A study shows that Wall Street traders have lost their swagger

This post-pandemic behavioural finding could influence markets.

- Aaron Brown

In December, a team of researchers from the Federal Reserve Bank of New York, University of Southern California and University College London published a study of what cognitive skills make successful traders. They’re back with a look at non-cognitive skills, such as agreeableness and conscientiousness. This time, their focus is not on what distinguishes traders, but how the personalities of traders and non-traders changed due to the pandemic. The findings suggest a trading environment that is becoming less bold and more cautious with implications for the reaction function of financial markets that is very different than what we are accustomed to.

When I studied academic finance in the early 1980s, the focus was on economic fundamentals and mathematical theories. Behavioural finance, which examined how the psychology of participants affected markets, was a niche field that many academics disregarded. But behavioural theories have gained much influence since.

Much of the early work on behavioural finance studied tendencies that were considered near universal in humans. That gave way to work that recognized differences among individuals, but these were often assumed to be set early in life and constant thereafter. Only in the last 10 years or so have behavioural finance theories that assume personalities are malleable in adults become mainstream.

The pandemic is the biggest mass trauma that provides a natural experiment for these new ideas. How did the pandemic change the personalities of traders? What does that mean for financial markets?