Mindfulness for Traders

The research of Amishi Jha, Associate Professor of Psychology at the University of Miami, suggests that meditation is effective because it enhances our attention and increases working memory, giving us greater control of the information, we select and deselect.  This can be seen in Mindfulness Based Cognitive Therapy (MBCT), which adds mindful awareness to traditional cognitive work,… helping subjects to change not only what they think about, but also how they filter incoming information.

But can meditation boost the performance of traders and investors in financial markets?

An item on Forbes.com says: “In mastering meditation we can calm the nervous system by cutting out noise, increasing our reflection, and instilling gratitude. … yet the brain is not naturally wired for decisions in financial markets, distracting us from the meta-knowledge—the awareness of what we know and don’t know—essential to operating under conditions of risk and uncertainty. Could it be the case that meditation does not benefit traders simply by calming them down, but by improving their processing of the present moment? Just as powerful as fear and greed are regret and worry. Regret keeps us anchored in the past; worry projects our concerns about the future. By improving reflection and increasing access to meta-knowledge, meditation may ground us in the present, improving our perception of what is actually happening in the here-and-now of markets.” Here.  

So I looked for research to back this up: this paper from Thailand (2018) “The Role of Mindfulness Meditation on Stock Trading Performance” investigated the relationship between mediation and performance in 226 traders to answer this question. Here

The research showed that enhanced trading performance is dependent up on:

  • increased “trading discipline”,
  • reduced “panic selling”
  • and reduced “overreaction to news”.

The research showed that increased “trading discipline” and reduced “overreaction to news” were correlated with the level of mediation practice.  Reduction panic selling was correlated with the level of mediation practice yet was not statistically significant in this study.  Overall there was a positive correlation between trading performance and the level of meditation practice.

This makes sense – we can see that trading discipline is important – to avoid biases such as “sunk cost bias” (clinging on to a position rather than redeploying investment elsewhere). The research states:

Overall, the analysis shows that mindfulness meditation practice correlates with the ability of individuals to enhance focus, to promote mental clarity, and to effectively regulate and stabilize emotions; all of these factors are important for investors to maintain strong discipline in trading.

In particular, the positive association between mindfulness meditation and trading discipline provides support to prior research which reported the benefits of mindfulness meditation in helping individuals effectively regulate their own behaviours. Moreover, the results regarding the negative relationship between mindfulness meditation and overreaction to news and panic selling during stock trading are consistent with research which has shown that practicing mindfulness meditation can improve the cognitive process and promote rational decision making.  Specifically, these findings are consistent with research which shows that practicing mindfulness meditation helped lower the chance of individuals to commit sunk cost bias. They are in line with the research which has shown that mindfulness meditation practice tended to lower emotional interference on a cognitive task.

Many years ago, a remember meeting with a manager of a currency trading team who was seeking was to use automated trading. He commented that once his human traders had encountered a significant loss event then they were “never the same”.  He presumed that computers would be less impacted by such negative events.  The research above did not look at such situation but I wonder if meditation practice might better prepare traders for such adverse events so that they are less likely to allow the recollections and emotions to be carried forward and effect their subsequent performance.

So, if you want to enhance the performance of traders then introduce them to meditation – think about it.

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