Mark Atkinson
SHAREWORLD
Nick Leeson may have been a brash, high-risk gambler prepared to bet Barings Bank on a rise in the Japanese stock market but, on the whole, London traders are a shy and conservative breed, according to new research published this week.
Based on in-depth interviews with the London staff of four of the world’s top investment banks, the research found that traders tend to be loners who are generally “traditional and concrete” in their thinking rather than loud-mouthed extroverts.
Some take risks but no more so than people in other professions. And when it comes to their own money, health or career, traders are more cautious than the general population.
“It seems likely that these patterns exist primarily because of self-selection into trading by people who like to work with a high degree of autonomy but within a framework of rules and conventions,” says the study by a team of researchers at the London Business School.
The team – led by Professors Nigel Nicholson and Paul Willman – examined traders’ behaviour in an attempt to find ways of better managing them.
It found that many of the traders’ decisions were irrational. Despite being told to trade as if they have a flat book, that is one with no prior losses or gains, two-thirds of the traders said past performance was a major influence on their behaviour.
When traders make money, they tend to assume it is due to their skill and judgment but when they suffer heavy losses they blame their strategy.
This leads to much soul-searching about losing rather than winning trades. Traders might become more effective if they paid as much attention to understanding the causes of their profits as well as their losses, says the research.
Bonuses can often act as a perverse incentive to under-perform. Half the traders interviewed said the annual bonus cycle encouraged them to be protective of their bonus towards the end of the year, not making trades that might lose money and hence reduce their bonus.
They are similarly cautious about starting off badly with loss-making trades when the new bonus cycle begins. In effect, this means that for up to six months of the trading year, opportunities to make profits are not being maximised.
The bonus system is also confusing for many traders. As well as being based on profit and loss, bonuses are used by managers to recruit and retain staff and reward teamwork. A high degree of subjective judgment leaves many traders not knowing what they are being paid for.
The least successful traders, in the opinion of managers and in terms of the amount they are paid, are those who suffer from “illusion of control” – the belief that they are unrealistically able to dictate events in the markets.