects - What we see first biases our perception and affects our subsequent performance.

The important take-away from this research is that many of the factors that influence performance--even among expert performers--are situational and not part of fixed personality traits. What we perceive and how we respond are greatly influenced by the environment. A full understanding of a trader's performance requires an appreciation of the specific situation in which the performance was embedded.


Inside the Trader's Brain

Finding an Objective Basis for Subjective Knowledge

Four Insightful Studies From Dr. Andrew Lo