Traders Still Have One Over AI: Thank Gut Feeling

By September 8, 2017featured
Traders Still Have One over AI: Thank Gut Feeling

Everyone’s talking about artificial intelligence these days … How it’s taking the place of human traders; how in the future, it may very well take over the whole trading business, leaving humans out in the cold and so on and so on. These doomsday scenarios, however, are far away, if they ever become reality, because human traders still have one major advantage over algorithms: the simple gut feeling.

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So, is the gut feeling bad or good for trading?

Some feel that letting your gut instinct guide your trading decisions is basically the same as letting emotions guide control of your trades, which can have disastrous consequences. But, equating the gut feeling with emotions is a mistake. They are not the same thing.

Last year, a study led by the University of Cambridge found that traders trusting their gut feeling were much more successful than those ignoring it. And, traders in general were better at reading the signals of this gut feeling than non-traders. However, here’s one very important detail: this gut feeling that the scientists studied was not emotion or general intuition. It was what they call interoception.

This technical term sounds dry and dull, but it’s actually fascinating. It refers to your ability to sense signals in your body, such as your heartbeat, your breathing, or whether your stomach’s full or not. Don’t we all sense these signals? Actually, no – most people are barely aware of these unless, of course, they are put under immense stress when these signals become pretty loud, with heart racing, stomach clenching and head pounding.


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Traders, it turns out, can read these signals so well, sometimes, that they can count their heartbeats accurately without feeling their own pulse or putting their hand on their chest. Try to do it and you’ll see how challenging it is – unless you’re a star trader! It seems that the better a trader is at trading, the better they are at counting their heartbeats and, by inference, the other signals their bodies send them when they are about to make risky decisions.

And here’s something even more interesting: traders get better at reading their gut feeling with time. It makes sense, really, if we see this “reading ability” as a skill. The longer you do something, the better you get at it, so those traders who are best at listening to their bodies are also the ones with the longest careers. This sounds like great motivation to keep getting better at trading and learning to listen to what your body is telling you.

It’s worth noting here that an impromptu poll among 117 traders on Twitter had 52% say that they trusted their gut instinct a lot, while 24% said they tried to ignore it.

So, based on these findings, what are the chances of AI completely taking over financial markets? For now, not so great.

Here’s what the lead author of that study told media at the time it was released. “If we focus on conscious mind and model it as a piece of software we will conclude that humans are doomed. But, if we recognize that body and brain act as a single functioning unit…then we will also recognize how exquisitely we are constructed for rapid pattern recognition. Humans can indeed compete against the machines.” John Coates knows what he’s talking about – he used to be a trader before turning to academia in neuroscience and finance.

Be that as it may, we are bound to continue reading about more investment funds that rely partly or entirely on artificial intelligence.

This recent story, for example, talks about an actively managed fund that is entirely automated. It uses software that predicts market movements on the basis of huge quantities of historical data and makes trading decisions based on these predictions. The purpose of replacing people with software is the one you’re thinking of: eliminating emotions from the trading equation. But, at the same time, this eliminates the gut feeling from the equation and this may not be the best thing, if we are to trust those scientists and the traders who swear by their gut feeling.

We have pretty good reason to trust them, too. The gut feeling, intuition, interoception—call it what you like—can be honed over time, the scientific research suggests. In that, it is exactly like other skills, such as the ones you need to play sports or videogames. This story from golfing legend Gary Player sums it up pretty accurately.

The longer you play the trading game, the luckier you will become, as you learn to not lean on emotions but on reason and data and you also learn to better interpret the signals your body sends to your brain. No decision we make is entirely rational, there is also some emotional input involved. Minimizing it comes with time and experience. So does sharpening your intuition, your gut feeling.

Together, logic, data, and the gut feeling are bound to make for better decisions than just the former two. The moment when AI acquires intuition is the moment when machines will completely replace humans as traders. For now, that moment is far in the future.


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Join the discussion 12 Comments

  • drap2010 says:

    Woohoo! Interoception! Win for organic intelligence, even if I am one of the worst Tim Sykes students. Love the Gut! Live the dream.

  • Russ says:

    I can’t quite put my finger on it but i think they used to call this subconscious.

  • Lakshman Ukwaththa says:

    Good stuff, never thought of it

  • Vincenzo Migliaccio says:

    Interesting article. I actually noticed that whilst paper trading I was much better at using my gut feeling that lead me to good virtual profits. However, once I started trading with a real account, for the first month I have not been able to trade well because of the emotional involvment that ‘clouded’ my gut feeling and my more rational side. Hopfully, once I have grown my ’emotional muscle’ I’ ll be able to use my gut feeling successfully again.

  • Sara Bank_a_tronic says:

    This was one of the most fascinating articles on correlating bio-chemistry with having a potential trading advantage over AI technology!
    I very much enjoy learning about different forms of insight not only related to how our decisions are made but exactly how we can fine tune them to an astute edge in trading!
    I cant wait to get STT one day soon! I may have to wait until next year to save up for it, but not a day goes by that I dont wish that I had this mandatory trading platform crafted by the most brilliant minds!!!

  • Patrick says:

    I didn’t realize there was so much AI involved in the current trading realm — that’s extremely interesting. Is there other material you’d recommend for me to read to learn more about this?

  • Tim Vaughn says:

    Great articles. Thanks for sending.

  • Jermaine Russell says:

    Great valuable lessons written all over this article. Thank you for sharing.

  • Fred says:

    Great training. I so completely agree about what is being said about your gut feeling, but also learning how to technically trade and not let your emotions play with your decisions!

  • Cameron Fletcher says:

    good stuff im all about self improvement

  • Roger says:

    How true this is. Thanks for sending the info, always can use.

  • Stan Carver says:

    Thank you Tim

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