How professional traders will behave under stress is a very intriguing topic. They were supposed to be taking reasonable decisions under stressful conditions of trading environment where speed is of the essence. The article points out that under extreme stress the analytical part of human brain switches off and the intuitive part of the brain takes over.The intuitive brain cuts to the bottom line directly (read cash on hand) and reduces the chance of considering alternatives. This sometimes leads to traders taking highly risky positions to avoid loss. If a trader is given a offer of losing a lot of money 10% of the time or losing little money 90% of the time they may choose the former when under stress.

“The experiment involved students playing a gambling game. To stimulate stress, for part of the game half had their main hand in very cold water. The students faced financial decisions that varied in both the degree of risk and the amount of money that could be won or lost. They could choose between, say, an 80% chance of losing 75 cents and a 20% chance of losing $3 or an 80% chance of winning 75 cents and a 20% chance of winning $3. They could keep anything they won.

The psychologists found that exposure to stress led participants to choose riskier decisions when trying to decide between taking a minor loss or a major one. The reverse proved true with gains.”