The human mind is a powerful tool, but can easily be overwhelmed. The chemicals that affect emotional states and thinking patterns can shape the way we see the world. For investors, it is critically important to understand how our minds work and how they may be influenced by our own brain chemistries.
By understanding brain chemistry, and how our reactions and experiences can impact it, we can learn to compensate for -- and overcome -- the psychological and psychochemical impediments to smart decision-making.
Your brain is playing tricks on you
The human brain, for all its intricacy and elegance, is susceptible to chemical stimuli that can override the thinking faculties. In his book, "The Hour Between Dog and Wolf," John Coates offers a powerful example of how chemicals running wild in traders’ brains can result in poor decision-making and impaired critical thinking:
“Shell-shocked traders, under the influence of an overly active amygdala, become prey to rumor and imaginary patterns. In a recent study, two psychologists presented meaningless and random patterns to healthy participants, who appropriately found nothing of significance in them, and then to people exposed to an uncontrollable stressor, who do find patterns in the noise. Under stress we imagine patterns that do not exist.”
In other words, as we experience increasing levels of psychological stress, we experience floods of chemicals that alter our moods and perceptions of reality.
This can create vicious cycles in which stressed investors continually respond to false patterns, resulting in suboptimal -- and often wealth-destroying -- decisions.
Overcoming the mental sugar high
Jim O’Shaughnessy, an asset manager with a long and illustrious track record, recently weighed in on the potent psychological stressors affecting investors and traders in the increasingly high-speed and high-intensity world of public markets:
“Today’s society is overrun with useless distractions that misdirect your attention—life is filled with focus being wasted on the trivial and unimportant. If you let them, these distractions will sap your mental and even physical energy. They will exhaust you by chasing what amount to sugar highs. You become what you focus on. If you’re breathlessly awaiting the next up or down tick, you’re telling your brain that is what is important, and when you do this, you allow your emotions almost full control because they live in the here and now.”
The idea of “chasing sugar highs” in the world of constantly shifting information is a powerful notion. But as with real sugar highs, the market's psychological high also ends inevitably in a crash. All is not lost, however. O’Shaughnessy offers some sage advice:
“Think of something you reacted emotionally to a few months ago—you’re far more likely to think 'What the hell was I thinking?' Because now, the emotions have drained away and you can see more clearly once all the cortisol has cleared from your system. If you can change your focus, you can change your future. Don’t spend a minute worrying about something that you can’t control. If something can’t be changed by you taking direct action, put it out of your mind.”
Using fear to your advantage
The key to market mental health is to understand the stressors affecting our decision-making. We can either manage, and even harness our fears and stresses, or we can become a slave to them.
As the legendary Paul Tudor Jones (Trades, Portfolio) has said, fear can improve performance when understood, respected and reacted to in a healthy way:
“I know that to be successful, I have to be frightened. My biggest hits have always come after I have had a great period and I started to think that I knew something.”
Fear is a potent tool, but a terrible master. Investors must understand themselves in order to ensure their emotions do not overwhelm them.
Verdict
Investors might be well served by looking to science fiction for advice on how to achieve mental serenity in a world of intense emotional and psychological pressure. Frank Herbet, in his classic novel "Dune,"Ă‚ offered this mantra:
“I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain.”
Embracing this powerful mantra can help improve the mental and financial performance of investors and traders alike.
Disclosure: No positions.
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