The following is an article from The Annals of Improbable Research.
by Alice Shirrell Kaswell, Improbable Research staff
Researchers are delving into the blood, fingers, and genes of financial traders. Here are some of the studies that may give us insights into the success or failure of the traders, and of the researchers who study the financiers’ digits and chemical composition.
Here, too, are a few earlier studies that probe the mysteries of high and low finance.
Coates and the Blood of Fabulous Financial Traders (2008)
John M. Coates is a leader of the modern scientific attack force.
“Endogenous Steroids and Financial Risk Taking on a London Trading Floor,” John M. Coates, Proceedings of the National Academies of Science, vol. 105, no. 16, April 22, 2008, pp. 6167–72. (Thanks to Catharine Dobbs for bringing this to our attention.) The author, at Cambridge University, reports:
Here, we report the findings of a study in which we sampled, under real working conditions, endogenous steroids from a group of male traders in the City of London. We found that a trader’s morning testosterone level predicts his day’s profitability. We also found that a trader’s cortisol rises with both the variance of his trading results and the volatility of the market. Our results suggest that higher testosterone may contribute to economic return, whereas cortisol is increased by risk.
Coates and the Fingers of Fabulous Financial Traders (2009)
“Second-to-Fourth Digit Ratio Predicts Success Among High-Frequency Financial Traders,” John M. Coates, Mark Gurnell, and Aldo Rustichini, Proceedings of the National Academy of Sciences, vol. 106, no. 2, Jan. 13, 2009, pp. 623–8, DOI:10.1073/pnas.0810907106. (Thanks to Hugh Henry for bringing this to our attention.) The authors, at Cambridge University, explain:
Here, we report the findings of a study conducted in the City of London in which we sampled 2D:4D [second-to-fourth digit length ratio] from a group of male traders engaged in what is variously called “noise” or “high-frequency” trading. We found that 2D:4D predicted the trader’s long-term profitability as well as the number of years they remained in the business.
Millet on Coates (2009)
Professor Coates’s publications spurred at least one colleague to hazard a daring new interpretation of Coate’s daring interpretation.
“Low Second-to-Fourth-Digit Ratio Might Predict Success Among High-Frequency Financial Traders Because of a Higher Need for Achievement,” Kobe Millet, Proceedings of the National Academy of Sciences, vol. 106, no. 11, Mar 9, 2009, p. E30. Millet, who is at Katholieke Universiteit Leuven, Belgium and VU University, Amsterdam, The Netherlands, writes:
The article by Coates et al. adds interesting evidence that a low 2D:4D ratio in men predicts success, not only in sports or music, but also in job performance.... However, they overlook another frugal explanation for their findings.... I expect low-2D:4D people to outperform high-2D:4D people in all kind of competitive jobs, sports, and other activities, not because of specific physical characteristics, but because of one specific psychological characteristic: a higher need for achievement.
Coates on Millet on Coates (2009)
Millet’s hazarded interpretation did not daunt Professor Coates.
“Reply to Millet: Digit Ratios and High Frequency Trading,” John M. Coates, Proceedings of the National Academy of Sciences, 2009, vol. 106:E31; published online before print March 9, 2009. DOI:10.1073/pnas.0900882106. Professor Coates writes:
Kobe Millet, in a letter (1) commenting on the correlations we found between digit ratios and success in high-frequency trading (2), suggests that digit ratios gauge the psychological need to excel rather than a physiological characteristic. However, if this were true, then we would find low 2D:4D among successful people of most occupations, but I do not believe we do....
We should, however, point out that our study could not fully test for the mechanism underlying the correlations between trading success and digit ratio. Only laboratory work can establish this mechanism. Our study rather was a piece of field work, a type of study we feel is sadly lacking in the new subject of neuroscience and economics.
The Genes of Fabulous Financial Traders (2009)
Other researchers, too, are delving into the biomedical complexities of the individuals who make and lose fortunes by trading financial instruments.
“Genetic Determinants of Financial Risk Taking,” Camelia M. Kuhnen and Joan Y. Chiao, PLoS ONE, vol. 4, no. 2, 2009, e4362. DOI:10.1371/journal.pone.0004362. (Thanks to Ferran Mir for bringing this to our attention.) The authors, at Northwestern University, Evanston, Illinois, explain:
Individuals vary in their willingness to take financial risks. Here we show that variants of two genes that regulate dopamine and serotonin neurotransmission and have been previously linked to emotional behavior, anxiety and addiction (5-HTTLPR and DRD4) are significant determinants of risk taking in investment decisions. We find that the 5-HTTLPR s/s allele carriers take 28% less risk than those carrying the s/l or l/l alleles of the gene. DRD4 7-repeat allele carriers take 25% more risk than individuals without the 7-repeat allele. These findings contribute to the emerging literature on the genetic determinants of economic behavior.
Swindlers: A Non-Biomedical Approach (2005)
Some researchers, though, take a non-biomedical line of approach to understanding what’s behind or beneath the notable success of high-stakes financial traders.
“Dealing with Swindlers and Devils: Literature and Business Ethics,” Christopher Michaelson, Journal of Business Ethics, vol. 58, no. 4, June, 2005, pp. 359–73, DOI:10.1007/s10551-004-5264-5. The author, at the Wharton School of the University of Pennsylvania, explains:
It has become quite common to use stories in order to make moral sense of business life. Case method is the standard teaching method in top business schools, and so-called “war stories” are customary for on-the-job training.... Still, it is one thing to claim that literature can contribute to our understanding of business conduct, but yet another to claim that literature can contribute to the related goal of improving moral conduct in business.... These claims warrant further investigation if they are to be perceived by business scholarship and practice as worthy of serious attention, not just a quaint search for lowbrow moral fables or a vain pursuit of highbrow poetry.
Accountants: A Non-Biomedical Approach (1999)
“The Poverty of Accounting Discourse,” R.J. Chambers, Abacus, vol. 35 no. 3, October 1999, pp. 241-51. The author, a professor emeritus at the University of Sydney, Australia, reports:
Some forty years ago, accounting was scarcely noticed as a subject of university study. In the last decade it has soared in popularity as an undergraduate option. Professional firms which once disdained accounting graduates now clamour for the cream of the crop. It may seem that accounting has won its spurs as a domain of demanding inquiry and discourse. But things are seldom what they seem. For, while city buildings are emblazoned with the names of big accounting firms, and those firms lend their names to university scholarships and chairs in accounting, almost every large firm has faced legal writs in damages, in thousands to millions of dollars, through demonstrated or admitted professional inadequacy. There’s something odd about this.
For more on Professor Chambers’s investigations of this particularly exciting topic, see “Great Adventures in Accounting” elsewhere in this issue.
Garbage and Fraudulent Financial Reporting
“Garbage In/Garbage Out: A Critique of Fraudulent Financial Reporting: 1987–1997 (the COSO Report) and the SEC Accounting Regulatory Process,” Abraham J. Briloff, Critical Perspectives on Accounting, vol. 12, no. 2, April 2001, pp. 125–48. The author, at the City University of
New York, reports:
According to traditional wisdom, the efficiency of a sanitation department should not be measured by the amount of garbage it picks up, but instead by what is left behind. This axiom came to mind regularly as I reviewed and reflected on “Fraudulent Financial Reporting: 1987–1997 An Analysis of US Public Companies,” a report commissioned by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).... Most certainly had the authors of the study sensitized their olfactory organs they would have realized that the garbage, which they thus picked up for their arithmetic recycling, was not representative of the really stinking stuff which is contaminating the accounting and financial reporting environment.
Swindlers: An Early Non-Biomedical Approach (1926)
The non-biomedical approach is not new. As far back as 1926, bold researchers used simple approaches that may seem, in comparison to modern blood-composition, fingerlength, or genetics analysis, primitive and not fully worth taking into account.
“The Fight on Stock Swindlers,” H.J. Kenner, Annals of the American Academy of Political and Social Science, vol. 125, no. 1, 1926, pp. 54–8, DOI: 10.1177/000271622612500108. The author, who was (and perhaps still is) general manager of the Better Business Bureau of New York City, explains:
Business men are now taking a hand in checking the “rising tide of crime” and the “growing disrespect for law.” While one national group is studying the problem of curbing crimes of violence, others locally and nationally are continuing action against the white collar bandit, the gentleman thief who steals the savings of the uninformed or the gullible by stock-swindling and fraudulent brokerage practices. Such gentry have an appearance and a savoir faire which are the envy of night prowlers who use nitro-glycerine or a blackjack to get results. But they lack the physical courage of their heavy-handed brother crook; they are a much more despicable lot.
The False Twinkling of Superstar CEOs
Inevitably, some researchers fixate on celebrities, neither using nor even acknowledging the power of modern blood composition, finger-length, and genetics analysis tools.
“Superstar CEOs,” Ulrike Malmendier and Geoffrey Tate, SSRN paper #972725, March 15, 2007. The authors, at University of California Berkeley and at University of California Los Angeles, respectively, explain:
We analyze the impact of winning high-profile tournaments on the subsequent behavior of the tournament winner in the context of chief executive officers of U.S. corporations. We find that the firms of CEOs who achieve “superstar” status via prestigious nationwide awards from the business press subsequently underperform beyond mere mean reversion, both relative to the overall market and relative to a sample of “hypothetical award winners” with matching firm and CEO characteristics. At the same time, award-winning CEOs extract significantly more compensation from their company following the award, both in absolute amounts and relative to other top executives in their firm.
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The article above is from the May-June 2009 issue of the Annals of Improbable Research. You can download or purchase back issues of the magazine, or subscribe to receive future issues. Or get a subscription for someone as a gift!
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