I read this a couple of weeks ago in the FT and forgot to blog about it. Basically Phillips and ABN Amro are teaming up to develop a bracelet to be used by traders that displays a warning if their stress levels are too high. The idea here is that investors might follow irrational strategies if they cannot think properly and should take a brake if they get to stressed out before taking any decisions.
This reminds me of a paper by Andre Lo in which he measures physiological characteristics of traders (like blood pressure) during live real trading sessions and finds significant correlation between changes in cardiovascular variables and market volatility.
Here is a video of how it should work. It looks like really good sci-fi stuff. I wonder if it might help in other situations, like preparing to an interview, approaching girls, or right before some World Cup penalty shoot-out...
Here is a video of how it should work. It looks like really good sci-fi stuff. I wonder if it might help in other situations, like preparing to an interview, approaching girls, or right before some World Cup penalty shoot-out...
Frankly, it sounds a bit Orwellian. And not terribly useful in addition. Incentives always achieve what they are set up to do, not what they are intended to do.
ReplyDeleteAssuming we were even any good at measuring what a 'rational' decision looks like (and in real time no less), it still seems these physiological stress measurements should be rather easily manipulated by drugs - prescription or otherwise. Never incentivize on an indicator...
S
I remember reading in the FT that at one of the big banks (perhaps Lehman of Merryl) they were pumping pure oxygen in the air conditioning system to make people more excited).
ReplyDeleteI find your last comment interesting, aren't profits (or money) and indicator?
Mr Saffi,
ReplyDeleteIn the "changes in cardiovascular and market volatility" variables, I am not sure that the first is always the exogenous one. It is the same as the "buy and sell rumors" joke.
Makes me remember Tostines.
jac
I like the idea of the oxygen. I have no idea whether it makes people more excited, but for sure it should make them more awake, which is also good for doing your job I suppose.
ReplyDeleteAnd yes, I agree that profits are an indicator. Which is why they s*ck as an incentive measure. Indicators that are the basis of incentives will stop indicating what they are meant to indicate.
GM made paper profits for years by selling cars to people on long term payment plans at rates below their own financing rate. Which also meant they never saw any cash, which did not work out well for them overall. But those people being paid based on ‘profits’ were happy.
Same problem for incentivizing on stocks or options, unfortunately. Mgrs start fiddling with the price, coming up with ideas of ‘signalling’ undervaluation, back-dating their option grants, instead of doing their job: finding +NPV projects and investing.
Incentivizing on an indicator is like the boss saying “you know, I really have no idea how to assess what you are contributing here, so let’s just use this accounting number”.
I can now work really hard and still be subject to random shocks (or other people not doing their job), or spend my day manipulating the indicator with more certain results… obviously, my boss cannot tell the difference anyway, and the latter is easier. But it also stops being an indicator of my working hard.
Since ‘value’ itself is not immediately (nor perfectly) observable, this does pose a problem, I don’t disagree, but in search of the second best, I am quite sure we are ending up at third best.
That was my original point. If I am judged by my cortisol levels or whatever that Philips contraption measures, I will spend my day managing those levels, rather than focusing my energy on being a good trader, since that is more difficult than managing the cortisol…
S