Genetics

Our ability to trade against fear is in large part genetic.

Several traits influence how we take investment risk including personal background, life experiences, age, and gender.  Gene-environment interactions are also important.  But primary among these influences is our personal genetic endowment.

Consider a polymorphism of the serotonin transporter gene:  5-HTTLPR.  Individuals carrying the short polymorphism of this gene are more likely to develop depression in response to negative events and are more likely to experience a long-term emotional impact from financial losses. In some studies, people carrying this polymorphism experience more financial anxiety than others.

Kuhnen and Chiao (2009) had previously reported that this polymorphism biased investment preferences among a sample of university students.  Students who are homozygous for the short form of the transporter - the s/s allele - took 28% less investment risk in their study.

Building on this work, Gregory Samanez-Larkin, Camelia Kuhnen, and Brian Knutson examined the investing habits, genetics, and beliefs of a group of 60 retail investors in this excellent study. They showed that all factors have some explanatory power over investment risk-taking, but that genes appear to be the strongest contributor.  Our genes - an element out of control - determine the majority of our financial risk taking (the contribution of the personality trait neuroticism to risk taking is accounted for by the 5-HTTLPR variant).  

This is a dramatic conclusion, and it's important to qualify that it hasn't been replicated on other genes.  It's disturbing to discount the valuable notion of free will. But it's only when we recognize that much of what we THINK is in our control actually is not, that we can we then accurately forecast and plan for our errant investing behaviors.

Meanwhile, the vast herd of investors is reading news and reacting in a knee-jerk biological manner.  And the saavy (and self-controlled) investor can take advantage of the surges of market fear and relief.

I have had to condition myself a lot for several years, so I guess I dont have the trading genes.