Investors need to relax if they want to succeed, according to Andrew Lo's recent five-week study of the performance of 69 day traders.
The results suggest that the most successful investors do not exhibit strong positive or negative emotional reaction to gains or losses. The paper, "Fear and Greed in Financial Markets: A Clinical Study of Day Traders," indicated that day traders who were "relaxed, at rest, calm, at ease" produced the best results.
Conversely, those who were "distressed, upset and guilty" were correlated more closely with negative performance. People who were "excited, proud and inspired" also did not do well.
The study also indicated that introversion, extroversion, agreeability and neuroticism are not correlated with either negative or positive results, although Mr. Lo admitted that a small sampling might have skewed that result.
The results of the study are significant to institutional investors because "when institutions are managing money for individuals they can be aware how participants react to market movements," Mr. Lo told P&I. "Also, institutional investment decisions are ultimately made by individuals, and individuals are subject to the human cognitive processes."
Mr. Lo, director of financial engineering at the Sloan School of Management at the Massachusetts Institute of Technology, Cambridge, Mass., co-wrote the paper with graduate students Dmitry V. Repin and Brett N. Steenbarger.