As Michael finished packing up his U-Haul, he almost couldn’t believe he was leaving Chicago for New York—again! After his first foray at Schoenberg Trading, he never had really expected to go back. He certainly hadn’t foreseen landing on a desk at a top bank. He sure hoped he wasn’t driving toward a siren song. The markets had changed since the Internet boom and bust. Computers and algorithms drove so much more volume now. Maybe instead of hoping to manage money, he should just be developing models. He certainly had the math cred even if he lacked the desire.
On the plus side, looking at it through a psychological lens seemed promising. When he first heard Denise Shull’s guest lecture, he had to grapple with it. He understood her logic—the limits of numbers, the role of beliefs and judgment, and the idea of conscious emotion as part of the context in a decision. Nevertheless, he still could feel how, despite his intrigue, tangible numbers sounded inordinately easier!
His new “friend” Renee on the other hand didn’t see the problem. Ironically, she had turned out to know a whole lot more about trading than he would have ever guessed. When he originally had called her about the special lecture, she had blown him away with not only being one of the organizers but with also being a bit of an options trader herself. Even more amazing was the revelation that her father traded on the floors of the Chicago Board Options Exchange and the Chicago Mercantile Exchange. “He always said the numbers only take you so far and then there is a leap,” she said. “It’s a leap that is about reading the other people and about the feelings of fear or confidence you have in that read.”
According to her, her father, Christopher, had “made money in all kinds of markets but he never could fully explain why (or how). In truth,” she said, “that’s mostly what got me so interested in psychology.”
She explained that he was also one of the few to make it when he switched from the floor to the screen. “Most don’t, but he ported whatever it is without too much trouble. I want to know why some traders have a knack and some have to struggle and some just never get it. I want to know what makes a great trader—from the point of view of their whole psyches—body, brain, and mind! What was it that was special about my father?”
The subject of beliefs in particular got her going. She insisted they formed a foundation and, almost no matter what they were, skewed the believer’s perception. Her favorite example of beliefs and perception was what she called her great water-skiing “misadventure.”
Late on a Friday afternoon in Cocoa Beach, she and two friends had gone water skiing. Unfortunately, the boat had a tiny engine and Renee had trouble getting out of the water on one ski. They decided, given that no one was around, to use the easier tactic of her dropping one ski once she was out of the water. It worked until her friend thought she wanted to slow down and and inadvertently caused her to fall. Figuring that they should grab the ski from the darkening water where they left it as soon as possible, they let Renee bobb in the water as they circled the boat around. They had skied at sunset scores of times and normally this ritual would only take a minute or so. But the Banana River’s current was surprisingly swift, and within moments her friends were not only completely out of sight and but also out of shouting range. When they didn’t return within three or four minutes and she couldn’t see them anywhere on the water, she distressingly intuited that the boat’s engine had failed. Earlier, while putting on her skis in the water, she had heard her friend Zap curse as he had to turn the key a couple of times to get the engine running. With a palpable panic she knew she was completely alone in the water. The sun was setting fast, and she was quite sure her friends were floating downriver. She simply had no choice but to swim in. She pointed herself northeast toward a Lobster sign on shore and did a kind of side stroke in order to hold onto her ski. Yet, she quickly “realized” that at very best, she was only keeping pace with the current. She would swim for what she estimated as five minutes and then look up to see where she was vis-à-vis a hotel perpendicular to her position. After a few of these five-minute intervals, she seemed to actually be farther south of the hotel! Stopping more than a few times to save energy and to assess her worsening circumstances, she eventually noticed a white sailboat anchored a ways off-shore. With the sun now completely down and the river lit with bright moonlight, the white of the boat attracted light like a neon dress under a 1970’s style black light. Within moments of changing direction yet again and pointing herself towards this beacon instead of towards the shore, she surprisingly realized she was finally making good time. As she drew nearer and nearer to her new goal, she marveled at how previously she couldn’t seem to make any progress but when a clear objective appeared, she started making quick progress—despite, at this point, having been in the water close to two hours.
As it turned out, however, her friends had ultimately anchored the broken boat and also swam in—but within the context of a radically different set of perceptions and beliefs. They never experienced what turned out to be her false perception of making no progress. They knew they were moving farther and farther from their reference point because they could more easily see how far from it they had swum. With Renee’s initial navigational sign being a much more distant neon sign and a building on shore, her perception and her beliefs had been way off base. She had been making forward progress the whole time. Most likely, she had been swimming more or less in the direction of the sailboat the whole time and it was simple distance and being at water level that prevented her from seeing it until the moon came up. Had she just kept swimming in her original direction when she first started she would have made it all the way back not only to shore but to her friend’s dock without having spent an extra hour and a half in the water! Instead, she had stopped, reassessed, and headed toward different landmarks six or seven times before spotting the “lighthouse” of the white sailboat.
As she relayed to Michael, “My belief that I wasn’t making any progress (even though I was) meant everything to the repeatedly incorrect assessments and decisions I made. The incorrect belief stemmed from a skewed perception, but I didn’t know it—despite my repeated attempts to accurately analyze what was happening.”
He understood, particularly in the case of swimming in the dark, but he disagreed that there was virtually no such thing as complete objectivity. After all, everyone sees and studies through a lens or a context that comes kind of “pre-packaged.”
There was also the matter of emotion. Everyone on Wall Street says, “Control your emotions.” How do people reconcile needing emotions and controlling them at the same time? Michael’s mother, the divorcee who went back to get her own PhD in cognitive psychology, always said the research showed you could regulate—and really, isn’t that the same as control?—your emotions with your thoughts.
But Shull seemed to be saying in the lectures that the research unequivocally proved that you almost couldn’t think without emotion. Emotion gives meaning; and without meaning, how does one ever “know” anything? The two clearly conflict. Which is it—rely on or regulate?
At one point, near the Ohio border, Michael’s mind flashed back to a discussion he had been lucky enough to have with Renee’s father, Christopher. Renee’s parents had hosted what turned out to be a sublime graduation party for her at Topolobampo (the restaurant where President Obama turns up now and then), and Michael had fortuitously found himself on the guest list. When Christopher discovered that Michael was headed for a trader training program at a major bank, he had explained his own retirement from the exchange as being directly attributable to it being much harder to read the other players from what he called “upstairs.”
“Not impossible on the screen,” he said, “but a lot harder than when I could see the whites of another trader’s eyes across the pit.” A new skill for an old dog that wasn’t sure he needed to learn it, was the way he put it.
Michael wondered, have the markets changed so much that he wouldn’t recognize them either? Had HFT (high-frequency trading) turned them into a whole new ballgame? Will the only way to do it be via models, which only approximate, and algorithms? Will in the end this job amount to being a robotic arm operator? He has been assured it wouldn’t be in the interview.
But then he wondered, how does the human interact with the computer? Are the old changes in speed and rhythms—the tape reading that he was taught at Schoenberg—still even there?
And then he remembered a study that he had brought up in the interview. He had just stumbled on it on Physorg.com. The gist was that the best market simulation model developed to date relied on “sentiment” of various market participants. Reported by a group of Italian academics, this artificial market demonstrated “sentiment” flowing from one type of market participant to another.
In doing so, this market model ended up looking the most like actual market data, where big moves beget more big moves and, in probability terms, the less likely events or “behaviors” were indeed more common. When plotted on probability graphs, the curve has the “fat tails” or more time spent in theoretically unlikely events—exactly as real markets have proven to unfold. Discussing this study, in fact, seemed to be what clinched the new job for him. The managing director on one of the desks had seemed quite leery of hiring a new trader who had a PhD. Normally, people like that went into research and built models. They didn’t sit on trading desks and deal with the much messier world of gyrating markets.
One thing Michael did know for sure: in a practical way, all prices emerged from perception and perceptions change. One day a few years ago, a condo on Chicago’s Gold Coast sold for $1.5 million; and a few short months and a market crash later, the one next door sat on the market priced at $1.1 million. Now, you could grab it for a mere $850,000! What had changed? The building was just as beautiful and well located as ever. It was how people thought about the value that changed the price—both when it was going up and when it was coming back down.
The study seemed to say that tracing the trail of market players’ thoughts and feelings from one trader or investor to another held the key to creating a research tool that looked like real markets. Surely, one could use computers to help with this and, even more surely, given that humans built all the models anyway, couldn’t it be a matter of learning a new, albeit still fundamentally, human game?
As the seemingly interminable road across Pennsylvania just kept on painting a long straight black line in front of him, Michael’s mind wandered. He and Renee definitely were not “an item”; but looking from the outside in, one might not know that. Somehow, before he had left Chicago, they kept finding themselves biking to her volleyball matches on Oak Street Beach or sitting in Starbucks discussing the differences between classic decision theory, subjective probability, and emotion neuroscience.
All he could think of was how it seemed every time his feelings got strong enough for him to notice, if he paid attention to them, he inevitably did something he regretted. She lobbied for the idea that emotions made meaning—literally in the brain—and the fact that one could feel something but not act on it. She had a point in that certainly that had been his M.O. with her. To his knowledge, he had disguised even the slightest clue regarding the extent of his interest in her. He knew how he felt, but he didn’t act on it. He hoped she might be doing the same. Maybe….
Stearnsmann Bank ranked within the top five of global banks and was known for their aggressive and comprehensive approaches to trading their own capital. They used both discretionary and automated trading across every market. New hire training had begun on Tuesday, July 5.
Every day for weeks now, Michael had sat in a chair for the better part of nine hours. He knew his days of academia’s flexible schedules were over and he felt more than ready to get onto the desk and be in the action. Lectures on company policies, dealing with the media (did journalists ever call the junior guy?), the bank’s proprietary market quotes and order-routing technology, and war stories from managing directors in each market—US equities, emerging markets, US “govvies,” currencies—were necessary.
Despite his antsiness, he had gained the basics of what he needed to know to not be a complete imbecile on his (second) first day out on the trading floor. The research and quantitative analyses segment even let him show off just a tad with a few nuanced questions. New York’s legendary summer humidity permeated the building and his mind fast-forwarded a few days to the class’s “graduation dinner” in the Grill Room of one of the Wall Street power brokers’ favorite places, the Four Seasons Restaurant.
As he walked into today’s class a moment late (due to the huge number of people buying frappuccinos), he heard, “Who will put in the first bid? $100 for…. Do I hear 50?” His fellow classmates were bidding it up fast. “Do I hear 80? 85? 90?”
Michael didn’t hesitate. “95!” he shouted. He figured the iced quad latte that had made him a moment late was now free. Then he heard that guy from MIT bid 100 and wondered why everyone giggled?
“Michael, unless you bid 105, you have to pay him 95,” his new buddy Bill explained with a smirk. “That’s what you get for walking in late, chump! The second highest bidder pays their bid amount!”
Aside from his embarrassment in front of the class, he couldn’t believe he hadn’t noticed that Denise Shull from the campus lecture was today’s guest lecturer.