Traders' Preferred Option - A Hunch
Sydney Morning Herald
Thursday October 14, 2004
The image of stockbrokers as walking, talking sharemarket super computers complete with enormous egos is, in a lot of cases, only partially right.
The part about the super computer is now in doubt following a University of Queensland study looking at the decision-making processes used by the masters of the financial markets.It turns out that much of the time their decisions are based less on what they are thinking and more on their gut feeling.Peter Noordink, a PhD candidate in the university's School of Business, found that stockbrokers often relied on hunches to make split-second decisions worth hundreds of millions of dollars."They don't have enough time to be rational. They can do that kind of analysis before the trade," said Mr Noordink. "But when you are in the thick of making decisions you have to do it based on your intuition." Mr Noordink is studying the accuracy of both intuitive and analytical decisions based on the responses of 125 traders. So far he has found that about 40 per cent of their decisions were made according to "gut feel".It is like crossing the road, Mr Noordink said. "Do you calculate distances or speeds of vehicles before you cross the road, or do you simply 'feel' whether it is ok to cross?" he said. "Most people use the second (method) and make it across 99.9 per cent of the time."Unfortunately, the success rate for stockbrokers is not anywhere near as good as that, said Andrew Brown, managing director of investment group Trent Capital. Most of the time they get knocked flat by a speeding sharemarket."I can tell you that most of the worst investment decisions I've seen were ones based on gut feel," said Mr Brown, who has worked as both a stockbroker and fund manager here and in Britain. "The guys who make the real killings at the end of the day are the ones who ignore the gut feel and make sensible decisions with a long-term outlook."
© 2004 Sydney Morning Herald
