‘The Chimp Paradox’ and 'Success in Financial Markets'.

The Chimp Paradox, written by Steve Peters a leading UK sports psychologist, is based on  simple metaphor which describes the interplay between the emotional and rational functions of our brains.

The ‘Chimp Paradox’ metaphor describes the brain as working in two modes, the chimp and the human mode. The chimp is the area of the brain driven by feeling, impressions, emotional thinking and gut instincts. The chimp makes snap judgments, thinks in black and white, and is capable of being paranoid, irrational and emotive. Its primary motivator is survival. On the other hand, the human part of the brain is rational, evidence-based, thinks in shades of grey, and operates on balanced judgement. It is driven by having a greater purpose in life rather than the pure survival instincts of the chimp. There is a third aspect to the metaphor, the computer within our brain. This computer, which had an empty hard drive at birth, is only as good as the information it contains and is limited by its operating system and hardware. The computer contains stored beliefs, some of which are positive, some negative, some deeply hard-wired and tough to change, and others easier to re-programme. Our personalities are formed by a combination of the chimp, the human and the computer: Together they dictate how we act and behave.

The assumption at first glance might be that we want to be in human mode at all times. However life is not that simple, we cannot simply ignore or turn off our 'inner chimp'. This inner chimp is part of our nature, and as in real life, the chimp is far stronger than the human and has far more stamina. A chimp has 5 times the strength of the average human, so don’t even think of challenging him to strength contest. Furthermore, the human requires a lot more energy to function than the chimp. Thus when tired, fatigued, and depleted, the human brain is more likely to turn off and we automatically switch to chimp mode. In reality we function by being in a constant interplay between the two, rather like a hybrid car switching between battery and oil/gasoline. However, as mentioned, there will be times when our inner chimp, far stronger than our inner human, will be in control. When this happens, the chimp can run riot, and the consequnces can be hugely destructive. I am sure everyone can think of times when they have functioned in this way, letting their inner chimp run wild. However understanding your inner chimp, and keeping him calm, can help bring the chimp, to a degree, under control. And in some cases you can make the chimp your ally. When you are under attack you want your chimp to be fighting your corner. And therein lies the paradox, there is a time and a place for everyone’s inner chimp to prove both useful and necessary.

It is on the back of this metaphor that one can draw upon the success of outstanding performers in many fields, including trading. Master performers learn to tame their inner chimp and work with it in practical ways to harness its enormous power’s of impulsivity and emotional strength. When combining the power of the chimp, and the logic and resourcefullness of the human, and using the computer as a more productive and reliable reference source, great things can be achieved.

How does this play out in the financial markets, where belief in the superiority of rationality and logic reign supreme?

We have been carrying out some fascinating research into the proclivities and behaviours of successful risk-takers. Our work is based around a number of banks and hedge funds where we coach traders and portfolio managers. The research is on-going and still its in early days, however we are seeing some clear trends emerging which may surprise some people’s expectations of traits and characteristics needed for success in financial markets. (We recently presented our initial work on trader personality as part of a webinar which can be seen here).

One of the aspects of our personality research we are seeing is a close correlation between success in volatile markets, and a tendency to favour emotional cues over rationality and logic, particularly when one is trading shorter-term time-frames. Perhaps this is not overly surprising when one links this to the ‘Chimp Paradox’. In fast volatile markets, the ability to make money relies as much on an on ability to react fast to new news and seemingly irrational price action, as it does on an ability to read markets and having a strategy for trading the markets. Allying the human rational perspectives; a definitive trading plan with strict money management, with the chimps extraordinary sensing and intuitives abilities, enables individuals with these skills to thrive in short-term fast markets. However, allow that chimp to run wild, and all the good work will be undone. Our recent interview with Brady Dahl, author of Momo Traders, revealed how these masters of fast markets are able to survive and thrive. The traders featured in Momo Traders mastered the art of allying their inner chimp with their inner human.

There will however be days where where extreme volatility reigns and fear stalks the markets. On these days the markets are full of agitated chimps, each reacting to threats, and making seemingly irrational decisions. January 2016 saw virtually a whole month of these days. So well done to all those who came through January on top. 

To know more about the chimp paradox, Steve Peters provides an excellent Ted talk on his 'Chimp Paradox' which can be seen below.



The 'Behavioural Trading' blog is presented and managed by leading Trading Performance and Behavioural Trading Coach Steven Goldstein. Steven is Managing Director at Alpha R Cubed, which works with banks, hedge funds and investment firms to help them improve their people's capabilities  within their frontline financial risk businesses. To know more about Alpha R Cubed, visit their website www.alpharcubed.com or email Steven at steven.goldstein@alpharcubed.com.

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