Julia Payne, chief executive of the Centre for High Performance Development, looks at the new methods of measuring cognitive activity used to identify top traders.
If trading firms managed money as scientifically as they conduct their hiring, most would be out of business quickly.
The problem is prevalent in the business world. We have sophisticated tools for accounting, process control and marketing, but hiring practices remain stuck in the subjectivity of personal interviews and reviews of CVs.
Hiring new traders poses special challenges. Without an established track record of success, how can firms determine if candidates have the skills and talents needed to succeed?
Few people are aware that research in psychology has led to the creation of highly realistic simulations that allow firms to directly measure the competencies needed for success.
Competencies such as strong decision making skills, particularly in stressful situations, a strong focus on the end result, sharp analytical minds and being comfortable with a high degree of risk can all now be analysed accurately by today's highly realistic assessment simulations.
The studies of Dr Siegfried Streufert and Dr Usha Satish are particularly noteworthy in this regard. They have developed strategic simulations which put candidates through a series of scenarios that require decision making. The decisions made and rationales for them are used to create a web-like diagram of the candidate's cognitive functioning. What the diagram actually measures, the researchers note, are aspects of frontal activity in the brain.
Cognitive neuroscientist Elkhonon Goldberg calls the brain's frontal cortex 'our executive centre'. It is responsible for much of our reasoning, planning, judgement, analysis and problem-solving. By creating standardised tasks for a variety of professions - from CEOs to physicians - Streufert and Satish in essence have designed a methodology to match people's brains to the work they will be doing.
The implications for trading are immense.
Mapping traders' thoughts
It is not difficult to create highly realistic trading simulations using actual historical market data. By asking traders to trade a standardised set of markets and track news and market events as they occur, we can analyse their reasons for decisions. This analysis will generate cognitive maps that display how candidate traders think and behave under varying conditions of challenge, complexity and stress. We can directly observe how people handle risk, how their emotions aid or hinder their objectivity, and how they manage change and new information.
If simulations on a computer can accurately predict the performance of surgeons, they can also unlock some of the factors that account for trading success. In doing that, they can help identify future superstar performers.
The most promising application of psychology to trading - and many other fields - comes, not from the therapy couch, but from cognitive neuroscience. Quietly, in a variety of fields, matching brains to tasks is revolutionisng hiring practice.