How Our Strengths Shape Our Trading Psychology
In this article, we will learn about our personal strengths and how those shape our development as participants in financial markets. Years of working with portfolio managers and traders have taught me that the greatest performers are not those without weaknesses, but those who maximize distinctive cognitive and personality strengths. But what are our strengths, and how can we maximize them?
A particularly innovative approach to the assessment of our capacities comes from the research of Christopher Peterson and Martin Seligman. They propose a framework of strengths that is a positive psychology counterpart to the standard classification system of emotional disorders. This scheme defines 24 “character strengths” that fall into six groupings of “virtues”. The VIA Survey is a standardized test that assesses these virtues and strengths, and it is available free of charge, along with a summary of our “signature strengths”, “middle strengths”, and “lesser strengths”. The virtues, as summarized by Lopez, Pedrotti, and Snyder in their reference volume of positive psychology research, include:
- Wisdom and Knowledge – Cognitive strengths of gathering and applying knowledge;
- Courage – Emotional strengths involving willpower in the pursuit of goals;
- Humanity – Interpersonal strengths involving caring for others;
- Justice – Community strengths involving leadership and participation in groups;
- Temperance – Behavioral strengths involving self-control and perspective;
- Transcendence – Spiritual strengths involving connection to larger sources of meaning.
When money managers seek me out as a performance psychologist, they invariably want to correct or eliminate weaknesses. For example, they might find themselves unduly influenced by fear, greed, impatience, etc. and want to eliminate these emotions from their trading. The strengths framework offers a different approach to trading psychology: Our greatest problems in managing risk and uncertainty come from the suboptimal deployment of our strengths, not necessarily because of underlying weaknesses or emotional problems that require remediation.
Consider the following principles that reflect my years of research and observation regarding performance in financial markets:
- Distinctive success draws upon distinctive strengths – Participants in markets who have enjoyed long and successful careers are unusually strong in one or more of the character strengths. For example, one portfolio manager at a hedge fund has enjoyed consistent success for well over a decade across very different markets and market conditions. His distinctive wisdom/knowledge strengths enable him to generate unique ideas for investment, and his distinctive temperance strengths have helped him manage positions with consistent risk management and careful maximization of reward relative to risk. Wherever we see great performance we encounter great strength.
- Poor performance in markets often follows from a failure to understand and utilize one’s strengths – I’ve worked with traders who have displayed particular interpersonal strengths, such as those associated with the virtues of humanity and justice. When they cannot channel these strengths into daily work processes—perhaps through collaboration within teams and the cultivation of active information networks—they become frustrated, and the frustration colors their decision-making. For example, one unusually social manager felt isolated and bored on the trading floor and tried to compensate by trading (over) actively to create stimulation. His problem was not an absence of discipline, but the failure to cultivate a work process that tapped into his ability to lead others and benefit from mutual give-and-take. Note also how our work environments (such as the configurations of traditional trading floors or the inflexible structure of business meetings) can unwittingly frustrate the exercise of our strengths, leading to subpar performance.
- Poor performance in markets often follows from an overutilization of our signature strengths – A fascinating and useful assessment of the “dark side” of our personality traits comes from Hogan Assessments. The key idea is that, when we become rigidly grounded in signature strengths, those can bring unwanted consequences. For instance, the trader who pushes to increase risk-taking and achieve higher and higher profitability goals, taking the courage virtue to an extreme, can become an underperformer when markets make radical shifts in their behavior, as happened earlier this year. Similarly, team leaders who are unusually supportive and grounded in the humanity virtue may find it difficult to enforce productivity goals. Very often this occurs when one signature strength dominates to the point that it interferes with the expression of other strengths.
- The development of successful traders and investors hinges on the cultivation of “latent” strengths – This is a very important concept, and not one that is well-appreciated. If overreliance on a strength can bring unwanted consequences and if merely shoring up weaknesses will never create distinctive strengths, how are we to grow? The answer is found in what the VIA survey calls our “middle strengths”: capacities that we clearly possess but do not particularly identify with. These middle strengths often are latent strengths that can be cultivated, bringing unique gains in performance. As I described in a recent series of blog posts, a great way to identify these latent strengths is to have someone close to us—a colleague, friend, or romantic partner—complete the strengths inventory based upon how they perceive us. What we find is that our closest contacts see strengths in us that we do not fully appreciate. These are often great candidates for latent strengths to develop. For example, Mike Bellafiore and Seth Freudberg of SMB Capital recently described a top trader who took his performance to a new level by exercising creativity and variety in how he expressed his ideas. His risk-taking courage was a major element in his initial success, but it was the latent strengths of wisdom and temperance that allowed him to find new ways to capture reward relative to risk.
- Successful styles of trading and investment are expressions of clusters of strengths – Unique performance reflects intersections and integrations of strengths. For instance, one successful portfolio manager I have worked with combines the virtues of knowledge, humanity, justice, and transcendence to create a team culture that emphasizes the growth of each of its members, inspiring them to continually cultivate and share new areas of expertise. This cluster of strengths creates a dynamic team culture that has been instrumental in recruiting high quality team members. Similarly, the integration of courage and temperance is a cluster common to managers who achieve high risk-adjusted returns. A great way to build on our strengths is to explore how one strength can be used to express another. If we wish to become more effective in our justice virtues as a leader, for example, perhaps we can channel those communication and teamwork skills through a transcendent sense of mission and purpose.
Too often I have seen that the result of intensive work on weaknesses is an internalized sense of being weak. Day after day of focusing on our flaws inevitably reinforces the sense of being flawed. The way to avoid this pitfall is to ground our performance reviews in our successes as well as our shortcomings. When we study our successes, we discover signature and latent strengths in action, pointing the way to the solutions best able to fuel our development. There is no better way to assess our strengths—and clusters of strengths—than to observe how they manifest themselves in our best performance. Our successes point the way to our greatness.