Odd Lots - This Is What a Real-Life Wendy Rhoades Actually Does

Episode Date: June 23, 2017

On the TV show "Billions," one of the most important characters is Wendy Rhoades, the psychologist at Axe Capital who helps traders get out of their slumps. What viewers may not realize is that the job exists in real life. On this week's Odd Lots, we speak with Brett Steenbarger, a professor at SUNY Upstate Medical University and author of several books on trading psychology. Steenbarger, who has worked with several funds, explains to us what he actually with traders and how is work is similar to and different from the fictional TV character.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real. Lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a very big. It's a very big. It's a very much. It's a lot of commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at vanguard.com slash audio.

That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation distributor. Put knowledge to work and grow your business with CIT. From transportation to health care to to manufacturing, CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at cIT.com. Put knowledge to work. And welcome to another episode of the Odd Lots podcast. I'm Joe Wisenthal. And I'm Tracy Allaway. Tracy, you know what is one of my favorite things that you've written? There's so many, Joe. No, I mean, it's hard to choose because they're all my favorites.

I really liked your review of the show Billions when it first came out. Did you? I thought we were a little bit opposed on that one because I wasn't a big fan of it, but you like it, right? I do like the show, but that's irrelevant whether we agree or disagree on the show. I thought your review was very funny and made a lot of good observations. Such as. You know, some things you said about the dialogue and all that stuff. It was pretty spot on.

Well, the thing that amazed me was the, like, I guess the amount of male testosterone on that show and just how blatantly, manly some of the trading environment is. But one of the things you did point out was some of the attempts there were to sort of have some role reversals. And I forget exactly who they were. what you pointed out, but there are some sort of like alpha-type characters who are women that is sort of, you know, trying to make it a little more interesting. And I think one of the sort of most interesting characters on the show is Wendy Rhodes, the trading psychologist for Axe Capital. Right, at the hedge fund. So she's basically employed by the hedge fund to

help the traders in various ways. Get into top psychological form. And one thing that's interesting, interesting, and a lot of people might not know this, is that that role kind of actually exists in real life. It wasn't just made up. There are people whose job it is to help traders get in top psychological performance. Right. Some of whom have been employed at large hedge funds, real-life hedge funds like Bridgewater. Exactly. So, to cut right to the chase. We have Wendy Rhodes on? We don't have Wendy Rhodes on. We don't have the actors who played Wendy Rhodes, but we do have someone who actually is kind of Wendy Rhodes in real life. A real life trading psychologist.

A real life trading psychologist. Isn't that cool? That's even better. So we're going to talk about what this job actually entails and hopefully learn a few things about how one day when you and I, Tracy, launch our own hedge fund, which will happen eventually, I'm sure, how we can trade with top psychological performance. Do you think there's like a Freudian or a Jungian? interpretation of trading behavior? You better ask that question.

Okay. With us today, we have Dr. Brett Steenberger. He's a clinical associate professor of psychiatry and behavioral sciences at SUNY Upstate Medical University, and he is the author of four books on trading psychology. He has worked at various hedge funds. He advises different funds still today. He trades index futures himself. So a perfect guest for this topic.

Brett Steenberger, thank you very much for joining us. Well, thank you for having me. I always like to ask this in the beginning because I'm very nervous. But was that introduction a fair characterization that more or less you are a real-life Wendy Rhodes? Well, yes and no. I think she's a little more dramatic and probably a little better looking than I am. But there are some similarities. I think one of the differences, and you were talking about this, Tracy, in terms of the manliness of the environment,

is that it's surprising the degree to which professional trading environments have become not so manly, have become geeky. And we see evidence of quantification throughout the investment world. And so working with traders is a little bit less. dramatic than working with alpha types. There are many different types of money managers now who are active within hedge funds and other firms. More Big Bang theory than Wolf of Wall Street, then. Well put. And of course, that is actually a tension that sort of emerges on the show as the firm X capital has to sort of adjust to a new reality and try new strategies. In terms of the career itself, the job. Wendy was at one firm. You work for several firms or sort of

freelance and advised at multiple firms. But in terms of the sort of, okay, she sat down with traders in what looks like a very familiar clinical therapy type session, talking through them. Is that more or less how this works? That is sort of looks like traditional therapy, two people sitting across from each other, one person trying to dive in. Is that fairly accurate? That's a portion of the role. In other words, I'll have one-to-one meetings with people about their trading and about the challenges that they're facing in their trading. And so that will look a little more counseling and therapy-like. Unlike traditional therapy where you're working on ongoing problems, many times the work of a psychologist in a hedge fund or trading firm, is more like a coach where you're building on strengths. So the dialogue is going to be different than in a traditional therapy way. But in addition, the psychologist is often on the trading floor

and is talking to people in real time about what's going on. So Brett, I wanted to ask, what exactly is the goal that companies have when they bring you in to do this? And how much guidance do you get from the people that hire you? they come to you and say like, oh, well, this trader is good at this, but he's had some difficulties with that. And do you kind of help them achieve the company's goals? Yes, good question. So what will happen is that I'll work with trading firms really in two roles. The first is the Wendy Rhodes' performance coach kind of role. The other role is a little bit different,

where as a psychologist, I help firms with their recruitment processes, assessing, evaluating, and bringing on the right kinds of people that would fit within their teams and with their environments for optimal performance. So that's a little bit, again, different from a therapy-like role. You talked about in the beginning this sort of changing nature of the investment firm. We're, you know, the world of billions characterized by a lot of these sort of cliche, alpha-male-type characters. As you put it, many of these firms are undergoing dramatic changes. The whole industry is undergoing dramatic changes to more quantification, stuff like that.

How does that affect their needs for someone like you, and how does that affect what you can bring to the table? Again, good question, and that gets at something. that you were asking just earlier, sometimes it'll be the firm itself, the management that will come to me and say, can you help us accomplish XYZ? Can you help us build out more effective teams? Can you help this trader who's having difficulties? And other times the need, and I say most of the time, is coming from the money manager themselves, saying I could use help with X. I'm doing well trading in this market. I would like to start to broaden out and trade other markets successfully. I'm in a drawdown. My confidence is waning. I need some help with my confidence. So many times it'll come from the performer, him or herself.

One of the things in the show Billions, and I know eventually we could get past referencing billions, but I keep mentioning it just because, you know, it's a frame of reference for people. Internal tension, so a traitor might be frustrated with how they're being treated by, you know, Bobby Axelrod or a colleague or they feel someone else is disrespecting them and that influences their psychology. Do things like that come up? Once in a while. It's actually pretty rare. At least of the firms where I work, the management is pretty sophisticated as far as people and people skills. And so I don't encounter huge amounts of frustration. Once in a while, within teams and within a firm, there will be some conflicts.

And yes, I do help people manage those conflicts in a constructive way. just like one would do, let's say, in couples counseling. But I'd say that's the exception. I think the larger issues are the more common issues that money managers face when they want to trade in a certain way, but the risk management guidelines of the firm rein them in. And so there's a conflict between how they would like to manage money, and how the firm would like them to manage money. I'd love to be a fly on the wall for group therapy sessions at Bridgewater.

Yeah, me too. All right. We are going to take a short break. Put knowledge to work and grow your business with CIT. From transportation to health care to manufacturing, CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at CIT.com.

Put knowledge to work. work. We're back. Brett, I'm wondering, I'd love to just drill down before we move on to other things into the exact problems that traders tend to have. I know you mentioned confidence as one of them. So give us some more examples of the issues traders might encounter and how you might encourage them to rectify those problems. Yeah. So I would say there are three major classes of need that bring a money manager to a performance coach like myself. The first is if they're having difficulties with performance because of their trading and investing. Something is going wrong with how they are managing capital. Sometimes it's because markets have changed and the

trader has not adapted very well. Sometimes it's because emotional factors, frustrations, or maybe overconfidence. Maybe they've gone on a run. And so out of overconfidence, they're making some impulsive decisions, suboptimal decisions that are now causing them to lose money. So those are all situations in which performance is hurting and the money manager will reach out to a coach. How do you differentiate, though, between someone just being a trader and putting on bad trades and their performance being affected by emotional or psychological issues. Good question. Yes, and that is more of an issue if you're working at a firm that employees beginning traders.

At the funds where I work, the minimum portfolio size is hundreds of billions of dollars, and you need a multi-year successful track record just to get the job. So the issue of them just being a bad trader and not knowing what they're doing is less of an issue than if you were working, let's say, at a proprietary trading firm where someone could be trading for the first time ever. So you do have to differentiate in that latter situation when it's a matter of skill or a lack of skill and when it's a matter of just situational emotions getting in the way. However, what I'm also bringing up is there's a third possibility, which is that markets themselves have changed and that as a result of different volatility, different trend, the shift in the market now creates situations where what worked or what used to work in the market now is not working. And that leads to frustrations, and that leads to drawdowns.

So sometimes emotional issues trigger trading problems, but sometimes changes in markets can trigger emotional. Let's talk about, let's get into some specific. So imagine Tracy and I are going to launch our hedge fund one day, Oddlots Capital, which is actually a pretty good name. It's a great name. That's great. Pretty good name for our hedge fund. Let's imagine we already know we're pretty good. I don't know how we would establish a track record, but obviously it would be pretty good.

So we're sort of abstracting that way. But we're in a bit of a rut. Let's talk about what can Tracy and I, how would you start to figure out how we'd get into peak performance? What are the things that you would start to look for, the techniques that we could use to get into a good mental state? Well, let me step back. It's a great question. And let me step back and mention something. I've done at several trading firms to help with their peak performance is to conduct research

projects where we intensively study their peak performers. So we take a look and investigate the personality factors, the skill factors, and the cognitive strengths that differentiate their best traders from average traders. And so we look at what makes for success in that particular fund or in that particular firm, and that then can inform the types of qualities you want to coach for, but also the kind of qualities you would look for in your recruitment processes. So in your research, I know it varies firm to firm, but are there some general characteristics that seem to make a strong trader?

There are definitely some personality and cognitive factors that seem to go along with good trading, and it does seem as though different kinds of trading call upon different skill sets. So, for example, among day traders who are trading actively throughout the day, one of the most important things to look for is both fast thinking, fast processing of information, and parallel processing of information, the ability to look at and process many things at one time. Much of what they are doing amounts to pattern recognition. And so they need to be able to rapidly process information to detect patterns. That's extremely different, let's say, from a macro hedge fund investor who is doing deep dives into macroeconomic statistics to figure out where there is greater strength and lesser strength in global economies and then formulating investment ideas on that basis.

That's deeper thinking, not fast thinking. And so in that setting, the deep thinking is a big part of the investment. success. What you said about day traders actually makes me realize something years ago after I graduated college, I actually applied for a job at a proprietary trading firm. And one of the things they had me do during the interview was play a video game. But then on another screen while playing the video game, I had to occasionally like answer a trivia question that had nothing to do with the video game. And so it was a combination of could I focus on X, but also be aware that X or why was going on at the same time. So now I realize what they were going for. So thank you. I've always

been curious. That sounds like a pretty interesting screening going for fast thinking and parallel processing. We'll use that for our recruitment. Yeah, exactly. There you go. I also had to play ping pong against the CEO during that interview. I see. Well, that's testing your social skills to see if you let him win. All right. We just have a couple minutes here left. But, I want to get some really general things. So you've written some books about trading. So obviously a reader of those books, you don't know exactly the situation the reader is in. What are two or three basic pieces of advice you could give to a prospective trader that they could use to reset themselves and get them in a good psychological state?

Well, per my most recent book, the Trading Psychology 2.0, I make the point the trade. Trading psychology is about much more than just solving emotional problems and challenges. Right now, the greatest challenge facing traders, investors, investment firms is the correlation among their performers. People are looking at the same things, putting on the same trades, developing the same investment ideas. That correlation doesn't allow a trader or a trading firm to truly stand out. They become part of the herd, and it hurts their performance. And so what we see in trading psychology is that the best performers are cultivating creativity. They are developing ways of looking at markets in unique fashion so that they see things that other people don't see.

They see opportunities that others don't detect. And that gives them some unique. uniqueness to their returns. That ends up being very, very, very important. Now, because they have to look for unique opportunities in different markets, different timeframes, what we see is that individual traders increasingly are building out teams. They are hiring junior people to work with them who have some of the skill sets and perspectives and expertise that they might lack. And so increasingly, the good money managers are called upon to become good people managers. And that never used to happen before. So trading psychology has expanded. It's about enhancing creativity. It's about enhancing leadership and people skills, not just about controlling your emotions. But Brett, if I could just play devil's advocate for one moment, you know, you mentioned the way that markets have evolved and changed over the

years and it does seem like the emphasis now is on quantitative trading, it's on systematic trading. So, you know, how much does getting the psychology or someone's personality right actually matter when it comes to performance anymore? It's a great question. And I work with some quantitative firms. And so it's been very interesting for me to see the differences in how psychology is employed at one firm versus another. when a firm is more quantitative than a huge part of their work is research and development. They are really R&D firms. They are constantly researching, developing new ideas, almost like a pharmaceutical firm.

And so work with them on enhancing their creative processes, helping them work more effectively as a team becomes important rather than working with them because they're becoming frustrated because the first two trades they placed in the morning didn't work out. Fascinating stuff. Dr. Brett Steenbarger, a real-life trading coach and a professor of psychiatry and behavioral sciences, the author of four books. Thank you so much. Really appreciate you coming on.

Now I want to download all your books to my Kindle and read them, and so I know what I'm going to do this weekend. Well, good. And now I want to invest in the Odd Lots hedge fund. This is great. Perfect synergy. Thank you so much for coming on. Thank you.

Okay. Thanks a lot. I appreciate it. So, Tracy, I'm pretty excited about our hedge fund. No, seriously, we always joke about, like, different things we're going to do. We're going to go to go to a casino and teach you play poker. We're going to go eat fried catfish in Louisiana. You know we could achieve all those things in one go.

We start a hedge fund in Louisiana where we have fried catfish for lunch. And we test our potential employees by playing poker with them. That is perfect. No, but I did really enjoy that conversation. One, it's cool to like hear about what that job is in real life. And I really thought that was interesting. This idea, there's more to psychology than just sort of emotional state. That perspective, that it's one of the sort of ways you bring value to affirm or anything is not just falling into a groove and not just doing what everyone else does.

And as we know from humans being social animals, that's actually a really hard thing. to avoid. Yeah, and it's like, I guess it's fairly obvious, but it seems, it's interesting to me that one of the factors that can affect performance is loss of confidence. And then I imagine Brett, you know, in a room with someone going, yeah, you're okay, you can do this. Well, it's also, it's, when someone loses confidence, and I've seen that happen in different realms and life, and it's a really hard thing to break out of. Right, because the skill hasn't changed. Well, and it's also because it's like it's kind of like telling someone who's to relax you know if someone's like really anxious and you tell them to relax it accomplishes the exact opposite and so if someone loses confidence

and the next thing you know they're in a room it's that's like it could be very hard to snap out of that yeah and then you have the opposite problem of overconfidence which i'm pretty sure is what a lot of the characters on billions seem to suffer from yeah i think that's uh i think that's well put all right shall you leave it there let's leave it there this has been another episode of the Oddlots podcast. I'm Joe Wisenthal. And I'm Tracy Alloway. You can follow me on Twitter at Tracy Allaway.

And you can follow me on Twitter at The Stalwart. You can also follow our guest, Brett Steenberger on Twitter at Steenbab and our producer Sarah Patterson at Sarah Pat, two teas. Thanks for listening. Put knowledge to work and grow your business with CIT. From transportation to health care to manufacturing, CIT offers commercial. CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at CIT.com. Put knowledge to work.

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