Even in the most bullish markets, Wall Street deals with depression.
After all, it's tough to be chipper after staring at a Bloomberg terminal or PowerPoint deck for 14 hours. It might be the norm, but it's not good for business.
Depression may make a wide swath of Wall Street workers worse at their jobs. A new study from the INSEAD international business school shows that people who are down in the dumps are much worse at making accurate predictions.
A number of studies suggest that depressive people are more liable to predict negative events, while sunnier dispositions lend themselves well to gauging positive scenarios. But the latest research focused on less psychologically loaded events, namely the outcome of World Cup soccer matches.
"We wanted to move away from events where the individual had some control in the outcome," said Neil Bearden, one of two INSEAD professors who wrote the report. "The World Cup starts to have features, which look more like features of markets than some kid who is trying to forecast his final exam grade."
The researchers tested 1,100 soccer fans for depression and then had them predict the likelihood of success for a number of teams in last year's tournament in South Africa, with a cash prize awarded to the best prognosticators.
Those who tested higher for depression submitted noticeably less accurate guesses.
In the initial round of predictions, almost half of the depressed subjects did not even beat a baseline scenario in which the odds of each team were evenly weighted by the numbers of teams in the tournament.
Ironically, the depressed subjects tended to overestimate the likelihood of long-shot results -- like North Korea winning the whole thing. Though, they seldom put short odds on the teams they actually liked. The study said the guesses of the morose were "less sensitive to base-rate probabilities." In other words, they didn't have as good a grasp on reality.
If similar handicaps apply to trading, the study results could reshape the way companies screen and hire traders. About 7% of U.S. adults can be considered clinically depressed and only slightly more than half of them are receiving treatment, according to the National Institute of Mental Health.
Bearden said a number of trading companies, including a few household names, are clamoring for the results and pushing his team to investigate further. But he points out that the tendency to overestimate rare events – "to see fatter tails" -- would be useful at certain times -- say in the summer of 2008.
"It might, in fact, be a good thing," Bearden said. "What you really need on a trading desk is some divergent opinions...so at the very least, you'd probably want a few of these depressed folks in the mix."
Bearden and his coauthors are now in the process of testing the emotional states of actual traders and seeing how the results correlate to performance. Forget about 1928, depression is back on Wall Street.
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