Thursday, December 31, 2009

Attributional Style and Trading Performance

When positive or negative things happen in life, we tend to attribute them to causes. This helps us make sense of the world. A robust line of research over the last two decades suggests that how we attribute causes--our attributional style--plays an important role in our moods and behavior.

The Attributional Style Questionnaire (ASQ) developed by Peterson et al (1982) has been used in a wide range of research to assess three dimensions of attributions:

1) Internal vs. External: Are events attributed to factors within our control or outside our control?

2) Stable vs. Unstable: Are events attributed to factors that are enduring or that are transient?

3) Global vs. Specific: Are events attributed to general circumstances or highly circumscribed causes?

It turns out that the mix of these dimensions defines a person's attributional style, and that style is predictive of the onset of symptoms of depression.

Let's take an example:

Suppose a trader loses money several weeks in a row. We are more likely to see a depressed mood if the trader attributes the poor performance to something about himself (internal), something not likely to change (stable), and something likely to occur across a variety of situations (global): "I keep losing money because I lack the discipline to be prepared each morning."

We're also more likely to see depressed mood among traders who attribute positive outcomes to external, unstable, and specific factors: "I make money when volatility is high and markets are trending."

Why is that important? Emotions can be thought of as motivational states; depressed mood reflects a kind of motivational suppression. We lose the will to change events if we perceive those events to be outside our control. Conversely, if we view important events as within our control, we are likely to experience optimism and motivational enhancement.

Take the example of those notorious high-frequency trading programs that affect short-term market movement. A pessimistic attributional style would attribute losses to those programs and view the "manipulations" of those programs as outside the trader's control.

An optimistic attributional style would attribute losses to the failure to adapt to the algorithms and would view such adaptation as within the trader's control.

In the first case, the pesssimistic trader loses motivation and fails to take specific steps to adapt to the market. In the second case, the optimistic trader gains motivation to beat the bots and takes a number of steps to change how he executes and manages trades.

So it is that attributional style can become a self-fulfilling prophecy: Our viewing inevitably shapes our doing--and our lack of doing. Ultimately, however, research sides with the optimists: attributional style itself is within our sphere of control: We can learn to be more optimistic. More on that in the next post on this topic.