Monday, March 30, 2009

Digit ratios and high frequency trading

As a followup to my Jan 16 posting on this topic, I pass on a 'letters to the editor' exchange.
From Kobe Miller:
The article by Coates et al. adds interesting evidence that a low 2D:4D ratio in men predicts success, not only in sports or music, but also in job performance. According to the authors, low-2D:4D traders perform better (i.e., they earn more) because of basic characteristics: rapid visuomotor scanning and physical reflexes. However, they overlook another frugal explanation for their findings. Recently, it has been shown that low-2D:4D men react much more strongly on performance feedback than high-2D:4D men, irrespective of the performance itself. When men with a low 2D:4D ratio find themselves in a subordinate status position (e.g., when they lose a game), they might react strongly, e.g., by acting impulsively, or perhaps even abandoning the activity if possible. Following this rationale, my hypothesis is that low-2D:4D men want to excel and therefore will look for a specific domain (in both hobbies and jobs) where they have the abilities to excel. This idea might help to explain why a low 2D:4D ratio in men is related to better performance in completely different domains such as sports and music.The same mechanism might also lead to a better performance in trading in the financial world but needs not be limited to this type of job. I expect low-2D:4D people to outperform high-2D:4D people in all kind of competitive jobs, sports, and other activities, not because of specific physical characteristics, but because of one specific psychological characteristic: a higher need for achievement.
From the original author, Coates:
Kobe Millet, in a letter commenting on the correlations we found between digit ratios and success in high-frequency trading, suggests that digit ratios gauge the psychological need to excel rather than a physiological characteristic. However, if this were true, then we would find low 2D:4D among successful people of most occupations, but I do not believe we do. One study, for example, found that faculty in the math and science departments of universities had higher more-feminine digit ratios. Furthermore, several digit-ratio studies have controlled for effort and found that relative performance in many sports is predicted by 2D:4D independently of training intensity. Lastly, our own findings show that a lower 2D:4D predicts greater trading profit and loss when the volatility of the market increases, higher volatility demanding faster reaction times. This result, together with the sporting studies mentioned above, suggests that a physiological trait rather than a psychological one is at least partly responsible for success in these fields.

We should, however, point out that our study could not fully test for the mechanism underlying the correlations between trading success and digit ratio. Only laboratory work can establish this mechanism. Our study rather was a piece of field work, a type of study we feel is sadly lacking in the new subject of neuroscience and economics. In field work, you forgo the ability to establish mechanism, but what you lose in rigor you pick up in relevance.

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