Doing a PhD to study all you crazy traders

Over the last couple of years I have been researching PhD programs with an eye toward taking that final step in my academic career (having already done an MBA). I’ve had a former professor of mine pushing me in this direction just about ever since I finished my undergraduate studies oh so many years ago. I resisted for many reasons, but a couple years back it occurred to me that one of my major excuses – lack of shareable experience to bring into the classroom – wasn’t really valid any longer. That started the process.

This week I was offered a PhD studentship by the business school at the University of Exeter in England and have accepted. I still have to be offered and accept admission by the university proper, but that is just a formality and should happen shortly. The business school wouldn’t offer me the funding if they weren’t going to accept me, after all.

That means I’ll be leaving my current position as a professional analyst, but it most certainly doesn’t mean I’ll be leaving the markets or trading. In fact, that will be the focus of my dissertation. My research proposal for admission was on the subject of individual retail forex trader profitability and performance. It fits into the general area of Behavioral Finance, which is basically the counter-point field to classic efficient markets theory.

I’m really looking forward to delving into the data (I’ll be using a big set of trader transactional and performance data for my studies) and the sort of results that come from it. As much as this will be academically oriented work, I see lots of opportunity for it to be applied in the practical arena.

Do you like Doctor of Trading or Trading Doctor better? 🙂

The Basics

Noise Trading

One of the more interesting topics I’ve come across in my delving into research in the area of Behavioral Finance is the term “noise trader”. I’ve been reading a paper on the subject which has former Treasury Secretary Larry Summers as one of the co-authors. To put it simply, noise traders are those who do not operate on a strictly rationale valuation basis when making buy/sell decisions in the market. In other words, if you’re reading this blog post you are almost certainly a noise trader in the way academia defines the term.

One of the things I find interesting is how Summer & Co. refer to the non-noise set of market participants as “sophisticated investors”. The implication is that these folks can build a proper valuation model with the correct inputs that correctly account for risk. The implication is that noise traders can’t correctly estimate future risk (among other things), while the so-called sophisticated investors never makes any errors in estimating all the contributing factors which go into a valuation calcuation. Not very realistic in a world of failable human actors, in the latter case, or in terms of valuing the abilities of some very smart researchers on the other.

What’s kind of funny is the expressed observation of the paper that noise traders make value investing a sub-optimal course. One the one side, noise traders are said to increase volatility, and thus risk, reducing asset prices (stocks, really) in terms of their attractiveness to the non-noise set. On the other side, the added volatility actually increases the returns accruing to a noise trading approach. I think a lot of traders will feel vindicated in this. 🙂

I haven’t gotten all the way through the paper, and there’s a lot of very academic stuff, so it’s not the easiest read in the world. For those with an inclination, though, it’s an interesting bit of intellectual discourse.