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Tuesday, January 24, 2012
Researchers from Claremont Graduate University (CGU's) Center for Neuroeconomic Studies have identified genetic traits that predict the success of professional stock traders.
The findings, published on Jan. 24 in the online science journal PLoS ONE, identify a suite of genes linked to moderate production of the neurotransmitter dopamine that predict career longevity on Wall Street. Those who possess the gene combination are biologically predisposed to be highly analytical and take moderate, though not high, risks.
"I think this research dispels the popular notion that the most successful Wall Street traders are risk-taking cowboys," said CGU Professor Paul J. Zak, who led the study. "What we see is that traders who are genetically predisposed to be either too risky or not risky enough will not last in the business. They'll either flame out or fade away."
Zak partnered on the research with Steve Sapra, who earned a PhD in economics from CGU, and Laura Beavin, a current PhD student in the School of Behavioral and Organizational Sciences.
Previous research in the field of neuroeconomics has found links between dopamine production and financial decision-making. Past studies have also associated dopamine activity in the brain with tendencies for novelty-seeking.
In the current study, 60 professional Wall Street traders were genotyped and compared to a control group of MBA students who did not trade stocks. The 60 traders, on average, had survived the ups and downs of Wall Street for nearly a decade.
The researchers found that distinct alleles of the dopamine receptor 4 promoter (DRD4P) and catecholamine-O-methyltransferase (COMT) that affect synaptic dopamine were predominant in the traders. These alleles are associated with moderate, rather than very high or very low, levels of synaptic dopamine.
The traders did not tend to carry an allele associated with low dopamine production, or high risk-taking behavior.
The results suggest that using a history of risk-taking and competitive behaviors when hiring traders could be a mistake, though this is often done when brokerages hire traders.
By one estimate, professional traders were responsible for only 10 percent of New York Stock Exchange trading volume in the 1960s, while individual investors were the primary source of trades. Professional traders are estimated to account for 90 percent of that activity today, with traders from the 100 largest institutions responsible for 75 percent of volume.
"As we've seen this shift, we've seen the stock market become more volatile," Zak said. "The reasons for this are ultimately unresolved, but the high volume of institutional trades suggests it is at least partially due to the behavior of professional stock traders. Understanding their behavior is especially important in light of calls for increased regulation of financial markets we've seen since the stock market collapse of 2008."
Zak is famous for his work in the field of neuroeconomics, specifically for his studies on how the hormone oxytocin affects financial decisions.
The complete study is available online at www.cgu.edu/PDFFiles/news/Traders_FINAL2.pdf.
Founded in 1925, Claremont Graduate University is one of the top graduate schools in the United States. Our nine academic schools conduct leading-edge research and award masters and doctoral degrees in 24 disciplines. Because the world’s problems are not simple nor easily defined, diverse faculty and students research and study across the traditional discipline boundaries to create new and practical solutions for the major problems plaguing our world. A Southern California based graduate school devoted entirely to graduate research and study, CGU boasts a low student-to-faculty ratio.
Based at Claremont Graduate University in Southern California, its program is one of the top-ranked programs in politics and policy, economics, international studies and evaluation where students can earn a PhD or masters degree.
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