Want to Succeed on Wall Street? Learn Poker, Not Economics

Perhaps the most famous trading experiment ever conducted was when commodities investor Richard Dennis bet his partner William Eckhardt in 1983 that he could train a group of amateurs – dubbed “the Turtles” -- to be successful futures traders. The bet was to be settled by giving the Turtles real money to trade. In the end, the Turtles compiled an impressive record, handing Dennis the win.

Although the experiment settled the issue in popular imagination, it lacked the transparency, controls and statistical rigor demanded by academics. So ever since, researchers have strived to understand trading success through various studies – efforts that have not escaped notice of firms that are in the business of trading financial assets.

The latest entry in this quest comes from the Federal Reserve Bank of New York in conjunction with researchers at the University of Southern California and University College London. For a paper titled “Strategic Sophistication and Trading Profits: An Experiment with Professional Traders,” the authors recruited 56 professional traders, plus an equal-size sample of students for controls, and evaluated their performance in a computer-simulated trading game. They then tested their subjects on a wide range of specific skills to see which skills were correlated to trading success.

The main finding was that among students the only useful predictor of trading success was general intelligence. Among professional traders, though, neither intelligence nor other personality traits and cognitive skills mattered much. Success did not depend on any fundamental insight about value. What mattered was strategic sophistication in the sense of taking analysis of other people’s behavior to high levels.