(Please note: I will be giving a free webinar on Wed 17th February, and a talk on the 1st March on this topic and associated research on a population of trader and hedge fund portfolio managers - See bottom of this article for full details. )
Consider a boat on the sea with its anchor down. The boat moves around on the surface as it gets pushed, pulled and buffeted by the tides, currents, winds, and waves. However the boat can never move too far from its position or state because it is firmly anchored. In this analogy, the anchor represents a person's risk-type, (their personality in relation to how they act when faced with high risk decisions). The boat represents a person's attitudes to risk. These attitudes can change depending on transient events and circumstances, and their experiences of these. Together 'Risk Type' and 'Risk Attitude' form 'Risk Behaviour'.
Image 1
Image 2
Risk Type and Bright-Side (Positive) Behaviours.
When a person's risk attitudes are in a harmonic position in relation to their risk type, there will be little or no stress on the chain between anchor and boat, and the boat itself will not come under strain. In this part of the analogy, the person is more capable of making informed and optimal decisions, and are less likely to be affected by default decisions and factors which impair decision-making, such as behavioural biases. In these situations, they are more likely to be productive and performance is more likely to be optimal.
Image 3
Risk Type and Dark-Side (Derailer) Behaviours. When risk attitudes are not conducive and not in harmony with risk type, there will be stress and tension on the chain. A person's risk attitude may be in conflict with their risk type. In this part of the analogy, they are in danger of making more sub-optimal choices and impairing sound decision-making. Thus they will be vulnerable to derailing behaviours such as emotional hijack or ego based choices, and more susceptible to unconscious behavioural biases and other default behaviours. In these situations, they may be far less productive and liable to sub-par performance.
Image 4
Changing Risk Behaviour Requires Understanding Risk Type.
My recent article, which can be seen here, highlighted why it is so difficult for traders and investment professionals to change and improve their behaviours, and why so many highly successful traders are turning to performance coaches and consultants (Such as myself) to help them change, improve and stay ahead of the game. - Change is an immensely difficult thing to successfully achieve without outside help. One of the points I stressed in the article was that behaviours are mostly sub-conscious (they are impacted by risk type and remain hidden from view). Only our attitudes are visible on the surface, this is what we why to change, but without understanding the anchor, efforts to change are mostly futile.
The Risk-Type Compass
The 'Risk Type Compass' developed by PCL (Psychological
Consultancy Limited) helps people understand more about their risk personality
and how this comes to impact their decision-making in high risk situations.
This simple but powerful tool identifies people as one of 8 different risk
types, each with their own particular characteristics; upside traits (we label
them Bright-side Behaviours) and downside traits (Dark-side Behaviours).
Understanding your risk type helps you make sense of the
positive and negative behaviours you display in your trading activities. As an
example, individuals identified as the ‘Wary’ type tend to be highly risk
averse. They are usually very detailed orientated and highly analytical, thus
they are more likely to achieve success taking a tactical approach to trading.
On the other-hand the ‘wary type’ may display high levels of anxiety and find
ambiguity challenging. Diametrically opposed to the ‘wary type’ is the
'Adventurous type’. They have a high degree of risk tolerance and are more
likely to achieve success adopting a strategic perspective. They are
comfortable holding risk without becoming too flustered. However, they lack a
detail orientation and can get caught out being over-confident and
under-appreciating the level of risk they take.
What matters for success is not what risk type you are, but
whether you applying yourself in the correct way for your type. The most profitable trader tested by us in our
work so far, was an extreme version of the 'wary type'. This was an individual
from a large and very successful hedge fund who was very anxious and nervous
when trading. Yet he produced profits well in excess of $100 million over each
of the past 2 years. His method, which is purely discretionary, plays very much
to his ‘wary type’ upside traits, and away from his ‘wary type’ 'downside
traits'.
The Risk Type Compass has many applications beyond improving trader and investment manager performance, and we are applying it increasingly in helping improve team, leadership and management performance. We are also using it in our work to help bank and investment firms improve 'Conduct Risk' and 'Risk Culture', and to support other cultural initiatives and change projects. The tool is also being used by consultants and coaches in their work with boards and strategic decision-makers, as well as in the world of high performance sport.
Risk Personality, the next frontier for Behavioural Finance.
The rise of behavioural finance has done much to raise awareness of how much the psychological, emotional and relational aspects affect people's decision-making and impacts financial market behaviour. However focus on personality has remained no more than at the very fringe of Behavioural Finance. Victor Riccardi and Kent Baker's excellent book 'Investor Behaviour' is one of the exceptions, the book includes a chapter on Personality Traits, written by Lucia Fung and Robert Durand, who themselves have produced some interesting research in this area.
Webinar and Presentation on Risk Type and The Risk Type Compass.
I will be presenting a live webinar and giving a talk, both hosted by the Market Technicians Association (MTA), whereby I will be talking about Risk Type, the Risk Type Compass,
and how I use it to help Traders, Investment Professionals and Financial
Market firms improve performance and risk culture. - In
the webinar I will be sharing some fascinating research we have doing
using this tool across a population of traders and portfolio managers
from leading Investment Banks and Hedge Funds. The research sheds a
light on different types of trading personalities and how certain trader
types are more suited to particular approaches, methods and behaviours.
The webinar will demonstrate how by being more conscious of risk type
and risk personality you can start to reshape your trading and
investment behaviours to improve your trading and investment
performance.
Webinar Details
The live webinar will take place on:
Wednesday 17th February.
Timings for this event are:
London GMT 5pm to 6pm
Paris/Rome/Stockholm CET 6pm to 7pm
New York EST 12pm to 1pm
Los Angeles PST 9am to 10am
Hong Kong HKT 1am to 2am
The
webinar is will be available at
the following link:
Presentation Details
The presentation and talk on the Risk Compass will take place on:
Tuesday 1st March from 6pm to 7pm
Location
CMC Markets, 133 Houndsditch, London EC3A 7BX
Registration for this event is free
for MTA Members and Non-Members.However places are limited. You can register for this at the following
link. https://www.mta.org/event-registration/united-kingdom-chapter-meeting-featuring-steven-goldstein/
I look forward to you joining us for these events.
Warm regards
Steven Goldstein
Managing Director - Alpha R Cubed Ltd
www.alpharcubed.com
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The 'Behavioural Trading' blog is written and managed by leading Risk Performance consultant and coach Steven Goldstein. Steven is Managing Director at Alpha R Cubed, who work with banks, hedge funds and investment firms to help them improve their people's capabilities and performance. To know more about Alpha R Cubed, visit the website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com. Follow Steven directly on Twitter.
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