Sunday, March 02, 2008

Cross-Talk: The Challenge of Hiring Successful Traders

I noticed that Barry Ritholtz recently linked my post on expertise. This is a topic of tremendous relevance to professional trading firms that face the challenge of hiring successful traders.

A number of trading firms that work with me begin by asking my help for their traders, but then expand the scope of our collaboration to aid with the hiring process itself. The simple economic reality is that it is much cheaper to hire the right people than to hire struggling traders who require extensive support and risk management.

Hiring successful traders is more of a challenge than one might think. Partly this is because we don't have a great deal of research to draw upon to predict trading success from failure. Often, trading firms make the (flawed) assumption that success is a function of personality traits, leading them to seek people with the "right" interests and characteristics. Even a cursory overview of successful traders at any firm, however, reveals considerable diversity in personality features.

My personal experience across trading firms is that there is no holy grail of right traits that generate success, but the presence of certain characteristics can almost certainly ensure failure. Across dozens of trading firms, I don't think I've ever encountered a successful trader who displayed a high degree of neuroticism (tendency toward negative emotion) and a low degree of traits related to risk-taking.

A different approach to hiring successful traders is to focus on expertise, rather than personality. That is, we look for talents and skills that are predictive of success for particular kinds of trading. An interesting article identifies five facets of expertise:

* Experts rely on experience to guide them, rather than explicit rules;
* Experts perform tasks automatically, rather than through (self-) conscious effort;
* Experts display significant efficiencies in processing information;
* Experts possess multiple strategies for dealing with challenging situations;
* Experts approach problems more flexibly than beginners, relying more heavily upon intuition.

As I indicate in an article from a few years back, much of expertise is the result of implicit learning. The expert trader is one who has experienced so many markets and market patterns that their response to these (and anticipation of these) becomes second nature. If a trader has career promise, he or she should show evidence of a learning curve that is consistent with expertise development. Instead of screening prospective traders for personality alone, trading firms should "get under the hood" and investigate a trader's actual trading statements and knowledge base for signs of growth and development.

The research I summarized in my book on performance is unequivocal: Those who develop expertise are immersed in their work--and in working on themselves as performers. There is a qualitative difference between the learning of the competent performer and the learning of the expert, and the difference can be traced to the nature and degree of the developing expert's immersion in his or her craft.

We tend to make decisions based upon the information that is most readily available. Casual impressions from interviews and simple personality observations thus dominate the hiring landscape. To delve deeper into developing expertise takes a kind of expertise itself, which perhaps is the reason even very sophisticated trading organizations rely on relatively primitive hiring practices.


A Look at a World-Class Trader