Coaching and Continual Improvement

Challenging the behavioural aspects of trading performance

Originally published in the December 2012/January 2013 issue

“It is not the markets we conquer, but ‘ourselves’.” Financial Markets firms are increasingly looking at ways to enhance individual trader and portfolio manager performance as a step towards improving returns. This quote paraphrases a famous Sir Edmund Hillary quote. The original quote, ‘It is not the mountain we conquer, but ourselves’, has been used extensively to highlight the human nature of performance, that once one has the skills, the tools, and the knowledge, then it comes down to the biggest obstacle of all, the person, or more specifically, their mindset, attitudes, beliefs and behaviours.

Working on people and the behavioural aspects of performance is one of the new frontiers opening itself increasingly to the world of trading. A growing number of financial market businesses are looking at ways they can support their people to improve profitability and increase returns. There are a number of catalysts behind this, including, the continued emergence of the ‘Behavioural Finance’ movement, championed by the works of Nobel Prize-winner Daniel Kahneman, and luminaries such as Richard Thaler and Robert Schiller. The emergence of Behavioural Finance has led to a growing appreciation of the limitations of human rationality and the role that emotions play in effective decision-making in financial markets. Another major catalyst is the increased pressure for results in the challenging post-global financial crisis environment; much of the fat has disappeared from the market, and decent returns have become considerably harder to achieve. Further to this is increasing recognition of new avenues available to businesses to help them support their staff to enhance personal trading performance; in particular this includes the positive effect of coaching on individual performance together with cultivation of a culture aimed at ‘continual improvement’.

Until now the world of trading has been slow to embrace the concepts of coaching, and ‘continual improvement’; whilst there are some notable exceptions, these are few and far between. This contrasts with many other areas of business and performance: senior management in most large corporations make use of ‘executive coaches’, whilst ‘sales coaches’ are used comprehensively to help improve performance within many sales teams. Medicine, and in particular surgery, use coaching to improve technique and effectiveness. The teaching professions and the military use coaching as a way of improving performance over and above traditional training processes. Also most high-performance activities, including virtually all sports, plus music, theatre and dance, use coaching extensively: in fact the higher up the ladder of achievement in these fields the more crucial coaching becomes.

What exactly is coaching? How does it help?
Coaching is a forward-looking, powerful, yet flexible approach which aims to help facilitate people to progress towards higher levels of performance. The coach acts as an impartial observer whose objective is their client’s success. The coach plays the role of a sounding board for their client as they seek to prosper in the markets and respond to the challenges they face. Working with their client in a collaborative way, the coach listens, reflects and sometimes challenges the client, aiming all the time to help them realise their potential, and reduce the interference factors which undermine their performance. The coach does not engage in teaching or training; they view the trader or portfolio manager as an expert in their field, akin to how a professional tennis coach does not teach or train the player, but rather works with them outside of competitive matches, to improve their performance within competitive matches.

Why has the trading industry been slow to adopt coaching?
There would seem to be a number of reasons for this; amongst these is a belief that once a trader possesses the skills and knowledge, then performance should be permanent. This is of course an ideal, but performance is rarely permanent; individuals change, the nature of the markets change, the environment changes and the challenges facing individuals are in a constant state of flux. A further reason is a misconception about what exactly coaching is, together with a reluctance to be seen needing outside assistance: many people in the market seem to confuse coaching with either teaching or training on the one hand or psychiatry or counselling on the other. This confusion is exacerbated by the number of people who incorrectly call themselves coaches but really fall into at least one of the former categories. Adding to these general misconceptions about coaching is reluctance by some traders to be seen needing help, at the risk of being seen as weak in the minds of their colleagues or peers. Yet those who do use coaching know that it is a source of strength rather than a weakness. Certainly the businesses we work with apply coaching to individuals who they see as having potential, people who they want to invest time, money and effort in.

What exactly is ‘continual improvement’?
‘Continual improvement’ is really a philosophy or approach to the job or the business. Developing a culture of ‘continual improvement’ is a step on the road to enhanced and more robust decision-making, reducing imperfections, biases and analytical errors which all people are prone to. As a consequence people and businesses are better able to profit from opportunity and more able to withstand the inevitable setbacks that working within uncertain environments entail. Although many firms talk of practicing this sort of ethos, most tend to pay little more than ‘lip-service’ to the idea. Goldman Sachs and Bridgewater Associates, two of the most respected firms in the investment industry, are notable exceptions: Goldman’s has an extensive set of business principles which it adheres to. The business has a flat organisational structure with few hierarchies. This makes the business open to ideas from people at all levels, with managers encouraged to constantly provide constructive feedback that allows for continuous improvement. Bridgewater Associates, the world’s largest hedge fund, has a similar ethos instilled in them by founder Ray Dalio. In an interview with Jack Schwager last year for his book, Hedge Fund Market Wizards, Dalio stated a number of his management rules which form part of the culture at Bridgewater. These include: ‘Recognising that mistakes are good if they result in learning,’ and the ‘Creation of a culture in which it is okay to fail, but unacceptable not to identify, analyse, and learn from mistakes’. At Bridgewater, criticism and feedback are sought; it is not uncommon to find junior members of the organisation openly questioning decisions taken at senior level.

As financial and investment businesses adjust to the post-global financial crisis world, increasingly they seek ways to be more effective and productive. An example of this from our client portfolio involves a major hedge fund client who has recently adopted ‘coaching’ and a ‘continual improvement’ ethos. This client has been rewarded by seeing an improvement in performance of individuals being coached, and in an improved retention rate of new portfolio manager hires. Embracing ‘coaching’ and the ‘continual improvement’ ethos, are signs of progressive, forward-looking businesses, who are coming to realise that the success of their people is also their success.

Steven Goldstein is a qualified executive coach and trader performance coach who has worked with traders and portfolio managers at some of the world’s leading hedge funds and investment banks. Goldstein brings a unique perspective to his work having been a trader for 25 years at a number of major investment banks in the FXand fixed income markets.