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- Episode 4: The psychology of trading
Are we scared of emotions? Or can they be harnessed for good in stressful trading situations? In our latest episode, we speak to two long-time experts in the field of psychology who work with traders to help them optimize performance on the desk and off. Dr. Richard Peterson is a psychiatrist and the CEO of MarketPsych and Dr. Alden Cass is a licensed clinical psychologist and trading performance coach. Listen in as we learn how to achieve better performance during stressful times.
Jamie: [00:00:05] Hello and welcome to Hedge Fund Huddle. I'm your host, Jamie McDonald, and today's episode is a particularly interesting one for me. It's something I focused on a lot in my trading days. It's something I studied at university and it's really the psychological aspect of trading and I guess a little different to previous episodes we've had in this series. I think this episode is going to be extremely interesting and useful for whoever you are, really, whatever field you work in because it's about approach, it's about psychology and it's about basically performance. So the great news is that we have two long-time experts in the field to talk to. Today we have Dr. Richard Peterson and Dr. Alden Cass. And for those of you who study this area, those names will be very familiar to you. But for those of you who don't know them, what I am going to do is say, welcome to Richard and Alden. And Richard, why don't you start first and just give us a little bit of an introduction about your background and in particular, what area you focus on.
Richard: [00:01:05] Thanks Jamie for the intro. I'm a psychiatrist by training but have long been involved in financial markets. I originally was a quant actually developing systematic models and became very interested in how do we understand the human interaction with financial markets and in doing so realized, well, to do that, to really understand deeply about people, I've got to study that in more depth. So I went to medical school, did a psychiatry residency, and since then have been coaching hedge fund managers, portfolio managers, analysts over many years now and doing research on how can we optimize performance in these uncertain, chaotic environments like financial markets, how do we optimize the decision-making process? So that's really what I've been focusing on over many years. And in the meanwhile, I've also continued on the quant side and work in the data industry, producing media based sentiment data using natural language processing on media flow. So also trying to understand how information flow impacts trader and human decision making and financial markets, but on the other side systematically so that it can be used in quantitative models.
Jamie: [00:02:10] Thank you, Richard and Alden?
Alden: [00:02:11] Thanks for having me today. I got my start in this whole Wall Street sector as a clinical psychologist in 1999. I actually did one of the first clinical investigations on the mental health of financial professionals in the last 50 years in the United States and looked at a lot of the coping skills and some of the things that are affecting people's performance from a clinical perspective and how they cope with stress and whatnot. I did this in 1999, so since then that landed me in the Wall Street fishbowl and I've been doing a lot of work with portfolio managers, analysts, hedge fund traders, prop traders on a global level, just helping them achieve optimal performance, develop conviction in their trading thesis, develop a very solid process by which they believe in every day, despite any setbacks or uncertainty in the marketplace. And I've just basically parlayed that into both sports, trading and anyone who's trying to achieve better performance during stressful times. That's basically how I marry clinical psychology with performance coaching.
Jamie: [00:03:18] Great thanks, so, Alden I'm going to jump straight to you if you don't mind, a bit of a left-field question to you, but what are the kind of things that you do in your own life to de-stress, remain objective, not get too emotional? This is one of those questions where it's ‘judge a man by what he does, not by what he says’. So, I'm just interested. And Richard, if you don't mind, I'd like to ask you the same question. What are a few things that you do in your own daily life to stay grounded and to ultimately optimize your own performance?
Alden: [00:03:46] Well, I’m a big fan of this question because I really do practice what I preach, and every day I start my mornings very proactively the same way. I'm a very ritualistic guy and most of my traders are ritualistic as well. And I think that's very important to developing strong work habits that start in the morning because the morning sets the table for how you perform in the afternoon. So, I really believe in that. I do that myself. So every morning, after I send my kids to school, I get on my Peloton tread, run three miles, listening to my music that I listen to get fired up in the morning, have my coffee, breakfast, get myself mentally prepared to start the day and on the weekends I always play some kind of sport, so I'm involved in a touch football game with guys probably 15 years younger than me that actually focus. It's to me playing football or softball with younger people actually allows me to remain competitive because just like my clients are, they're very competitive individuals. I am as well. And playing sports to me it allows me to turn my brain off for a couple of hours.
Jamie: [00:04:57] Or at least activate maybe a different part of the brain?
Alden: [00:05:00] Well, it allows me to allows my hand-eye coordination to just take over and to and my whole body-mind connection to flow more synergistically than it normally is, because I'm totally locked in for 50 hours a week, listening to people, coaching them, directing them, having to take in all that data and spinning out results immediately. And when I'm playing sports, I'm reacting to the environment around me. When a guy is coming after me and playing football on a Saturday morning and it's 20 degrees, I'm not thinking about anything that I've just thought about for five days. I'm actually just in that moment living it, I'm not thinking about anything that's stressful other than to get as a quarterback just getting that ball to that wide receiver and finding out who's open and getting around the defender. It's just reaction. And to me that is freeing because I'm so locked in during the week and I think that that's a great way for people who do things like meditation, they do boxing, they do CrossFit, they do all these classes to get away and turn their brains off for an hour. And that's part of one of the techniques I use with my clients is to help them. I have something called a mental highlight reel that helps them turn their brains off as well for 15 minutes.
Jamie: [00:06:11] It's so interesting you say that and in moments of madness, some of my friends come to me for advice even. And the first thing I say is you've got to be exercising. And if they're not doing that, they need to be doing that. But even more specifically, what you just hit on and some people have used rock climbing actually as something because you just need in that moment, you need to be so focused that you can't think about anything else. So it's not just a sport like running where you're actually constantly thinking, but a sport where you are actually forced to focus on something else.
Alden: [00:06:40] Reacting
Jamie: [00:06:42] That's very interesting, Alden, thank you very much. Richard, how about you? How do you go about your daily routine to make sure you get the most out of your day?
Richard: [00:06:50] Jamie, that's a great question. I like how you do that practice what you preach approach. As you pointed out, exercise is key. So is diet. So I do hot hit or hot yoga four times a week. I do cold showers like a really cold. I don't have the plunge pool yet, but I'm in that direction. I find that's really helpful. I do a little meditation script every morning. I have a routine, As Alden said, a routine is important, so I have a routine, but I don't do the full say, 20 minutes of meditation. I'll do about 3 minutes of meditation. I do about a one-minute visualizing my best possible self, which is visualizing who you want to be that day, how you can be your best self that day. And if you have some challenges coming up rather than yourself, is there a role model or somebody you can visualize and live through or imagine yourself being in their shoes in that situation? So I'll do that for a couple of minutes and then some days not every day I'll do a gratitude list and that whole routine can take me 10 minutes. So, it's pretty quick in the morning. But I do find it makes a big difference. So that's the whole routine of the best possible self-meditation and gratitude. And then I used to have a much longer one. But it's got to be flexible and it's got to be realistic with your life. And so if you have little kids, as I believe Alden does, and I do, you can't really spend 20 minutes necessarily every morning doing that unless you're going to take a big cut out of your sleep. So you've got to be flexible with these, find what works for you. So that's what works for me. And then the exercise works really well. I like the temperature variation from really hot, exhausted, sweaty to really cold. I find that that's been really useful to maintain, there's literature that shows that that maintains a balance, your ability to be resilient in the face of stress or anything that comes up. I take supplements too. I take certain supplements. I'm not sure I want to endorse anything on this podcast, but I certainly have my little supplement stack that I take every day, Omega3 fish oil is one, of course, I take a couple of grams of that every day.
Jamie: [00:08:55] Let me let me jump into a bigger picture question because when I was trading, I was at SAC, and I know we have all have a mild connection with SAC and feel free to go into it. But if you look at any professional sport and you guys are talking to some of the best investors and traders in the world and trying to get them, I mean, we're talking such small margins here. I feel like it's running the 100 meters, like every single little thing counts in terms of squeezing out performance. Golfers have a caddie to walk them around to make sure they have the right decisions. And people have coaches for technique and then skill and then their own fitness. But in many large firms, people at the top of their game, they don't seem to or at least, you know, I'd love to get your opinion, they don't seem to have people at you, performance coaches who just seem so necessary to turn and squeeze out that extra bit of performance. So is there still resilience to hiring people like yourselves or what's the state of play in that world?
Richard: [00:09:50] I certainly see that there is interest at the higher levels. So people who are experienced in the field, often there is interest. At the same time they're limited in how much resources they can spend on this. Many of them, they want more flexibility in their time. So they might listen to podcasts or read specific books about how to enhance their performance. But there's definitely limitations in time and resources. Often the newer people are just really trying to catch on to how do I trade the Polish Zloty or how do I get interest rate spreads in Korea? So, they're really focused on the nuts and bolts. They're not necessarily focused on the psychology, and that really tends to come later in their career. So that's one issue, is it requires some experience and understanding, maturity when this matters. And then once you get to that level, you've really got to draw on multiple expertise. So I have a certain approach that I generally use, Alden has an approach I imagine, we try to be flexible, but we are who we are and we've done what we've done. And I've worked with hedge funds that then say, well, actually I want like a Tony Robbins. And sometimes they do literally bring in Tony Robbins, sometimes they bring in people like him who pump up the troops. Maybe they don't have clinical expertise like Alden and I have, but they have some joie de vivre or some chutzpah that really just gets everyone pumped for the day. So it depends on what's happening at the firm as to what approach they need as well. We all try to be flexible and do the best we can for what's appropriate at the time. But it's just like you said, markets are complex, markets change and the needs of firms change as well.
Jamie: [00:11:21] Alden, before we come on to you. Richard, would you mind just giving us an example or perhaps we'll stick with a financial one, someone who's a trader or a portfolio manager who seeks your help to say, listen, I'm on a bad run. I'm on a bad streak. How do I remain objective? How do I improve my performance? What's the sort of starting point for you? And then maybe you could give us an example of how you take them to being a sort of better version of themselves?
Richard: [00:11:44] So it depends on where they are in the cycle. So, there's essentially a slump process that happens. We call it a slump. If they are at the beginning of that process and going through a lot of acute stress, then there's exercises for acute stress. There are muscle relaxation techniques, breathing techniques. Of course, hit training or vigorous exercise interval training can be really good for relieving that immediate stress that they have. If they're farther down in the slump, then there might be something they need like to actually get away from the markets, take a one-week vacation and learn a new skill, like a new language, or take a Thai cooking class in Thailand or something like that where it's just completely different, where they turn off their phone and they get away from the markets. So, it really depends on where they are in that sense of self-doubt and that slump process. Usually, they come to us when they're pretty far down the rabbit hole. And so then we start by helping them disengage from markets, take that vacation. But before they take the vacation I talk about, how are you going to structure your return? How are you going to be objective about this? How are we going to wipe the slate clean so that you feel like every day is a new day? Because part of the problem of a slump is you get into a high cortisol state where you develop a sense of loss aversion and risk aversion that then carries through day after day. And it also tends to lead to both a withdrawal from the markets. But then when they get re-engaged, they're more impulsive and rapid in their decision-making, so they're not as thoughtful as they used to be. So we have to make sure they don't make any impulsive decisions, but also that they reengage slowly and methodically with a disciplined process. So we set that up before they go off on their vacation and then get them back into it. When they come back.
Jamie: [00:13:21] Hit the reset button.
Richard: [00:13:24] Hit the reset button if they're far down on the slump. For most people, if you're just having a bad day, there are other things like taking a walk in nature, take a hike for the weekend with your dog and your family, ways to kind of re recalibrate if it's not a severe slump. It depends, but if it's gone on for more than a few weeks, then people actually biologically change and you have to do a biological reset.
Jamie: [00:13:46] So Alden perhaps you can start with a bigger question of how are you engaging with some of the bigger firms and how that landscape is changing. And then again, like Richard did maybe give us a few examples of specific pieces you've been through.
Alden: [00:13:58] Obviously, the TV show Billions is really kind of normalized coaching or performance coaching in the workplace. And I think that this is not only taking shape in the hedge fund world, but I've been reached out for business with private equity funds, rock bands in Nashville, Tennessee. I've had to do interventions for because of the exposure of that show of how important it is to have a performance coach in your room.
Jamie: [00:14:24] Just for me to ask the sad questions, but what kind of pickup did you see in the business post that show? Was it almost immediate and quite material?
Alden: [00:14:32] It was definitely immediate and material. And I actually grew up in the same neighborhood with the star of the show, Wendy Rhodes, as we grew up in the same neighborhood, ironically. So that's a funny thing about that.
Jamie: [00:14:46] Did she reach out to you for some tips, some advice and like how she should act?
Alden: [00:14:50] Well, there was definitely some sharing of my book on basically some of the basic concepts of cognitive behavioral therapy as it applies to trading. That's in my book. There's a lot of interest that has come from that show that has really given a lot of credence to what Richard and I have been doing for many years prior to that show's existence. But we were kind of under the radar. And people like Dr. Ari Kiev that you knew very well. He was one of the pioneers of this type of role within a company. But I think it's spread all over. It's in law firms now. The big ten corporate law firms have these performance coaches as well. So, this has become more normalized. There is a little bit of hesitancy amongst employees of hedge funds and any company to have an in-house coach, in my experience. As much as I have been asked to do it, there's a huge uptick in my own private practice of people who come on their own outside of the firm because they want complete confidentiality, and they want there to be no awareness that they need to fix something. And I think that there's still that little stigma in Wall Street, no matter whether you're a trader in private equity or a broker, that you don't want to show weakness or show your bosses that you need extra help or support. That's probably not a good thing in the culture, but nonetheless, at least the option is that people can come to people like Richard and myself and get this support outside of the fund. And improve their performance before it actually becomes a problem at work or before they get pointed out as having an issue.
Jamie: [00:16:26] This brings a lot to us Brits actually, us Brits are the worst, we seem to be the worst at coming forward and actually admitting that we might need some sort of help in terms of performance coaching. And perhaps you could go a little more into specific examples, like who would be your typical client who comes your way and how do you go about sort of assessing what to do next?
Alden: [00:16:45] I get a lot of portfolio managers that have had great careers. And actually, it's from junior traders, junior portfolio managers to analysts all the way up to seasoned veterans who have just really kind of fallen into a bear trap for a quarter or six months maybe. And they're starting to get nervous about that. We've seen different types of markets in the last year than probably we did in 2013. And some of the younger traders have never experienced a market like this. So they're trading without a plan and they're trading amidst a lot of uncertainty, a lot of grey ambiguity in their daily jobs. And they're falling into a lot of the trading biases which are impairing their ability to make good decisions, execute trades, and deliver a disciplined process every day. Which also effects the risk reward balance on any trade. I'm really helping them slow down their process, break down their mechanics, and they can actually see it in slow motion, much like a baseball player, when they're in a slump with hitting. You kind of have to break them out of that slump by breaking down like they go on, they start hitting off a tee and you could see where their mistakes are. I kind of do that. I sit down with these guys and I explain to them how we can meet their bottom line of improved performance, reaching that optimal performance zone if they slow down and develop a consistent, disciplined process that they believe in and become more objective. One of the things I often do outside of the initial things that what Richard says is, okay, take a deep breath. Let's turn off the noise in your brain that's slowing you down, that's preventing you from seeing clearly. We have all kinds of progressive muscle relaxation exercises that we do. Thought exercises, I have something called a thought monitoring log that I do with them, that I train them in how to understand what are the negative underlying thoughts that are preventing them from actually taking risks, from actually seeing things more clearly and not emotionally. They're making a lot of emotional decisions. So I help them really understand how emotion plays into this, not to avoid emotion, but to understand what part of the emotion is helpful and adaptive and which part is maladaptive and self-defeating and allowing them to really develop, what I do is often create have people slow down their process by creating a checklist of all the things that have ever worked for them in their type of trading, in their specialty, and to really create almost like you check off these boxes, if the trade meets that criteria, all of the criteria that has made you successful before, you don't think about it, you just execute. And again, all the risk parameters are in there. You're looking at a trading plan and you're thinking about a longer-term perspective. And that helps people feel more comfortable and less overwhelmed in the moment when they can slow down, take deep breaths, and actually develop a process that is disciplined and repeatable on every trade. It takes emotion out of the equation.
Jamie: [00:19:53] It's interesting you say that because it was something I tried to do in my day all the time. Is it as simple as the more you can take emotion out of it, the more likely you are to see success? And the reason I asked that is I used to come in every day, and I used to try and say to myself, if I had a blank piece of paper would these be my trades, and it's very difficult because when you have a position on, you naturally have a bias, you naturally have a confirmation bias. And it's very difficult and I remember when I used to get in, if I was long some quote of stock, whether it's I don't know Johnson or Johnson, I would just naturally gravitate towards reading a buy note on Johnson and Johnson just to make myself feel better. But actually, the thing to do is to find a sell note on the stock and read that and see what the others are saying. I should also say that people listening may not be professional portfolio managers and they may just be getting started in the world. But how do you advise people to try and take emotion out of it and to take biases out of it?
Alden: [00:20:52] So what would I do again with that checklist not only does the trade have to meet certain criteria for you to have put it through in the first place, but once you do that, I have them do something called a conviction sheet where they take that original trade and they write down all the variables or data points that made them have strong conviction enough to put that trade through. They monitor that trade. So if it's a mid-level trade that could last a week or two or a month or two they might do another checkpoint of that same exact trade in a week. And they're going to go through all the same data points. Do they still exist? Do I like it the same? Do I still have the same amount of conviction based on, oh, we just lost two data points, or this new negative data point came in. Do we still like it the same? Should I now take off some of this? Should I hedge a little bit now and reduce my risk because we just lost these two data points? Or do I hate it now? Does it go from a five of conviction to a two? I'm out of this trade. I'm not going to allow me to have any kind of sentimentality bias towards this trade anymore because I just lost three data points. So it's focusing on actual data and not allowing emotion and nostalgia of being right or needing to be right. It takes that out of the equation. This is part of a process and if you actually stay disciplined to this and you're knowing, okay, well, this is a trade, I'm going to look at this conviction sheet in a week and there's a date on this sheet that I have them do, and they're going to continue to look at it. And sometimes I have traders who have an intraday trade that they're using this conviction log every 25 minutes to see if things are changed.
Jamie: [00:22:30] That's great.
Richard: [00:22:31] Yeah, it's really key on conviction. There's a couple of companies that look at portfolio management patterns and they look at your trading patterns and then they say, okay, we've found that those who have low conviction in a trade, who hold that low conviction trade, those particular positions have much lower performance than the high conviction positions. The other thing is with conviction, that's interesting, when people get into a position as much easier than getting out. So to your point about biases, we are very good at buying, people spend a lot of time on the buy decision or the entry decision, but they don't spend enough time on the exit decision. And so you've really got to have this type of checklist, as Alden said, where you know the criteria that got you in but then importantly, when are those criteria violated and then it becomes black and white. I need to get out rather than having this sort of emotional morass. Well, you know, it's sort of good, maybe I'll read a positive note about it. So the key is, having that type of checklist, which eventually becomes internalized. So I know for a lot of portfolio managers, it's annoying at first to have to sit there with a checklist. It interferes with the process, it doesn't feel good, and they often don't like it. But over time you internalize that discipline, and that's the key of these types of exercises. So I just wanted to emphasize that as well.
Jamie: [00:23:48] It's kind of this checklist becomes second nature. It's something that you just sort of mentally go through every time. Richard, maybe sticking with you, how important is sizing for the people who come to you for advice? Because you don't have to be in or out. Maybe going through that checklist, if the conviction goes from an eight to a five, do you tell people use the size to your advantage, be flexible, increase in decreased size?
Richard: [00:24:14] There's two aspects to that. One is, as you pointed out, emotions change your conviction at time. And so, people really have to learn to distinguish between the positive emotions that are helpful, as Alden pointed out, and those where you're getting greedy or you're biased in your emotion. Some days you'll come in and say, J&J is up 2%. And another positive note came out about J&J, and now your conviction is even higher because you're reacting to the marketplace. But when you go back and look at your checklist, did anything fundamentally change about J&J. If not, then maybe your conviction should actually be lower because now your thesis has been realized by 2% and maybe you should be slightly lower in your conviction. So do the criteria that you set up actually, were they met? So, the emotion that you feel is shouldn't be a reactive emotion. It should be a proactive emotion, something that's responding to the cues that you see around you that haven't been manifested in the marketplace yet. So, distinguishing that proactive from reactive emotion is key. And that's where exercises like meditation help. And essentially what Alden and I do face-to-face is help people get into a state where they're reflecting on their emotions. But we accelerate that type of meditation process and help guide it and direct it so that they can distinguish those two types. So again, it's a way of just like the checklist becoming innate and internalized. So does the recognition of which emotions are positive and which ones are negative to your decision-making. That also over time becomes internalized. So that's one aspect. The second one is with low conviction trades, there was a study, I believe, by Novice or Essentia research that shows that low conviction trades lead to over 200 basis points, I think maybe about 300 basis points of lost performance annually in portfolios, whereas the high conviction trades have about the opposite effect somewhere around 200 basis points outperformance. And so, what they say the conclusion of that research is that PMs don't overweight their high conviction trades enough to sort of keeping a farm or a stable of small ideas, placeholders that they want to keep track of that are usually small positions and those actually are the ones underperforming, dragging down the entire portfolio's performance. Sometimes people just can't let them go. And so what I coach people to do is get clear out the bottom 20% of your positions, just clear them out. You don't want them occupying your attention because one of the other biggest biases that portfolio managers have is distraction and cognitive load. And this can be manifested by social events like getting a divorce or getting married even, having children. All of these occupy our minds, moving a house, and they have been documented to impact performance because they erode the quality of our decisions because of just the virtue of distraction. And then the other one is cognitive load. And we see that a lot with analysts where, by the end of the day, if they're expected to make recommendations on the stock, their buy, sell, hold recommendations have lower quality by the end of the day or by the end of earnings season simply because they've been so occupied with a few other more pressing companies that are more urgent to them. So, you see cognitive load distraction actually impacting people a lot. And so it's very important to reduce that bias, to clear out some space and some time in your own schedule to reflect. And you see this with some CEOs like Dorsey or Twitter when he was there, he would schedule at least half an hour, I believe it was half an hour a day or maybe an hour a week where he had nothing scheduled and he could just sit and reflect. So having that reflection time is key as well.
Alden: [00:27:44] Jamie, that's a very important point that Richard's talking about with distraction and how valuable it is to have people who have actually clinical backgrounds around these individuals who are trading with large sums of money, because a lot of the real life, the personal life does sneak into their trading and the emotion that comes with real life and it cannot be ignored. And one of the things that I actually phrased it within my practice, it's called lifestyle portfolio management, where we focus with my traders on all those different elements, diversifying their energy and focus into a bunch of different buckets, not just trading because they're also very much focused when they come into my office to let's get to the bottom line, let's make me make money again, let's get me back to optimally performing. And I'm like, I have to slow them down and focus on their marriage, focus on their kids, focus on sports and recreation, focus on, as Richard said, meditation or finding a hobby that helps them turn their brain off. And all of this stuff, taken together, it reduces slippage in the workplace. And, I think that's a very important point he mentioned because I think it does take a toll on people and they don't deal with their actual real life outside of their work and they're all married together.
Jamie: [00:29:03] I almost think of an investor, or a trader is a bit like a sort of well-oiled machine, like a car. Just one thing can go wrong, which means that you can't have a car that's functioning perfectly. And it could be a lack of sleep or, as you say, something that's happened in a sort of marital way. So I guess those are the things that actually you just have to focus on as well.
Alden: [00:29:24] Well, as you said before, the margin for success in this industry is so small. Every inch matters when it comes to being successful in this industry. So that's why focusing on all those diverse areas in your life and all those little buckets are so meaningful and significant and actually helping you reach that threshold into the profitability zone. Every inch matters.
Richard: [00:29:47] That's the irony, actually, as Alden pointed out too, about when we're called in to work with clients and companies its often when things have gone south and are in a bad way, and then we can make an impact for sure. But if companies would bring us in and make us part of their process early on, part of the culture early on, then we could certainly set up a culture that's high performing for the long term and where those downturns don't impact as quickly. I mean, there will always be downturns, but where there's a much better maintained culture. That's the key. There's a lot we can do. It's a shame that we're not used typically until it's almost too late in some cases.
Jamie: [00:30:30] I was watching this interview last week, and this lady who does her job very similar to you, was really saying that the firm should be getting a nap room in their trading floors. And I know that the likes of big tech, whether it's Google or Facebook, have thought about ideas like this. Do you agree with that kind of thing? Are there any other things that firms should be doing today, that they aren't?
Richard: [00:30:52] I definitely agree. And there are these nap pods that can buy for that. I've advised many of my clients to take quick naps. There's actually research on napping that shows it increases your IQ quite substantially in the afternoon. So just even as little as putting your head down on your desk, closing your eyes for one minute will measurably increase IQ in subsequent cognitive tasks. So, 20 minutes is ideal. We completely support that. I also recommend exercise rooms depending on the size of the firm, of course, or if they're near a gym where people go out and get some exercise in the middle of the day. That also gets the blood pumping again. So healthier cafeterias. I know some firms have their own in-house chefs, so changing the composition of the food that they eat at lunch, for example, is important. More complex carbohydrates, less simple carbs, things like that are important.
Alden: [00:31:43] I have something called a happy light in my office that it actually brings in vitamin D3. I totally agree. Those are some of the simple things that firms can do to make things better, the environment better. I think there's a lot of need for even some form of socializing that is prosocial in a sense. Like I've had been working with some funds on actually developing pitches for trade ideas, but making it more of a competition and making it more fun and light and helping people really understand, this is better for the younger traders out there to get them through the process and learn from the older traders, but from like a luncheon learn kind of thing, but turning it into like who's got the best trade idea for the week? And it's like how in the tech world they do hackathons and they have a keg of beer and some wings and pizza and then they turn that into a fun night as a team. So there's a lot of good team building exercises instead of it being more individualized. How are you performing lately? I think that is not necessarily a healthy way to operate from a cultural perspective.
Jamie: [00:32:53] I remember in my trading days. I remember feeling how lonely it could really be. I mean, obviously I worked for a firm, but it was a pod shop, so you were so in your bubble, and it could be so lonely at sometimes that more team building exercises like that. I know I would have benefited from. Alden, I had another question for you. I think naturally I would put myself down as somewhat of a risk-averse guy, which is odd considering, I didn't do fabulously well, but I did okay in trading for quite a while. Can you meet with someone and tell that they would be a good type of person to be a trader or an investor? Is there a certain personality type that you think lends itself best to investing?
Alden: [00:33:36] I've been using the disc profiling system on my traders for the last 20 years, and what this looks at is, there’s certain elements or dimensions of the scales that the disc uses that look at a person's decision-making, how decisive they are, and it also looks at how risk-averse they are. I've seen people who have really profiled on this as really impulsive, decisive risk takers, I've seen profiles that look like risk managers who are extremely high on the client scale, which is like averse to risk and focus on detail to an obsessive level and highly analytical and slow to make decisions. So I feel like with each of those extremes, they've all been successful, but I've been able to work with each of them on for the person who is extremely impulsive and quick to make decisions, I've helped them to slow down their process, to reduce some slippage, which was mistakes that they made because they didn't think things through. They didn't assess their conviction. They were haphazard with their trading. They didn't think of an exit strategy in advance. And then, the one who's risk little more on the risk-averse side, I've been able to get and understand thoughts are preventing them from actualizing some risk and leverage which would help them make more money when they're right on trades. Because, again, conviction is key. And if you're if you have conviction of a five out of five on a trade, you should be going for the gold on that one. Not be risk averse on that one. Take some off if the data changes. But allowing a person to feel like they're more in control of that decision based on facts and data is important. But there's a way to actually make a more risk-averse person take more risks. And that's what I do. But I use this report to actually uncover which one you are. Before we even get going.
Richard: [00:35:34] Yeah, on my side, it's kind of interesting because since 20 years ago we've put personality tests and cognitive tests online for traders and investors and business people. And we've had over 30 or 40,000 people now take these tests online. They're free. They're at tests.marketpsych.com and what we found when we analyzed the results is you can be on the personality side. You can have any complex person, different traits on your personality and still be successful in investing or trading. There's no clear, strong correlation there. And it goes along with what I've seen. I've worked with portfolio managers who are really nervous and excruciatingly nervous, even staying up late at night, watching central bank announcements in Australia and New Zealand and Japan, difficult sleeping, awake every 2 hours and yet they perform very well. And the other hand, people who are very relaxed and trade the same instruments who also do very well. So, personality doesn't necessarily determine performance. What we did find that was interesting was on our cognitive tests, some people can very quickly identify opportunities, something that we call risk IQ or strategic IQ. And we have a particular test called the MarketPsych Gambling Task that measures that. And with those tests, what seems to be happening is people have learned patterns of opportunity versus risk, like some people seem to be set up or maybe wired or have learned where there is better opportunities in the risk reward trade-off. And those people actually can accelerate and learn even better if they look at other cases. So one of the exercises we have PM teams do and it's a social exercise too, is to review what are the missed opportunities recently, what are some of the captured opportunities that went well, and what are some of the opportunities that didn't work out that they tried to capture? So, what are some of the losses? And we'll have somebody junior on the team go through and review these, which accelerates their own learning and then try to come up with a new idea based on what they've learned that avoids the problems they saw and then captures some of the success patterns that they've started to learn about. And so, this accelerates the learning of the juniors on the team and actually those who are senior as well. In medicine, we call it a morbidity and mortality report. So when something goes wrong at the hospital, everyone gets around and talks about what went wrong and why it went wrong. So, the same thing should be happening in finance, but to make sure it's not dower and too hypercompetitive, you should add in what went well and why it went well. So, you can see those patterns also. And it's got to be distinguished from the market regime. Sometimes tech stocks just go up and it's not that you were a genius because you picked Apple or Facebook. They all went up. So, you've got it. You've got to figure out how was I different? Why did my idea why is it better than a similar idea in that space? So in any case, there's a few ideas about how to improve those.
Jamie: [00:38:29] I remember it being very easy to look at luck and call it a brilliant performance on yourself. And you need to be very disciplined and honest with yourself. Before we wrap up, Richard, I just wanted to ask you one final question on characteristic trait, personality traits. You say you do a test on MarketPsych to assess personality characters. The one I'm more familiar with is Myers-Briggs and I think I'm ENFJ. But I know McKinsey use I think they use Myers-Briggs before they interview people just to get an understanding of who people are. Do you feel that could someone who's listening to this go on and I know you were just alluding to it going on and do a personality test and just see what kind of trader they should be, not whether they'd be better or worse than anyone else, but just what kind of risk appetite they have and are able to handle.
Richard: [00:39:16] They can and in our test, we do give color-coded responses red, yellow and green as to which traits generally correlate with higher success. But the correlation is weak. It's statistically significant because we have tens of thousands of people have taken the test, but they're generally pretty low correlations. You know, your R squared is like 0.03, 0.04, so it's not much, but we use the neo test, which is like the ocean, the five factor model. The reason we use that is it's a research-based test, the Myers-Briggs, there's a lot of controversy and I'll get maybe angry emails about this, but when you look at it, if you take it in the morning and you take it in the afternoon, there's a 50% chance you'll have a different type. So if you take it later in life, there's a much higher percent chance you'll have a different type. It's not reliable over time. It is face valid and that what you say about yourself does get reported back to you. And then it feels like it's genius. But it's just you know, it's an interesting report about what you said about yourself, similar to a lot of personality tests. The disc is a very good test that Aldean mentioned the discand then the Neo, the Neo, is a bit more obvious, but it is research valid and that's why we use it.
Jamie: [00:40:27] Guys, I honestly felt like I could chat with for the next 2 hours, but we have run out of time. But perhaps I can just start with you Alden to wrap up. Please feel free to mention some articles and literature you've written yourself. What kind of things do you advise people read just to make sure that they're fine-tuning their performance skills? Any concrete advice you want to give people out there? And also how can people get in touch with you if they want to get in touch with you?
Alden: [00:40:52] A lot of the things I work on with clients is education and making sure that they're doing a lot of research and their homework every morning. But one of the things, as I said before, routines and rituals and all that, it's very important. In the morning there's a book that I've been giving to financial advisers, traders, bankers, everyone for the last 20 years is called World's Greatest Salesman. And I know it says the word salesman in it. But the whole basis, even though this book is very hokey, spiritual wise, but the lesson is, is that every day should be a disciplined decision. You have to have sacred scrolls of success for the person and follow it every day for 30 days. And this is how you will be more successful in life. So that's a book that I do give a lot of people. And again, based on the world we're living in, I also have people read Manias, Panics and Crashes. This is a famous old-time book because I think all the stuff that's going on with crypto, it's important for people to know how similar it is to what we went through and bubbles before and crashes before. And my own book, Bullish Thinking, is also aimed at teaching people using cognitive behavioral skills, how to be a better, more emotionally disciplined trader, despite uncertain markets, uncertain trading patterns and basically becoming more resilient over time. I think that if I had any more lessons to give, it would be that you have to learn how to trust your hands. And the only way to trust your hands is to have a process you believe in and that's repeatable. And that starts with good habits. And good habits in the morning leads to momentum, and momentum leads to flow. And flow is when the mind and body operate very synergistically like I said on the football field where you're just reacting to the present. Emotion doesn't have to be scary. It could be helpful. It could be useful. You just have to learn how to keep it even, keep it controlled and learn from the emotion that's meant to be adaptive is supposed to tell you, get out of this. But then there's part of it that should be also just objective, which is, oh, it doesn't meet criteria on my checklist, I’m out. I'm not even getting into this trade or my conviction is much lower. 5 hours later, I'm going to pull out 25% or I'm going to take my profit right now. And it just simplifies decision making when you can keep emotion at bay.
Jamie: [00:43:24] Get the mornings right, and the rest will follow.
Alden: [00:43:26] Yep. And people can get in touch with me I do phone work all over the world. Remote work lectures, group work, team work, team building.
Jamie: [00:43:35] What's the best way for them to get in touch? Do you have an email or Twitter or website?
Alden: [00:43:40] DrAldencass@gmail.com and my website is Dr.AldenCass.com
Jamie: [00:43:48] Awesome. Dr. Peterson, a few takeaways from you?
Richard: [00:43:51] Yeah, I would say, Jamie, the book Tools of Titans by Tim Ferriss has some great exercises and there's a few investors in that book talk about what their rituals and routines are. So, it gives you another perspective on that. And then, of course, Ray Dalio, Principles is great, though it's a bit heavy reading and there's a lot to get through. But if you start on that journey, he's done obviously a fantastic job with what he does running the world's largest private hedge fund. So certainly, you can get a few tips from there. And then, of course, I've written a couple of books also Inside the Investor's Brain, which is a bit more in-depth if you want a lot of academic research about what has seemed to work historically, then that's a good book. We wrote a simpler version called Market Psych, which is also, I think, quite useful, especially if you don't want anything that's too technical or heavy. Those would be my recommendations and obviously it's not an easy job that we have. It's not only about ourselves, It's also about the market. So, you compared us to a car and fine tuning a car, but sometimes it depends on what road you drive that car on. If you drive a Ferrari on a mountain road, you're not going to get the same performance as if you have some four-wheel drive. So it depends on what kind of car you are and what kind of road you're driving on. And then sometimes you just have no choice. You just go from A to B you don't have a choice what the road is going to be. It might be flooded, etc. So you've just got to figure out what to do. Understand that the markets are chaotic, that optimizing ourselves for these situations is important, but also that ability to look focus down and to step back and see the big picture are key. So it's all got to be understood as a big, dynamic moving picture. It's not simple. We also find I think Alden probably sees this as well that as people get older sometimes in the financial markets, they really appreciate the managerial positions more than the trading positions. You don't see a lot of traders over 40. So, there's all sorts of dynamics, lifetime dynamics, etc. I wish everyone luck it's a challenging workplace.
Jamie: [00:45:48] Well, you're preaching to the converted. I am over 40.
Richard: [00:46:01] Now there you go.
Jamie: [00:46:04] So, Richard, if people want to get in touch with you, what would be the best way?
Richard: [00:46:07] So Marketpsych@gmail.com or RPeterson@marketpsych.com as well. It's the best way to reach me.
Jamie: [00:46:15] For anyone listening, if you've enjoyed listening to this episode, my bit of advice is to go back and listen to it again. There were some real pearls of wisdom in there. I want to say Dr. Peterson and Dr. Cass, thank you so much for your time. This really was great. Thank you.
Richard: [00:46:29] Thanks, Jamie. Good to see you and Alden
Alden: [00:46:31] Thanks for having us.
Jamie: [00:55:47] Thanks very much for listening. And if you like what you heard, please give us a follow wherever you get your podcasts. The information contained in this podcast does not constitute a recommendation from any Refinitiv entity to the listener. The views expressed in the podcast are not necessarily those of Refinitiv and Refinitiv is not providing any investment, financial, economic, legal, accounting or tax advice or recommendations in this podcast. Neither Refinitiv nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast and any and all liability therefore, whether direct or indirect is expressly disclaimed. For further information, visit the show notes of this podcast or refinitiv.com.
Episode 3: Alternative data explosion
Episode 2: Crypto comes to hedge funds