Saturday, November 24, 2012

The wisdom of psychopaths and trading

All psychopaths are evil, or so goes the conventional wisdom. The Wisdom of Psychopaths by Kevin Dutton actually provides an alternative perspective whereby someone who has the characteristics of a psychopath can actually do good, or at least have characteristics which will be extremely useful in some professions and situations. 

Dutton develops his thesis in great detail through case studies and a review of the deep research on the subject. It shows that there is a continuum of personality characteristics which include those of psychopaths. Some of the characteristics which we abhor with criminals are actually very useful in some settings. 

Perhaps the main characteristics of any psychopath is the lack of emotion or empathy in their behavior. They are without the normal sense of human emotions. This could be a hyper-focus on rewards or goals but psychopaths have very little or no risk aversion in many situations. For the doctor who does not get emotional about an operation, for the spy who can mask his behavior, and for the hero who does not think about fear, the characteristics of the psychopath are useful. When tested, many of the best professionals in certain high risk jobs have the same characteristics as the criminal psychopath. The difference is that the focus may be for the good as opposed to evil.

From a trading and investment profession, this may be very useful. The poker player who  can sustain losses has an edge versus other players. Think of all of the behavioral biases that exist or all of the problems with changing or increasing risk aversion. What if the trader can be a risk neutral machine that will not allow emotions to enter his decision process? He would be a better trader. So, it is possible that those traders who minimize their emotions may actually score high on tests which measure characteristics of psychopaths. This does not mean that all good traders are psychopaths, but it is interesting to suggest that characteristics which we may not like in normal behavior will actually be very useful for survival in a trading situation. 

We have just started to scratch the surface of what it means to be a good trader or what it takes to make better decisions and the psychology of the trader may be one of the key components. Of course, the good trader sitting next you may be a psychopath. 

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