When asked at a dinner party what accounted for his success, renowned investor Charlie Munger –  Warren Buffett’s business partner – replied that he was rational. To classical economists, that market participants were rational was taken for granted. But the notion has been criticized in the field of behavioral finance, which studies the effects of social, cognitive and emotional factors on economic decisions.

Simon Savage, co head of European and global long/short strategies at GLG Partners, a hedge fund manager owned by Man Group, said:
 
"We were all born to be bad fund managers because of inbuilt behavioral biases, which are present in everyone to various degrees. It's through an awareness of them that as a fund manager you can begin to build a defense mechanism to avoid these vulnerabilities."  
 
After five years underperforming the equity markets, the hedge fund industry is grappling with ways to recover form. As part of that, some are now asking how brain and body affect trading decisions.

1.Understand what you’re up against

 
A common bias among all managers is loss-aversion bias, which leads them to avoid risk when gains are at stake but seek risk when losses are at stake. Essentia Analytics, which has developed
cloud-based software to capture performance data, gives this example:
 

• Would you rather take $100 now, or take a 50/50 bet in which you will win nothing or win $200?
• Would you rather give us $100 from your pocket now, or take a 50/50 bet in which you will lose nothing or lose $200?

Loss aversion is what leads most people to take the $100 in the first scenario and take the bet in the second one.
 

2.Know that luck plays a part in success

 
A behavioral bias called the self-serving attribution bias suggests there is a tendency for managers who do well to attribute their success to their own skill, while those who trip up tend to blame external factors. The role that luck plays is underestimated. By using data analytics, hedge fund managers can get inside the trading process and discern between skill and luck, so they can practice more of the good things and less of the bad. Capturing data can shed light on, among other things, a trader’s hit rate and their win/loss ratio, as well as showing whether a trader makes money from trading around positions or from a buy-and-hold strategy.
 

3.Avoid decision fatigue

 
Glucose levels have been shown to decline with mental, no less than physical activity. A study of a parole board in Israel demonstrated the phenomenon of “decision fatigue”. It found that board members were more likely to grant parole at the start of the day and after breaks for food.
 
Steven Goldstein, a trader performance coach at BTG Edge, said:
 
"Our decision-making and our ability to stay disciplined wears down as the level of glucose depletes. People get more prone to irrational behaviors and biases. I advise traders to structure their days to factor this in."
 

4.Try changing the psychology

 
Denise Shull, author and president of the ReThink Group, which coaches traders, helps them
understand their own emotional context. She said: “People trade their characters, their personalities, their personal histories. They all do it, they just think they don’t.” Ms. Shull tells the story of a trader who tended to size his positions too big. He was a tall man who played rugby. The man was a father to young daughters and so Ms. Shull advised him to “think of trading like play-wrestling with your little girls” when he was sizing positions.