John Coates, formerly a senior trader at Deutsche Bank and Goldman Sachs, has an interesting proposal for dealing with the negative consequences of emotional investing:
First, he wants banks and regulators to monitor traders’ biology; after all, he says, it would not be hard to install heart monitors, or blood tests in banks, to spot hormonal swings. Second, he wants banks to employ more women and older men on trading floors, not for reasons of political correctness, but because female traders and older men tend to have lower testosterone and better functioning vagal nerves. A better biological mix, he insists, will mean fewer swings in testosterone and cortisol, and thus fewer market dramas.
This quote led me to ask our team whether our investment model is a boy model or a girl model. I sure hope it’s a girl!
Minimizing the negative effects of emotional trading is one of the primary reasons that our investment decisions are model-based. We do extensive research to understand how best to apply relative strength to portfolio management, we build systematic investment models, and then we execute! Sometimes we have a good feeling about a particular trade, sometimes we have a terrible feeling, but we execute nonetheless (and there have been plenty of times when those terrible feelings have preceded winning trades and vice versa). When you’ve got an investment factor with results as compelling as relative strength, inserting emotions doesn’t make a whole lot of sense. If hand-wringing over particular trades can be avoided altogether by reliance on a systematic model, then why not? In the absence of systematic models, then sure, give the heart monitors and gender screening a try!
