The week before the year-end holiday, Adam, a (fictional) commodities trader, wanted to flatten out his riskiest positions to have his mind at ease on vacation with his fiancé. But he had a huge opportunity with several large positions that had taken him months to develop. While he had a plan outlining which indicators would trigger a sale, he didn’t want to think about work while away. Then news broke of Japanese-Russian talks concerning restrictions on petroleum products important to his positions. How would this uncertainty affect him?
For two nights, he slept terribly and all day was distracted and irritable. Periodically, he thought about dumping all the positions just to ease the stress.
He obsessed about whether more unexpected news would come. He skipped working out to spend all day at his computer, where he sat breathing shallowly, with his shoulders hunched, and facial muscles tense. He constantly checked his portfolio and felt like a failure when it didn’t show a profit. He doubted himself and worried that his anxiety would cloud his judgment.
On the third day, the market as a whole began to tick down, 1% then 2% and, imagining losing everything, Adam dumped all his large positions.
Within hours he was berating himself: he had researched his positions so well, he knew what market signals to watch out for and none had gone beyond his planned safety parameters; how had he let his emotions take over and mess the whole thing up?
Adam made five mistakes. Neuroscience suggests a solution for each.
1) Recognize what your emotions can tell you, and use that information to your benefit.
Adam’s first mistake was focusing solely on easing his anxiety. He therefore missed what his anxiety was alerting him to.
Psychologist Maya Tamir and colleagues have demonstrated that emotions have instrumental value. Extending that idea to anxiety, Adam learned to recognize its value was to keep him safe. Next time, he used it as a reminder to be vigilant to safety parameters he had identified in his original analysis, such as whether there was a 15% or greater swing in a holding’s daily trade volume. Rather than aiming to ease his anxiety, Adam recognized it as useful information, and thus kept his eye on what mattered. Doing so has since helped him stay calm and deliberate.
2) Plan ahead - actions instead of reactions.
Adam’s mistake surrounding his high risk, high reward portfolio was to simply hope no uncertain events would trigger his anxiety. We don't have to settle for hoping events won't set off our emotions. Research shows we can act differently, if we plan.
Fortunately, late in the following quarter, Adam had another good investment opportunity in the works. This time, Adam visualized a useful action in response to uncertain news, before any came – sitting back in his recliner and imagining new opportunities that could result from uncertainty about the market, which others might miss in their panic.
When the time came, rather than panic himself, he had a useful action to take. As a result, after re-evaluating, he sold one position for a small loss, and kept the others, making a nice profit overall. Now he even looks forward to uncertain news because he gets to look for new market advantages, on top of his already strong plans.
3) Change your body to change your emotions.
Adam mistakenly did the exact opposite with his body of what he should have. Bodily sensations influence your emotional experience. Smiling feels something like happiness, relaxed shoulders like ease, GI discomfort and shallow-tight breathing like anxiety, and so on. You can change this physicality directly, and thus change your emotions.
Going forward, Adam took two actions. First, on anxious days, he set an alarm, where “Body” appeared on his screen every 30 minutes, reminding him to change his breathing, release his jaw, and sit up straight with broad and relaxed shoulders, until the anxiety started receding. Consequently, he may have increased his testosterone and lowered his cortisol.
Second, Adam made extra sure to exercise on those mornings when he knew he might get anxious. For a period of time, his muscle tension, breathing, and so many of the bodily factors that can feed into emotional feelings shifted. He found it much easier to let fears go and stay with a positive feeling those days.
4) Set expectations you are likely to meet each day.
There’s a part of the brain that responds to expectations of rewards, such as occur when we meet or exceed goals, with an increase in dopamine, and to coming up short of an expected reward with a dopamine decrease. And dopamine can help the brain be in a good state for focus. Reward can feel energizing and lack of a hoped for reward deflating.
Adam’s mistake was measuring himself by his overall portfolio performance. Thus, he felt like a failure whenever his positions were down.
Adam has since identified 10 things a good trader does (e.g. Liquidate a position if it can no longer be evaluated clearly), and gauged himself against whether he was being a good trader, and not whether his portfolio was up. By changing his paradigm of success from “making a profit” to “doing the right thing regardless of outcome” he’s had more frequent feelings of success. That enabled greater confidence and mental clarity for subsequent decisions, ultimately bringing more of his trades to profitable outcomes.
5) Give yourself permission to feel.
Adam’s mistake was fearing his anxiety. Feeling anxious doesn't feel great. But what really feels bad is feeling anxious about how feeling anxious could steer you wrong.
Neuroscience research on mindfulness-based meditation illustrates what happens when someone accepts a feeling, allowing it to be and pass. With a little practice, it seems that emotional brain activity fades.
When Adam next got anxious, he said to himself "yes, I'm anxious," and didn't try to fight it. And the feeling started to pass. Consequently, it was easier to remember and implement the other four lessons.
Adam has since been enjoying both his work and his success more than ever.