Some days I wonder if I am cut out for trading. I have been banging my head on this thing for a while and feel at time like I am fighting my own nature. It is at that time you start wondering if trading is a nature or a nurture thing? Are good traders born or are they made? In this posting I want to look at the whole nature / nurture thing.

Nurture: Can we nurture good traders?

There is a famous story about two multimillionaire commodity traders, Richard Dennis and William Eckhardt, who had an argument about nature vs. nurture. Dennis believed that traders could be taught to be great, whilst Eckhardt believed that genetics were the determining factor and that skilled traders were born with an innate sense of how to time the market.

In order to settle the argument they made a bet with each other and conducted an experiment. In 1983 they placed an advertisement in the paper seeking people to be trained as traders and to trade real money. 21 men an 2 women participated in the experiment from a range of backgrounds. Richard nicknamed the participants the “turtles” after the turtle breeding farms he had seen in Singapore. All traders received the same training, they were taught how to find a reliable edge in the market and then were shown how to use the same system. Despite the consistent training, only 3 of the 23 traders really excelled and moved on to make serious amounts of money in the finance industry.

So what was the key determinate in success? was it nature or nurture? You could argue that given that everyone received the same training and only 3 traders made the cut that it is nature, but like all things in life the answer is never that simple. In examining the outcomes of the trial, it was the traders who consistently followed the system that made the most money. Those who decided to depart from the system and use their “innate sense” of the market got creamed. So it is consistently following a good system that mattered, not genetics. Or is it?

Nature: Is trading in your genes?

There is an interesting study reported in the national academy of science on how ring finger length is connected to your trading results. If you read the study you will see that they measured the length of the trader’s ring finger in proportion to their index finger.   Studies have shown that sports people with relatively longer ring fingers perform better on the field and it also appears that traders with longer ring fingers also make more money.

Why should the length of the ring finger matter? The theory goes that a fetus will tend to develop a relatively longer ring finger if it is exposed to greater amounts of the male hormone androgen. It appears that this exposure changes your personal makeup and in psychometric testing the longer ring finger people tend to have have increased confidence, a greater appetite for risk, are willing to spend longer searching for solutions to problems, have heightened vigilance and quicker reaction times.

Closing Thoughts

In looking at the stories in this area I am hoping you can see the connections. Being a good trader is about your ability to consistently follow a good system. Your genetics may play a part in this, but it is not about your innate ability to time the market – it is more about your innate confidence in yourself.

Now having said all of that and you are paranoid about your ring finger length, genetics isn’t everything. And in case you are wondering about my finger length I am doomed. I am so on the wrong side of the genetic equation.

But this really matters little to me. In life genes help, but they are not the only thing. I have met some extremely talented people in school who were very sure of themselves and had the best grades. When I came to my school reunion, I saw a totally different story. A number of these star performers turned out to be taxi drivers, shelf stockers in super markets, or were on the unemployment benefits. On the other hand I have had other friends from school who didn’t have much self confidence and did poorly at school, but now they are real estate multi-millionaires who regularly duplicate their property portfolio. The big difference was some of these people lost their confidence and passion for the next big thing after school and the others gained their confidence and passion after school and applied that to a system of making money.

The moral of the story is, genes are nice to have, but they are not essential. The thing that matters is getting a system that can repeatably make money and then nurturing your confidence so that you can apply that system consistently.

This entry was posted on Saturday, March 21st, 2009 at 11:14 am and is filed under Psychology. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.