Alpha males must trade on more than machismo
“Male traders, like animals in the wild, take more risk when their testosterone levels rise.”
This paper uses the sharpe ratio so watch out….and tread lightly..
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Introduction (Via FT)
Research by myself and my colleagues found that moderately elevated levels of this hormone increased the profits of high-frequency traders – although at higher levels it can cause overconfidence and risky behaviour, morphing traders into Masters of the Universe. What we could not say, however, was whether testosterone was having its beneficial effects by increasing the trader’s skill or merely by increasing his appetite for risk.
In a study published on Wednesday in PLoS ONE we found that testosterone had little to do with trading skill. Traders with higher testosterone did indeed do better at this type of trading, because they took more risk. But there was no link between the hormone and their trading skills, as measured by the Sharpe ratio (of which more later). Testosterone alone was not enough.
Showing this requires an understanding of how to judge whether a trader’s profits are due to skill or luck – a vital question for banks and hedge funds when allocating capital and paying bonuses.
Excerpt (Via FT)
Learning was encouraged by the compensation scheme at the trading company where they worked. Banks, with their yearly bonuses, may attract traders with an appetite for risk rather than prudence; but the traders in our study received only profit sharing, so if they lose money for the firm they lose it for themselves. These traders have, therefore, a strong incentive to damp the swings in their earnings.
As an aside, learning, like outperformance, is incompatible with the efficient markets hypothesis, according to which the markets follow a random walk and you can no more learn to trade them than you can improve at flipping coins. Our data therefore suggest the markets are not in fact random.
Click Here To Read: Alpha males must trade on more than machismo
