GAINING  THE  COMPETITIVE  ADVANTAGE  IN  THE  OPM  TRADING  WORLD,  Pg.  1  of  2  
The  OPM  trading  world  is  a  highly  competitive  environment,  where  everyone  is  looking  for  a  
leading  edge.    Performance  expectations  easily  transform  into  performance  demands.    And  
as  technology  advances  and  the  rate  of  information  flow  increases,  gaining  the  leading  edge  
can  become  more  difficult.      
Besides  technology,  the  three  primary  avenues  that  can  lead  to  a  firm’s  competitive  
advantage  are  informational,  analytical,  and  behavioral.  Most  OPM  firms  focus  on  the  first  
two  areas.        

In  today’s  world,  information  is  more  accessible  then  ever,  so  that  area  is  becoming  a  
relatively  more  level  playing  field.  Analytical  and  data  driven  strategies  can  continue  to  
perform,  but  as  more  market  participants  become  adept  at  quantitative  analysis  it  can  
become  more  difficult  to  achieve  and  maintain  a  leading  edge.      
The  behavioral  avenue  is  often  the  most  overlooked,  and  in  an  environment  where  
‘contrarian  thinking’  is  supposed  to  be  highly  valued  it  can  represent  a  relatively  untapped  
resource.  Behavioral  approaches  are  not  simply  idiosyncratic,  but  can  be  applied  to  the  
market  as  well.  Attempting  to  capitalize  on  the  perceptions,  thoughts,  and  emotions  of  other  
market  participants  is  a  time-­‐honored  tradition  among  some  of  the  most  market  savvy.    

However,  on  both  an  individual  and  organizational  level  various  biases  can  insidiously  
operate  creating  a  filter  that  can  dilute  even  the  most  sophisticated  trading  approach.    

As  a  side  note,  while  modern  economic  and  financial  research  has  progressed  well  beyond  
efficient  market  theory  that  previously  assumed  humans  always  make  rational  choices,  
technological  advances  are  pushing  into  new  territory  at  increasing  speed  and  can  have  the  
effect  of  making  us  forget  that  even  the  machines  (which  are  programmed  by  humans)  have  
limits.    Full  enumeration  of  the  many  innate  human  tendencies,  known  as  mental  biases  that  
can  deprecate  performance,  is  beyond  the  scope  of  this  paper,  but  two  are  worth  
highlighting  here.  

For  example,  Conservatism  Bias  and  Confirmatory  Bias  are  not  simply  human  tendencies  but  
can  transfer  from  human  decision  making  to  quantitative  driven  decision-­‐making.  Once  a  
perception  is  formed,  humans  tend  to  overvalue  the  information  that  reinforces  the  
perception  and  undervalue  information  that  may  run  counter.  Numerous  studies  have  
replicated  this  phenomenon.    
http://econlog.econlib.org/archives/2007/10/econometric_con.html  ;  
http://www.informaworld.com/smpp/content~db=all~content=a916502887  
http://www.informaworld.com/smpp/content~db=all~content=a783683810  

© 2010, Andrew Menaker, PhD, LLC – Trading Psychology Consultant – am@popdoctrader.com – ph. 415.285.8424
www.andrewmenaker.com
  
GAINING  THE  COMPETITIVE  ADVANTAGE  IN  THE  OPM  TRADING  WORLD,  Pg.  2  of  2  
 
On  the  most  simplistic  level,  one  might  say,  ‘we  hear  what  we  want  to  hear’.      

A  corollary  is  the  ‘yes  man’  phenomenon  in  many  organizations.    In  my  experience  working  
with  institutional  analysts  I  have  seen  how  easy  it  is  for  smart,  sophisticated  financial  
professionals  to  simply  defer  to  other  authority  figures  and  market  prognosticators.    
This  leads  us  to  another  human  tendency,  one  first  empirically  validated  by  the  famous  
psychology  experiment  by  Stanley  Milgram  and  his  graduate  students  at  Stanford  in  1961,  
which  showed  the  power  that  perceived  authority  figures  have  over  our  ability  to  make  
critical  decisions.    
Obviously,  a  firm  must  dedicate  resources  to  informational  and  analytical  approaches,  but  to  
leave  out  the  behavioral  is  a  missed  opportunity  and  akin  to  leaving  money  on  the  table.    
In  the  increasingly  competitive  world  of  managing  OPM,  achieving,  maintaining,  and  
expanding  a  competitive  edge  in  the  financial  arena  requires  a  third  avenue  of  competitive  
advantage,  the  behavioral  avenue.      There  are  two  primary  ways  to  expand  the  capacity  of  
the  behavioral  avenue.    
The  first  way  to  tap  into  the  behavioral  avenue  is  the  development  and  use  of  idiosyncratic  
procedures  that  allow  for  awareness,  or  early  warning  systems,  that  can  flag  the  appearance  
of  mental  traps  and  human  biases  within  individual  decision  makers  such  as  traders,  
managers,  and  programmers.      Emotion  analytics,  both  structured  and  unstructured,  can  
accomplish  this.  
The  second  way  is  to  expand  the  capacity  to  recognize  emotional  manifestations  and  mental  
biases  in  the  market,  or  more  specifically,  in  other  market  participants.    Although  machines  
and  algorithms  are  now  responsible  for  a  large  amount  of  trading  volume,  there  is  heuristic  
value  in  such  analysis.  There  are  multiple  ways  to  accomplish  this.  As  more  market  
participants  have  access  to  the  same  or  similar  data;  data  alone  is  not  enough  of  a  
competitive  edge.    Stimulating  variant  perception  around  the  way  data  is  organized  and  
interpreted  is  not  only  creative,  but  profitable  as  well.  It  often  provides  a  perspective  that  
others  miss  or  fail  to  take  advantage  of.  
 
 
 

© 2010, Andrew Menaker, PhD, LLC – Trading Psychology Consultant – am@popdoctrader.com – ph. 415.285.8424
www.andrewmenaker.com