Emotion + “Radical Neuroscience” = Alpha
Mar 6th, 2008 | Filed under: Guest PostsIf alpha is defined as the element of returns that results from pure human skill and creativity, then it follows that alpha is - in part - the result of a quintessentially human characteristic: emotion. Denise K. Shull, M.A. is President of Trader Psyches Inc., a consulting firm specializing in both market and trader psychology. In today’s guest posting, she cites new neuroscientific studies that suggest, in her words, ”emotion is a critical source of alpha”.
How science is showing that emotion, feelings and intuition can lead to alpha
Special to AllAboutAlpha.com by: Denise Shull, M.A., Founder, Trader Psyches
If 485 respondents to a recent Watson Wyatt/Financial Times Survey should be believed, we face a protracted shortage of alpha. Despite slicing and dicing portable alpha, alternative beta, returns or holdings-based alpha, excess returns remain elusive. Where can we find more? Has anything - or anywhere - been overlooked?
Infused within our market analyses and woven into our models, lies the quest to bet correctly on the future price of an asset. Alpha materializes when we figure out before the next guy what he or she will want or need to buy next week, next month or next year.
Does this fortune-telling aspect suggest buying The Complete Idiot’s Guide to Psychic Awareness? Before anyone runs to Barnes & Noble, let’s re-examine this decision making process. No, I don’t mean the morning trade desk meeting or the endless crunching of scenarios with variable implied volatilities. I mean a human being using their brain to evaluate information, draw conclusions and execute a trade. But how exactly does a brain do that?
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“Trading Tribe,” anyone?
Bill, albeit my knowledge of the Lake Tahoe based Trading Tribe is not extensive, my argument here is for a more widespread acceptance and valuation of the role of emotional awareness and intelligence in model creation, volatility assumptions and risk-management. This idea would extend to all decision-making and as such go beyond the quasi-therapeutic approach I encountered at a “Tribe” event in NYC.
The neuroscience supports a move in this direction as a likely source of improved decision-making amongst calculated risk takers.
DKS