I say this because of new research by Mark DeSantis and David Porter at Chapman University and Brice Corgnet at the University of Lyon. They looked at what makes good traders.
The standard way of doing this is to look at the characteristics of a few high-profile successful traders. This, though, is hideously unscientific. It doesn't tell us whether they succeeded because or despite of those traits, and it doesn't tell us how they differ from failed traders. Professor DeSantis and colleagues instead took an experimental approach. They got subjects to trade an artificial asset under laboratory conditions and looked for systematic differences between profitable and unprofitable traders. They made two big discoveries.
One is that successful traders did better than unsuccessful ones on cognitive reflection tests - those that ask questions like the one above. (The correct answer is five minutes.) Such tests measure our ability to avoid intuitive but wrong answers. Success on these is associated with an ability to use Bayesian reasoning which, as you'd imagine, is an asset for traders.
Secondly, they found that traders made more money if they did well on an eye gaze test, wherein they have to infer people's mood from looking at pictures of their eyes alone. This is despite the fact that trades were done on computers rather than face to face.
The point here is that good trading requires you to infer others' intentions - to both ask and answer the questions: why is someone happy to sell me this asset at this price? What does he know that I don't? This requires you to avoid what David Navon at the University of Haifa calls the egocentric framing error, the tendency to consider problems only from your own point of view rather than from others'.
These two qualities, found Professor DeSantis, are more important than merely having a high IQ.
In fact, this is consistent with other evidence. In other experiments, Dr Porter has found that people who do well on cognitive reflection tests also perform better than others in other financial decisions, such as choosing between different lotteries. Volker Thoma and colleagues at the University of East London have found that traders at investment banks do especially well on cognitive reflection tasks. And researchers at Caltech have found that the ability to forecast price changes "is correlated with the general ability to detect intentionality in one's environment" more than it is with mathematical skills.
However, the ability both to detect intentionality and to have cognitive reflection skills is a rare combination. There's zero correlation between the two; your correspondent for example is good on CRTs but lousy at eye gaze tests. And even if you have both skills, you can still make other mistakes. For example, Robert Metcalfe at the University of Chicago shows that even professional traders are prone to the error of myopic loss aversion. And this is not to mention the tendency to become overconfident and make risky trades after brief successes.
Personally, I suspect there are much easier ways of making a living than trading on one's own account.
