According to a new study from the University of Cambridge, successful financial traders are more adept at listening to their 'gut feelings' than the general population. In fact, the more tuned-in to his or her gut instincts a financial trader is—the more likely he or she is to hit it out of the park when making risky financial decisions. Also, in the cut-throat world of financial trading, survival of the fittest appears to rely on a combination of grace under pressure and trusting your gut. Both of these traits are directly tied to the vagus nerve.
The September 2016 study, "Interoceptive Ability Predicts Survival on a London Trading Floor,” appears in Scientific Reports.
Technically, gut feelings are referred to as interoceptive sensations. Interoception is the ability to sense physiological signals originating inside your body, such as heart rate, temperature, hunger, pain, irritable bowel, etc. Interoception and intuition go hand in hand. Oftentimes, a gut feeling is the first feedback your mind gets when making an emotional decision or conducting a ‘cost-benefit analysis’ of the pros and cons of a particular decision.
Previous studies have reported that people who have a more finely-tuned sensitivity to interoceptive signals—as measured by tests of heartbeat detection—perform better in laboratory studies of risky decision-making. However, prior to the new University of Cambridge study, there has been little field research conducted to determine if interoceptive sensitivity contributes to success in real-world, high-stakes risk-taking.
Interoceptive sensations communicate information from your peripheral body to your brain. The terms “afferent” and “efferent” typically refer to nerves that lead into or out of the brain respectively. Afferent signals are sent from a nerve receptor into the brain while efferent signals are sent from the brain to the peripheral body. This creates a feedback loop.
A wide range of visceral responses and gut feelings are transferred up to your brain via the vagus nerve. In previous studies, signals from the vagus nerve traveling from the gut to the brain have been linked to modulating mood and distinctive types of fear and anxiety. Having grace under pressure is directly linked to the calming parasympathetic response associated with healthy vagal tone.
Your vagus nerve is constantly sending updated sensory information about the state of your body's organs, digestive tract, heart rate, state of arousal, etc. "upstream" to your brain via afferent nerves. In fact, 80-90% of the nerve fibers in the vagus nerve are dedicated to communicating the state of your viscera up to your brain in the form of gut feelings.
The vagus nerve is known as the "wandering nerve" because it has multiple branches that diverge from two thick stems rooted in the cerebellum and brainstem that wander to the lowest viscera of your abdomen touching your heart and every major organ along the way. Vagus means "wandering" in Latin. The words vagabond, vague, and vagrant are all derived from the same Latin root.
In 1921, Otto Loewi, a German physiologist, discovered that stimulating the vagus nerve caused a reduction in heart rate by triggering the release of a substance he coined vagusstoff (German for "vagus substance”). The “vagus substance” was later identified as acetylcholine and became the first neurotransmitter ever identified by scientists.
Vagusstoff (acetylcholine) is like a calming tranquilizer that can be self-administer through deep diaphragmatic breathing. Anytime you are feeling anxious, simply taking a few deep breaths with long, slow exhales will engage the vagus nerve and trigger a calming parasympathetic response. Consciously tapping into the power of your vagus nerve can create a state of inner peace while also taming your inflammation reflex.
Your vagus nerve is the prime component of the parasympathetic nervous system which regulates your “rest-and-digest” or “tend-and-befriend” responses. On the flip side, to maintain homeostasis, your sympathetic nervous system drives your “fight-or-flight” stress responses.
Although the new study doesn’t focus on the vagus nerve, the researchers found that high-risk choices are accompanied by rapid and subtle physiological changes that send direct feedback on changes in heart rate to the brain. When someone is tuned-in to these visceral sensations, he or she can make important decisions in rapid-fire succession without necessarily being able to quickly articulate the logical rationale behind specific choices.
To find out the extent to which their hypothesis was correct, the researchers tested interoceptive abilities of financial traders against those of non-trader control subjects. These traders worked for a hedge fund that was engaged in high-frequency trading, which typically involves the rapid buying and selling of futures contracts within seconds or a matter of minutes.
This type of trading requires the ability to assimilate large amounts of information flowing through news feeds, to rapidly recognize price patterns, and then make large and risky decisions with split-second timing. This niche of the financial markets is particularly ruthless. In typical Darwinian fashion, unsuccessful traders who are unprofitable to the fund don’t survive very long as traders.
This particular study took place during the Eurozone crisis, which was a particularly volatile and topsy-turvy financial period. Throughout the experiment, the researchers measured individual differences in each trader's capacity to detect subtle changes in the physiological state of their bodies by means of heartbeat detection.
The researchers found that the crème de la crème traders performed significantly better at the heart rate detection tasks when compared to the control group. Even within the group of successful traders, those who were better at the heart rate detection tasks also performed better at trading and generated greater profit margins.
In fact, an individual's interoceptive ability could be used to predict how many years they would survive in the dog-eat-dog world of financial trading. In a statement, Dr. John Coates, a former research fellow in neuroscience and finance at the University of Cambridge, who also used to run a trading desk on Wall Street, said,
"Traders in the financial world often speak of the importance of gut feelings for choosing profitable trades—they select from a range of possible trades the one that just 'feels right.’ Our findings suggest they're right—they manage to read real and valuable physiological trading signals, even if they are unaware they are doing so."
The authors of the current study believe that in the world of financial trading, as in many other stressful professions, the seasoned pros are successful and have longevity in large part because they are sensitive to interoceptive sensations and gut feelings. This allows them to stay calm, cool, and collected. By intuitively tuning in to the vagus nerve and maintaining healthy vagal tone, high-risk traders who trust their gut tend to have more grace under pressure than skittish rookies.
"A large part of a trader's success and survival seems to be linked to their physiology. Such a finding has profound implications for how we understand financial markets," adds Dr. Mark Gurnell from the Wellcome Trust-Medical Research Council Institute of Metabolic Science at the University of Cambridge.
"In economics and finance most models analyze conscious reasoning and are based on psychology," Coates concluded. "We're looking instead at risk takers' physiology—how good are they at sensing signals from their viscera? We should refocus on the body, or more exactly the interaction between body and brain. Medics find this obvious; economists don't."
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© 2016 Christopher Bergland. All rights reserved.