Exploring financial decision making - first steps

When making financial decisions, many professionals, professionals with years of experience, have conflicting feelings. What is the reason for such anxiety? Interest in this topic has existed for a long time, but until recently research in this area has been rather superficial, which from our point of view is unfair, because traders are concerned not only with the result - the decision - but also with the process of making it.

In this article, I would like to elaborate on how our minds and our brains work and how a particular type of behavior emerges when we take financial risk.

The mantra of discipline

A few years ago, Saxo Bank hired a consulting firm that used social science methodologies (anthropology, sociology) to better understand the bank's existing and potential customer base. In particular, the experts were interested in how clients perceive themselves as traders and what role this perception plays in choosing the types of products and services that are important to them.

In the course of the research, the experts found one common trait that is characteristic of all traders, regardless of their personality and experience. In our internal jargon, we called this trait "the mantra of discipline". Almost every respondent in our study emphasized the importance of such a concept as "discipline", although many of the respondents admitted that they had not yet acquired this quality and were not satisfied with their work as a trader for that very reason.

So it was not surprising that when, a few years later, the bank invited another consulting firm to explore a new range of issues, discipline was again the dominant theme. What is meant by it and why is it given so much more importance in traders' discourse?

What is discipline for a trader?

First of all, discipline does not simply mean self-control or strict adherence to rules, although these two aspects paint an understandable picture of what a decision-making mechanism can be. Discipline is also associated with the words "emotion." и "rationality."The two concepts are often presented as mutually exclusive. Over the past decades, modern neuroscience has continued to question this straightforward dichotomy: understanding the role of emotion in decision making is not simply a matter of contrasting rationality, as the two concepts are inseparable and each has an important function.

Traders usually describe emotions as something bad, incompatible with financial decision-making. If we google the combination of terms such as "emotions" and "trading", we get key word combinations and phrases such as "controlling emotions", "dealing with emotions" or "trading without emotions". Naturally, the latter is impossible by definition: emotions, as we know, are an integral part of brain activity when making decisions - and is it necessary, desirable, to have no emotions when making decisions?

The ideal of a cold-blooded trader

You can find many recommendations to use the behavior model "cold-blooded trader"devoid of any emotional overload. A rational decision-making machine. But this model should be countered by the arguments presented in serious studies conducted around the world. They show that no matter how much we want to make decisions in cold blood, the decisions we end up making are different from those predicted by models of perfectly rational behavior. Factors such as insufficient information and time constraints force us to resort to heuristics, practical experience, intuition and, more importantly, force us to consider how we relate to our emotions in the decision-making process.

Thus, modern research in behavioral finance and neuroeconomics has helped us understand what it means to Make financial decisions in the context of emotionsIt also helped to explore what actions need to be taken to maximize effective decision-making. This was the subject of our own research in the framework of the xDelia research projectThe study, which lasted 39 months, was carried out in collaboration with various European universities and with the financial support of the European Commission. In our research, we focused not only on important questions in the field of psychology and behavior, but also in the field of physiology: we used sensors to determine how the body and brain behave when making financial decisions. We tried to understand how such data could be used for diagnostics and for responses, including direct implementation of such results in learning and trader applications.