As investment professionals, we’ve all heard managers referred to as “stopped clocks”, being right only twice a day. I was one such manager, being bearish for a good 10 years of my 25-year investment career. Half of that 10 years was around the global financial crisis (GFC), so I was lucky to have made some money. Nonetheless, every risk that I perceived was like a game of “Whack a Mole”, causing me to see only selling opportunities. Little did I know that my body’s physiological response to stress made it difficult for me to change my way of thinking.
Much is known today regarding how the body prepares and responds to risk. In an evolutionary context, our body’s risk management systems were trained to manage physical risks.
Despite the risks faced by traders and investment professionals as being non-life threatening, the body still prepares and responds as if confronted with physical threat. I didn’t know this when I was managing my hedge fund pre-and-post global financial crisis (GFC). It certainly would have helped, as I now know that my perceptions of risk were distorted by my body’s stress responses.
In his book, The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust (2012), author John Coates describes the effects that risk has on a trader’s physiology and the consequent impact on decision making.
The body prepares for risk via parts of the brain known as the locus ceruleus and the amygdala. An electrical response shoots down our spinal cord and stimulates an increase in heart rate, blood pressure and breathing and prepares the body for its fight or flight response. Remarkably, much of this activity occurs pre-consciously. So even when we are consciously unaware of the subtle changes in our environment that may be preludes to a risky event, our body’s awareness mechanisms are already stimulated.
Our steroid hormones are next to be activated as the threat becomes more tangible. Our testosterone levels increase and our adrenaline spikes, leading to faster reflexes and metabolism, providing a valuable shot of glucose into the bloodstream. In a trading context, we are pretty well primed at this point to take action as called upon and make decisions informed by our gut instincts. As a flow trader or when in execution mode, this physical preparation puts us in a trading sweet spot. However, the longer we stay in this state of heightened awareness, our body starts to prepare us for the long haul by releasing cortisol from our adrenals, which can negatively impact our creativity for idea generation.
Cortisol has the effect of drawing resources away from the digestive and reproductive systems and starts to burn muscle into glucose, effectively battening down the hatches and focusing on surviving the siege. This causes our focus to narrow, impacting our capacity to see the big picture.
Long periods of exposure to cortisol can also lead to increased feelings of anxiety and crucially for traders and investment professionals, a tendency to see risks where none really exist. In psychology, this is termed “anticipatory angst” and living with this front and centre in your daily existence wears you down and gets in the way of objective decision making.
So if you’ve been fighting a trend for prolonged periods and can’t get out of the way of your bias, you’re probably fighting your body’s stress responses as well as the market. I certainly did this post GFC and consequently missed some of the best developing trends of a generation.
Managing your Physiology as an Investment Professional
Our body thrives on stress. Just not prolonged periods of stress. Short bouts of stress followed by periods of rest and recovery are crucial to our mental wellbeing. Think of an athlete training for the Olympics. Putting the body under stress promotes growth, provided the period of exertion is followed by adequate recovery. Knowing the sources of your stress as an investment professional and the duration of that stress is helpful in determining the right balance in your process. This will ensure you can stay in the game for as long as you choose to and retain objectivity and perspective in your decision making.
Coates, J. (2012). The hour between dog and wolf. New York: Penguin Press.