by John Coates
To what features of the world do we pre-attend? When an infielder is crouched at the ready, frozen like a statue, his eyes fixed and unable to scan, what in his visual field captures the interest of his pre-conscious processor? We do not yet know a complete answer to this question, but we do know a few things. We attend pre-consciously, as in blindsight, to moving objects, especially animate ones. We attend to images of certain primitive threats, such as snakes and spiders. And we are strongly biased to aurally attend to human voices, and visually to faces, especially ones expressing negative emotions such as fear or anger. All these objects can be registered so rapidly, in as little as 15 milliseconds (this does not include a motor response, of course), that they can affect our thinking and moods without our even being aware of them. In fact we often know whether we like or dislike something or someone well before we even know what or who it is. The speed and power of pre-conscious images, especially sexual ones, were once used in subliminal advertising as a way of biasing our subsequent spending decisions. More usefully, this pre-conscious processing can affect motor commands for reflex actions and automatic behaviours.
One of these reflexes is our startle response, a quick and involuntary contraction of muscles designed to withdraw us, like an escaping octopus, from a sudden threat. It can be initiated by both sights and sounds. A loud bang will trigger the startle, as will a rapidly approaching object in our visual field. The way we visually detect an object on a collision course with us is ingenious: our startle is initiated by a symmetrical expansion of a shadow in our visual field. The expanding shadow indicates an incoming object, and its symmetry indicates that it is heading straight for us. Apparently this pre-conscious object tracking is so well calibrated that if the shadow is expanding asymmetrically our brain can tell within five degrees that the object will miss us, and as a result the startle response is not triggered. The startle, from sensory stimulus to muscle contraction, is exceptionally fast, your head reacting in as little as 70 milliseconds and your torso, since it is farther from your brain, in about 100 milliseconds. Coincidentally, that is roughly the time required for an infielder at the silly point to catch a ball coming off a cricket bat. It is entirely possible that infielders rely on the startle response to achieve the almost inhuman response times they display. If so, then, conveniently, perhaps the infielder can catch or avoid a ball in the little time allowed him only if it is coming straight for his head.
Besides the startle response, how can we react fast enough to meet the challenges sports, and daily life, throw at us? As we saw in the previous chapter, humans have adopted a wide range of movements, like those found in sports and dance and modern warfare and even trading, for which evolution has not prepared us. How can these learned movements become so habitual that they approach the speeds needed for sporting success or survival in the wild? To answer this question we should recognise a basic principle at work in our reflexes and automatic behaviours: the higher we rise in the nervous system, moving from the spine to the brain stem to the cortex (where voluntary movement is processed), the more neurons are involved, the longer the distances covered by nervous signals, and the slower the response. To speed our reactions the brain tends therefore to pass control of the movement, once it has been learned, back to lower regions of the brain where programmes for unthinking, automatic and habitual actions are stored. Many of these learned and now-automatic behaviours can be activated in as little as 120 milliseconds.
A glimpse into this process has been provided by a brain-scanning study of people learning the computer game Tetris. At the beginning of the study, large swathes of the trainees’ brains lit up, showing a complex process of learning and voluntary movement; but once they had mastered the game their movements became habitual, and brain activity in the cortex died down. Their brains now drew much less glucose and oxygen, and their speed of reactions increased markedly. Once the players had the knack, they no longer thought about playing the game. This study, and others like it, supports the old saying that when learning begins we are unconscious of our incompetence, and proceed to a stage where we are conscious of our incompetence; then when training begins we move to conscious competence; and as we master our new skill we arrive at the end point of our training – unconscious competence. Thinking, one could say, is something we do only when we are no good at an activity.
One last point. As fast as these automatic reactions may be, they still do not seem quite fast enough for many of the high-speed challenges we face, and may therefore leave us slightly behind the ball, so to speak. The trouble with these reaction times is just that – they are reactions. But good athletes are not in the habit of waiting around for a ball or a fist to appear, or opponents to make their move. Good athletes anticipate. A baseball batter will study a pitcher and narrow down the likely range of his pitches; a cricket infielder will have registered a hundred tiny details of a batsman’s stance and glance and grip even before the ball has left the bowler’s hand; and a boxer, while dancing and parrying jabs, will pre-consciously scan his opponent’s footwork and head movements, and look for the telltale setting of his stabiliser muscles as he plants himself for a knockout blow. Such information allows the receiving athlete to bring online well-rehearsed motor programmes and to prepare large muscle groups so that there is little to do while the ball or fist is in the air but make subtle adjustments based on its flightpath. Skilled anticipation is crucial to lowering reaction times throughout our physiology.
Let us finish by listening to Ken Dryden, a legendary goalie in ice hockey and one of the most articulate athletes ever, on the importance of anticipation and automatic behaviour: ‘When a game gets close to me, or threatens to get close, my conscious mind goes blank. I feel nothing. I hear nothing, my eyes watch the puck, my body moves – like a goalie moves, like I move; I don’t tell it to move or how to move or where, I don’t know it’s moving, I don’t feel it move – yet it moves. And when my eyes watch the puck, I see things I don’t know I’m seeing … I see something in the way a shooter holds his stick, in the way his body angles and turns, in the way he’s being checked, in what he’s done before that tells me what he’ll do – and my body moves. I let it move. I trust it and the unconscious mind that moves it.’
To sum up, we humans have been equipped over our long evolutionary training period with a large bag of tricks designed to increase our speed of reactions. In the foregoing discussion I have rummaged in this bag and pulled out only a few of our amazing gadgets. But demonstrating how they work should be enough, I hope, to show just how reliant we are on these quick responses for survival in the wild and in war, for success in sports, and for buying back a large block of bonds sold to DuPont.
WHAT LIES BENEATH
In fact, so fast are our reactions that consciousness is frequently left out of the loop. Given that sobering fact, we have to ask: what role does consciousness play in our lives? We experience our consciousness as something residing in our heads, peering out through our eyes much as a driver peers through a windscreen, so we tend to believe that our brain interacts with our body just as a person interacts with a car, choosing the direction and speed and issuing commands to a passive and mechanical device. But this belief does not stand up to scientific scrutiny. As George Loewenstein, an economist at Yale, points out, ‘There is little evidence beyond fallible introspection supporting the standard assumption of complete volitional control of behavior.’ And he is right, for the stats on reaction times tell us otherwise: we are for the most part on autopilot.
The news gets even worse for the Platonists among us. In the 1970s, Benjamin Libet, a physiologist at the University of California, conducted a famous series of experiments that has tormented many a scientist and philosopher. These experiments were simplicity itself. Libet wired up a group of participants with what are called EEG leads, small monitors attached to the scalp which record the electrical activity in the brain, and then asked them to make a decision to do something, like lift a finger. What he found was t
hat the participants’ brains were preparing the action 300 milliseconds before they actually made the decision to lift their finger. In other words, their conscious decision to move came almost one third of a second after their brain had initiated the movement.
Consciousness, these experiments suggested, is merely a bystander observing a decision already taken, almost like watching ourselves on video. Scientists and philosophers have proposed many interpretations of these findings, one of which is that the role of consciousness may not be so much to choose and initiate actions, but rather to observe decisions made and veto them, if need be, before they are put into effect, much as we do when we practise self-control by stifling inappropriate emotional or instinctive urges. (We may be on autopilot for much of the day, but that does not mean we cannot take responsibility for our actions.) Libet’s experiments, suggesting as they do that consciousness is largely an override mechanism, led one particularly witty commentator, the Indian neuroscientist V.S. Ramachandran, to conclude that we do not in fact have free will; what we have is free won’t.
It seems that consciousness is a small tip of a large iceberg. But what exactly lies below it? What lurks beneath our rational, conscious selves? The eighteenth-century German philosopher Immanuel Kant proposed a particularly intriguing answer to this question: we do not know what is down there. Kant believed that our consciousness – that is, our experience of a unified and understandable world, and of a continuing person experiencing this world – is possible only because our mind constructs this unified experience. If our mind did not organise our sensations the world would be a whirling, blooming confusion. But the mind does: it provides organising constructs, such as space and time, so that we experience a continuing world, just as it does another construct, that of cause and effect, which ties succeeding events together into a coherent story. Kant thought all these unifying constructs applied only to the veil of sensations, and not to the entities creating or lying behind the sensations. These objects we can never know. Inaccessible to rational analysis, forever mysterious to science, these hidden beings can be groped at and suggestively discerned only through art and religion. And it is in this dark world that the soul belongs, putting it too beyond the ken of rationality and beyond the domain of cause and effect. It was upon this argument that Kant rested his belief in free will.
Kant’s philosophy left a deep imprint on German thought. Freud, inspired by Kant’s vision, argued that below the façade of our rational selves, deep in our subconscious, there boils a devil’s cauldron of envy and sexual perversion and patricidal tendencies which warps our judgement. Nietzsche too found beneath our delusions of rationality and morality a dark urge for power and dominance. Modern neuroscience, however, has lifted the lid off this hitherto mystifying brain and found something far more valuable than the entities proposed by nineteenth-century German philosophy – a meticulously engineered control mechanism. More valuable because it has been precisely calibrated over millennia to keep us alive in a brutal and fast-moving world. And we can thank our lucky stars for it, otherwise we would long ago have been battered to extinction. Lifting the hood of our brain does not reveal the nether world of Kant’s unsayable, nor the volcanic will of Nietzsche’s superman, nor yet the hellish subterranean den of Freud’s subconscious. It reveals something that is a lot closer to the inner workings of a BMW.
FAST TIMES ON THE TRADING FLOOR
Let us now return to the financial world, and consider the importance of fast reactions to the success and survival of risk-takers. Traders like Martin frequently face high-speed challenges which demand an equally fast response. The challenges may not demand quite the same speed of reactions as fielding at the silly point, but traders nonetheless regularly face time constraints, and when they do their decision-making and trade execution must bypass conscious rationality and draw instead on automatic reactions. This is especially true when markets begin to move fast, as they might in a frantic bull market. Then Martin is obliged to sell bonds to clients or risk alienating the sales force, and must scramble to buy them on the broker screens or from other clients before losing money. At times like this trading is much like a game of snap, and the fastest person wins.
This simple point carries unexpected implications for economics. It is not often appreciated that financial decision-making is a lot more than a purely cognitive activity. It is also a physical activity, and demands certain physical traits. Traders with a high IQ and insight into the value of stocks and bonds may be worth listening to, but if they do not have an appetite for risk then they will not act on their views and will suffer the fate of Cassandra, who could predict the future but could not affect its course. And even if they have a good call on the market and a healthy appetite for risk, yet are shackled with slow reactions, they will remain one step behind the market, and will not survive on the trading desk – or anywhere else in the financial world, for that matter.
Treasury traders, like flow traders more generally (a flow trader is one who trades with clients, handles the flows coming off the sales desks), therefore require a battery of traits: they need a high enough IQ and sufficient education to understand basic economics; a hearty appetite for risk; and a driving ambition. But they also need the physical build. They must be able to engage in extended periods, hours at a time, of what is called visuo-motor scanning, i.e. scrutinising the screens for price anomalies between say the ten-year and the seven-year Treasury bond, or between the bond and currency markets. Such scanning requires concentration and stamina, and not everyone can do it, just as not everyone can run a four-minute mile. And once a price discrepancy has been identified, or a high bid spotted during a sell-off, a trader must move quickly to trade on these prices before anyone else. Not surprisingly, most flow-trading desks, be they ones trading Treasury or corporate or mortgage-backed bonds, usually employ one or two former athletes, a World Cup skier, say, or a college tennis star.
The physical nature of trading is even more apparent on other types of floors. On the floor of a stock exchange or the bond and commodity pits at the Chicago Board of Trade, a trader’s job can resemble a day spent in a wrestling ring. Hundreds of traders stand together, jostling each other and vying for attention when trying to trade with each other, something they do with an arcane system of hand signals. When markets are moving fast and a trader needs the attention of someone on the other side of the pit, then height, strength and speed are of paramount importance in executing a trade, as is the willingness to elbow a competitor in the face. Needless to say, there are not a lot of women in the financial mosh pits.
Another style of trading that makes punishing physical demands is what is called high-frequency trading. This activity involves buying or selling securities, say a bond or stock or futures contract, sometimes in sizes amounting to billions, but holding the positions for only a few minutes, sometimes mere seconds. High-frequency traders do not try to predict where the market is going in the next day or two, let alone the next year, as do asset managers who invest for the long term; they try to predict the small moves in the market, a few cents up or down. As a general rule, the shorter the holding period for a style of trading, the greater the need for its traders to have fast reactions.
Having said all this, there are good reasons for expecting the physical aspect of trading to decline in importance in the financial world. More and more activities are now carried out electronically. The first and most dramatic sign of such a change was the closing down of physical stock exchanges, such as the London Stock Exchange. In their place mainframe computers took over the task of matching buyers and sellers of securities. Today only a few physical exchanges, with tumultuous floors and face-to-face execution of trades, remain, the New York Stock Exchange and the Chicago Board of Trade being the most famous.
The same evolution has begun in bond and currency trading at banks. Many banks began to post the prices of the most liquid securities, beginning with Treasuries and mortgage-backed bonds, on computer screens, and then allow
ed their clients access to the screens. That way they could execute trades themselves, without the need of going through a salesperson like Esmee. Normally traders like Martin post prices on these screens for a limited size, say $25 to $50 million, and these will be executed electronically by clients; but for bigger trades, like DuPont’s, clients still prefer to call their salesperson. Nonetheless, many people within the banks think the flow traders are dinosaurs, and will eventually go extinct.
Perhaps the greatest threat facing the human trader, though, comes from computerised trading algorithms known as black boxes. Life for many traders has always been nasty, brutish and short, given the vicious competition between them. Survival has depended on their relative endowment of intelligence, information, capital and speed. But the advent and insidious spread of the black boxes has begun squeezing humans out of their ecological niche in the financial world. These computers, backed by teams of mathematicians, engineers and physicists (‘quants’, they are called) and billions in capital, operate on a time scale that even an elite athlete could not comprehend. A black box can take in a wide array of price data, analyse it for anomalies or statistical patterns, and select and execute a trade, all in under 10 milliseconds. Some boxes have shaved this time down to two or three milliseconds, and the next generation will operate on the order of microseconds, millionths of a second. The speeds now dealt with in the markets are so fast that the physical location of a computer affects its success in executing a trade. A hedge fund in London, for example, trading the Chicago Board of Trade, lags at least 40 milliseconds behind the market, because that is the time it takes for a signal, travelling at close to the speed of light, to travel back and forth between the two cities while a price is communicated and a trade executed, and the delays added by routers along the way mean the actual time is considerably longer. Most companies running boxes therefore co-locate their servers to the exchange they trade, to minimise the travel time for an electronic signal.