
Add another
perspective. Alsocalled reframing.
S
Suggest solutions.
savings ﬂuctuate. Maybe we should sell a smallpart of your holdings to take the pressure oﬀ.”
(O): “Naturally, it’s fun to research new and
interesting companies.”
(F): “One of the greatest investors in history said:‘Buy when there is blood on the streets.’ Thebest opportunities are during fearful periods.”(O): “How could we satisfy your interest in volatilestart-up stocks without risking your retirementsavings?”
(F): “If I remember correctly, you mentioned thatyou have a 10-year investment horizon. Try toavoid watching the market news or checkingprices. The quarterly and yearly market actionisn’t important in the long-term.”
(O): “Why don’t you use a trading account with
money you can aﬀord to lose. Why don’t we setone up with 5 percent of your savings?”
interactions. The IDEAS script should help facilitate communication, andit assumes that you have an established relationship and you have alreadydeveloped a ﬁnancial plan and educated your clients about long-term riskand reward.
The IDEAS script cannot change deep psychological issues. Cogni-tive techniques for reframing anxious thoughts and attenuating the stressresponse are outlined in the following paragraphs. Additionally, anxietyand stress management techniques related to breath-work, meditation, andlifestyle are discussed.
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COGNITIVE-BEHAVIORAL THERAPYAND STRESS MANAGEMENT
Much of the remainder of this chapter is devoted to cognitive-behavioralpsychotherapy and stress management techniques. Cognitive-behavioraltherapy (CBT) is a popular and effective form of psychotherapy usedfor everything from getting high-performers out of a slump to clinicaltreatment of anxiety and depression. CBT therapists help clients developconcrete coping skills and strategies. They use such techniques as: (1)challenging self-defeating beliefs, (2) teaching positive self-talk skills, (3)replacing negative thoughts, (4) desensitization or conditioning, (5) edu-cation about symptoms, and (6) teaching coping skills such as relaxationbreathing.
CBT therapists have discovered that one’s thoughts and feelings duringstress are often repeating patterns. If the stressful pattern can be mentallybroken, then the stress response is halted. Individuals should learn whattheir maladaptive, stress-inducing thoughts are. You can use the followingexercises for assistance. Challenge your negative thoughts and consciouslyreplace them with more adaptive scripts. If you do conscious thought re-placement exercises daily, and keep track of the changes you notice inyour daily life, you’re likely to discover subtle improvements. In time, youwill notice decreased reactivity to chronically stressful events, people, andcircumstances.
Ask yourself these questions to disrupt negative patterns of thinking:
Ĺ Is there an alternate explanation?Ĺ What is the evidence that this thought is true?Ĺ What will be the effect of continuing to think this way?Ĺ What is the best outcome, worst outcome, and most realistic outcome?Ĺ What is the likelihood that this will happen?1
Record your responses to stressful events in a table like Table 22.2 in
order to develop clearer comprehension of how they affect you.
The core skills learned in stress management programs are self-observation, cognitive restructuring (as noted above), relaxation training,time management, and problem solving. Self-observation is often practicedusing a daily diary or journal (such as in Table 22.2). In the journal, peoplewrite down stressful moments of their day in the ﬁrst column. In thenext column, they write down antecedents to the stressful event. In thethird column, they document their behavioral reaction, and in the fourthcolumn, they describe the consequences of their behavior. Investorsusing this strategy can gain awareness of their automatic behavioral
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TABLE 22.2 Journal Format for Recording Stress-Related Events
Antecedents(the StressfulEvent andPrecedingTriggers)
StressRating(from 0to 100)
BehavioralResponses
Example: Amajorﬁnancialloss.
80
Thoughts: “My
quarter is ruined.I’m going to losemy best clients.Maybe I’m dongthis all wrong.”Feelings: Frustrated,
angry, upset.
Physiologicalresponse:
Distractible,tension headache,craving alcoholand sweets,clenching teeth,stomachchurning, tightchest.
Behaviors: Startedshouting at ananalyst employeefor a minorinfraction,frequently lookingaway when inconversation,driving recklessly.
RationalResponse(ReframingOptions)
Rational
thought: “Myquarter iswhat it is. Ihave strongrelationshipswith myclients, andthey trustme. This isthe ﬁrst timeanything likethis hashappened.The marketsareinherentlyuncertain,and Ifollowed thebest decisionprocess I amaware of.
Consequences(Outcome)
As soon as Irealized Iwas oﬀ myplan, Iimmediatelyclosed outthe position.I’ll have towork withthe loss fromhere, but atleast it’s notbleedinganymore.Since closingthe position,I’ve beenable togenerate aplan for thefuture. I’mnicer to myfamily andfriends now.
patterns, learn to identify the precursors (eventually, they may see repeat-ing patterns), and reduce stress-related biases. Consciously addressingthe triggers, reactions, and consequences encourages interruption andeventual prevention of the response pattern.
The most convenient stress-reduction techniques are simple alter-ations of daily patterns: idle conversation with supportive friends, exercise,prayer, and meditation. Some activities, such as religious service or yogapractice, combine two or more of the above.
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YOGA, MEDITATION, AND LIFESTYLE
Study after study shows the beneﬁts of exercise, especially cardiovascularexercise, for the average person. Exercise improves mood and focusand decreases stress. Social or team sports can be excellent sources ofstress relief, especially those involving positive interactions with cohesiveteammates.
Individual exercises such as yoga hone breathing and meditationskills while toning the musculature. Research indicates that yoga re-duces the signs and symptoms of anxiety,2 depression,3 attention deﬁcit–hyperactivity disorder (ADHD),4 addiction,5 and obsessive-compulsive dis-order (OCD).6 Additionally, emotional stability and patience increase dur-ing a regular yoga practice. Some studies have found improved cognitivefunction for research subjects randomized to learn and practice yoga ver-sus those assigned to learn and practice swimming or dancing.
Studies have shown that meditation practice leads to improved emo-tional health. Meditation is an ancient technique practiced for spiritual,mental, and physical growth. There are several styles of meditation. Mind-fulness meditation is one technique for learning to consciously and sys-tematically work with one’s own stress, pain, illness, and the challengesand demands of everyday life.7 Mindfulness meditation has been shownto increase life satisfaction and bolster the immune system (increasingthe antibody response to cold viruses).8 On a psychological level, differ-ent styles of meditation have been shown to improve mood,9 decreaseanxiety,10 lengthen attention span,11 and enhance feelings of connected-ness, gratitude, and compassion.12 For example, “concentration” medita-tion cultivates the ability to direct attention. If one is practicing sustainedattention on a daily basis, then the neurons that support concentration andimpulse control will be strengthened.
Exercise and diet are the cornerstones of every doctor’s recommen-dations for optimal health. Eating whole grains, lots of vegetables, andcold-water ﬁsh (and other high-omega-3 foods) all have beneﬁts. Exer-cise can be anything from strolling to mountain climbing. The general ideawith exercise is that you are gradually increasing (or maintaining) the lim-its of your endurance—exercise should be somewhat challenging, but notpainful. Cardiovascular exercise is particularly beneﬁcial for longevity. Ex-ercise releases growth factors, both in the tissues and also in the brain,which enhances new neuronal growth and repair. Along those lines, a vary-ing routine of exercise, in a playful or challenging context such as compet-itive sports, is especially healthy for the brain.
One of the most taken-for-granted factors in emotional well-being issocial connection. Positive social interactions, including in one’s work en-vironment, are essential to long-term well-being. Many women know this
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fact intuitively, but for men, social connections can be easily put asidewhile work responsibilities dominate. Intimate friendships (in which out-side problems can be vented) and family support signiﬁcantly promotehealth.
SIMPLE STRESS REDUCTION
The stress and anxiety management techniques listed above require self-discipline and a commitment to practice; however, there are some immedi-ate stress-reduction techniques that can be used anytime, anywhere. Theeasiest and most immediate technique for relaxation is deep breathing.The ﬁrst time I was wired to psychophysiology equipment used to measurearousal in facial muscle tone and skin conductance, I thought I was re-laxed. Then I was instructed to take a deep breath, and I was amazed at theunderlying tension that was release from my body. I had been completelyunaware of it. Try the following technique. On your inhale, silently count“one one-thousand (1-1,000), 2-1,000, 3-1,000,” as you smoothly and evenlydraw in the breath. Then pause for one beat. On your exhale, silently count-down “3-1,000, 2-1,000, 1-1,000” as you slowly and evenly let your breathout. After a one-count pause, repeat the cycle. You can do this breath-workfor 5 to 20 minutes and experience signiﬁcant stress relief.
Another way to reduce stress is to put your current troubles into a long-term, big-picture perspective. For example, imagine yourself on a moun-taintop. See the view out over the plains and mountains beyond, or theocean stretching into the horizon. Alternatively, imagine yourself lookingup at the stars at night while hearing the crackle of a campﬁre. Slowly feelyourself expanding into the space all around you.
Another technique for reducing physical tension involves, paradoxi-cally, contracting the tense muscles intentionally and holding the tensiontightly for several seconds, and then relaxing. For whole body relaxation,progressively tense and release the muscles in your body from lower toupper. For example, tighten your feet, hold the tension for a breath, andthen slowly relax the muscles. Then tighten your calves, hold the tensionfor a breath, and then release. Move upward, breath by breath, contractingand releasing your thighs, buttocks, abdomen, hands, arms, chest, shoul-ders, neck, face, and scalp. When ﬁnished sit silently, eyes closed, breath-ing slowly and evenly, for three to ﬁve minutes.
There is a large variety of tension reduction techniques that can beused to clear the mind and improve judgment when under stress. Aro-matherapy scents such as lavender and jasmine improve alertness and re-lax the mind. Incense and soft music have been shown to reduce stress.
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Walks in nature and warm baths are helpful for some people. Exercise,play, and dance are other methods of stress relief. Long-term changes inlifestyle, such as exercise, mediation, religious practice, and social afﬁlia-tion, provide the best long-term relief. See below for a full list of anxiety-reduction techniques. Short-term tools such as muscle relaxation, deepbreathing, and the long-term perspective are useful in a pinch. Anxiety andstress management techniques (both immediate and long-term) include:
Ĺ Breathing exercisesĹ Relaxation techniquesĹ Proper sleepĹ Regular, vigorous exerciseĹ LaughingĹ MeditationĹ Time managementĹ Faith in one’s meaning and purposeĹ Reduction in caffeine and sugar intakeĹ Reduction in alcohol and marijuana consumptionĹ Psychotherapy, such as cognitive-behavioral therapyĹ Herbal remedies such as chamomile tea and lavender aromatherapyĹ For clinical anxiety disorders, medications such as selective serotoninreuptake inhibitors (SSRIs), benzodiazepines, and beta blockers areused
GETTING OUT OF A SLUMP
Many investors, at one time or another, ﬁnd themselves making consis-tently bad decisions. Often, a losing streak is simply bad luck, but many in-vestors believe it reﬂects problems with their strategy or personality. That’sone reason why back-testing one’s strategy (with the appropriate caveats)is so important—it supports conﬁdence in your strategy during a series ofdraw-downs. As slumps weaken one’s decision making, they may fuel a vi-cious cycle. In order to get through a slump, try the following cognitivetechniques (many were adapted from trading coach Doug Hirschhorn andShane Murphy’s excellent book, The Trading Athlete13):
1. Recognize that slumps happen to everyone.2. A slump is a statistical reality—go over your historical data and deter-mine the length and breadth of the worst draw-downs over that timeperiod. Chances are you aren’t doing any worse now than you wouldhave during some historical periods.
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3. Remember that slumps are temporary. Slumps always reverse, thoughthey may need some time. For example, value investors had trou-ble sticking to their strategies during the Internet bubble, when theyseverely underperformed the markets for approximately three years.Those who persisted were rewarded handsomely during 2000 and 2001.4. Don’t ﬁght the slump. Cultivate patience and use this opportunity to do
more fundamental research.
5. View the slump as a time to rest and regenerate. When the markets turn
in your favor, be sure to reemerge even stronger.
6. Imagine that the slump is a much-needed vacation. This reframing tech-nique will help you take advantage of the slump more constructively.
7. Remember: it’s not about you. The markets aren’t personal.8. While slumps are inevitable, how you interpret it is within your con-trol. If you wallow in self-pity, then it’s hard to get anything constructivedone. If you see a setback as a way to learn and improve your perfor-mance, then you’ll emerge even stronger.14
9. If you continue to own declining positions that are further depressingyou, then think to yourself, given the current fundamentals and tech-nicals, “Would I buy this position today?” If not, then you shouldn’t beowning it.
After a large loss, it is important to stay involved in investing, even ina very small way, to work through one’s experiences. The memory of atraumatic event in the markets will linger as long as one stays uninvolved.There is a saying in psychotherapy that every session with the therapistbegins at the same subconscious point where the last one left off. The samecould be said of one’s dealings with the markets. Psychologically, you willbegin reinvesting in the state of mind induced by your last experience inthe markets. It is very helpful to stay in the game and keep learning sothat personal doubts don’t overwhelm one’s ability to grow and maintainperspective.
TRADING COACHES
Trading coaches are useful for traders who have an established edge, butwho need some help reﬁning their talent. Most investors and analysts needhonest feedback about where they might be deceiving themselves. It is onething to get price feedback from the markets, which may or may not berandom noise. It is another thing to get an expert interpretation of one’s
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decision process. If we truly want to optimize our ﬁnancial decisions, thenwe’ve got to control what we can and ignore the noise. Trading coacheshelp ﬁlter the noise from what’s really important.
Investment coaches share many “tricks of the trade” with athleticcoaches. While athletes excel at physical activity, investors must excel inmental decision making. The primary functions of investor coaching areto: (1) facilitate goal setting, (2) establish a structure for practice and train-ing, (3) review performance, (4) refresh passion for the decision process(not outcomes), (5) support self-conﬁdence (especially during downturns),and (6) provide positive support and motivation.15 All of these functionsof coaching improve athletic performance, and from my experience withclients, they also enhance investment decision making.
Flavia Cymbalista
Some trading coaches work directly with traders’ decision-related emo-tions in order to help them improve performance. Raised in Brazil andtrained as a PhD economist in Germany, Flavia Cymbalista recognized agaping hole in traditional economic theory regarding how people makedecisions under uncertainty. She wondered, with uncertainty endemic toeconomic decisions, how could economics and market behavior possiblybe rational?
She studied psychology in a postdoctoral fellowship at the Uni-versity of California at Berkeley, and her interest in the philsophical/psychotherapy technique “focusing” led her to develop a methodologycalled MarketFocusing. MarketFocusing combines gut feeling and logic toimprove decision making in markets. For several years, she has been help-ing traders improve their performance by accessing their bodily knowledgeand increasing its reliability. In other words, she teaches traders how to de-velop their biological software.16
Cymbalista wrote a series of four articles for the magazine Stocks, Fu-tures, and Options with the collaboration of George Soros. Cymbalistaexplained that Soros integrates subtle feelings and an analytical decisionprocess to achieve his ﬁnal market decisions. Soros provides evidence thatsome experts are utilizing intuitive decision-making processes in situationsof uncertainty. In the case of Soros, self-awareness of his physical reactionsmay have contributed greatly to his success.
Denise Shull
Denise Shull is a neuropsychologist, student of modern psychoanalysis,and a long-time trader. She works with individuals and groups of traders toimprove their performance. According to Shull, “I am having better results
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than I imagined with getting . . . traders to think/talk/feel their feelings.”Shull encourages traders to frame feelings as if they are objects, askingquestions about feelings not in a personal way (which might arouse emo-tional defenses), but in an object-oriented format. She also ﬁnds that manytraders are afﬂicted by repetitive mistakes, as if they are compelled to re-peat an emotionally salient event from earlier in their lives.
Shull remarks that many traders are resistant to keeping journals. “Asfor journaling, that is the amazing part—how few traders actually keep oneand how much resistance there is to doing it. I have gotten some clientsto just speak into a tape recorder. The other tool I use—and love—is Mi-crosoft One Note.”17 Shull emphasizes that any tool for keeping track oftrader experiences is important. Self-analyzing what went wrong in one’sinvestment decision making, in a curious nonjudgmental way, tends to im-prove subsequent performance.
MODELING OTHERS
When you feel an internal resistance to change, one solution is role-playing.Trading coach Van K. Tharp advises some investors to model other people,such as great investors. Imagine what state of mind such a super investorwould need to be in to deal your current situation. Role-play that you arethat super investor. Tharp’s advice to model the state or person you wantto be is borne out by studies into the origins of happiness.
One’s well-being can be improved by imagining oneself as the per-son one would like to be. In a four-week study, researchers askedparticipants to regularly practice two mental exercises—counting one’sblessings (“gratitude”) and visualizing their “best possible selves.” Thesepractices boosted positive emotion, and continued to do so if practice wascontinued.18 Of the two exercises, visualizing one’s best possible self is themost beneﬁcial for raising and maintaining positive mood.19 As Tharp sug-gests, investors can extend this idea beyond happiness, to investing or anyendeavor in which one would like to model excellence.
GROWING HAPPIER
Most people want to be happier. Yet few people understand how happi-ness is cultivated. The factors that predispose one to happiness are bothinnate (genetic) and learned. The best predictors of happiness are: (1) anoptimistic personality style, with traits such as high extraversion and low
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neuroticism; (2) healthy social relationships (satisfaction with friendshipsand absence of loneliness); (3) a sense of purpose in life; and (4) overall lifesatisfaction.20 Some of these factors are ﬁxed, and some merit intervention.In general, a person’s happiness level is governed by three major fac-tors, only one of which is predetermined. Those three factors include one’sgenetically determined set point, life circumstances, and happiness-relatedactivities and practices.21 In order to increase one’s happiness level, activi-ties that bring joy are the most straightforward to implement. Hobbies, re-ligion, recreation, learning, and volunteering are some of the activities thatpromote happiness. Each person has to ﬁnd a few that resonate. Some-times a simple change in life circumstances, such as a move in residenceor job, can be very beneﬁcial for well-being (especially if there is somenoxious element in one’s current situation).
Positive psychologists emphasize that people can learn to feel happierby using a number of mental exercises. For example, people can sched-ule more positive experiences in their day. They can take time to appre-ciate and notice beauty. After losses, people are taught to focus on theirstrengths and coping skills rather than reviewing what went wrong overand over.
Many therapists advise clients to create a gratitude list in which theywrite-down everything they are grateful for. Every morning they add oneor a few items to the list. Many long-term gratitude list makers have thou-sands of items in their lists, and they feel happier thinking about their goodfortune when they (literally) count their blessings.
NEUROFEEDBACK
After I give talks about neuroﬁnance, I’m invariably asked if I can givesomeone (usually the questioner) a brain scan to improve their investing.Through 2006 I had to answer, “I don’t know, the technology just isn’t avail-able yet.” However, exciting recent advances in functional magnetic reso-nance imaging (fMRI) technology, especially “real-time” fMRI, suggest thatthe days of investor scanning are almost here. But before we use real-timefMRI to improve trading talent, there are a few obstacles to surmount.
The MRI scanner is sensitive. The one-ton, $2 million MRI magnetrequires its own ferrous-metal-free room, often at a major medical or re-search center. When scanning at Stanford, the scan itself may require oneand a half hours, but the preparation time will be at least one additionalhour, and the travel time is also signiﬁcant—not to mention the cost ofmagnet time: $500 per hour. Subjects cannot be using psychoactive med-ications (even ibuprofen). Additionally, up to one-third of subjects move
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their heads too much, ruining the data. As a result of these barriers, it hasbeen difﬁcult to ﬁnd Bay Area investors willing to commute to our facility.Now that researchers have identiﬁed four areas of the brain that pre-dict different biases in ﬁnancial decision making, the NAcc, MPFC, anteriorinsula, and amygdala, we can compare new subjects to averages. Unfortu-nately, different individuals show strikingly different activations in theseareas during experiments. On any given trial, it’s often not easy to see theexact locations of activations—the fMRI images themselves appear noisyand imprecise for each trial. It is only the grouping and averaging of theresults that produces the clean images seen in this book.
One breakthrough in fMRI that has brought routine investor scanningcloser to reality is real-time fMRI (rtfMRI). rtfMRI allows users to visualizetheir own brain activity as it occurs. By watching how their own thoughtsand feelings affect brain activations, they can learn to consciously changehow they feel and think in response to certain events and before importantdecisions. rtfMRI is like biofeedback techniques, where users are trained toincrease their skin temperature or reduce their heart rate by consciouslyaltering their thoughts and feelings. But rtfMRI is more fundamental andmore precise. People can actually learn to change how they think and feelusing rtfMRI.
Christopher deCharms is a former Stanford fMRI researcher and nowCEO of Omneuron, a venture-funded Menlo Park, California–based com-pany. Omneuron is developing clinical applications for rtfMRI. The Omneu-ron researchers wondered whether people could learn to dial up or downactivity in a particular brain region in order to produce a therapeutic effect.In a 2005 study, deCharms reported that participants could control theamount of pain they felt from a heated metal cube by modulating activa-tions in their rostral anterior cingulate cortex (rACC). The rACC is a brainregion thought involved in pain perception and regulation. “When subjectsdeliberately induced increases or decreases in rACC fMRI activation, therewas a corresponding change in the perception of pain caused by an appliednoxious thermal stimulus.”22
Chronic pain patients who underwent rtfMRI training reported de-creases in their ongoing level of pain after training. “These ﬁndings showthat individuals can gain voluntary control over activation in a speciﬁcbrain region given appropriate training, that voluntary control over acti-vation in rACC leads to control over pain perception, and that these effectswere powerful enough to impact severe, chronic clinical pain.”23
Neurofeedback techniques will initially be developed for the ther-apy of pain, anxiety, and other mood disorders. These disorders areclearly linked to dysfunctional neural regulation. Strategic business andinvestment decisions are complex, and optimization is still several yearsaway as a rtfMRI technique. It is likely that psychological biases such as
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overconﬁdence (seen in the NAcc), risk aversion (arising from the anteriorinsula), loss aversion, herding, and attention and memory biases can bereduced through real-time “neurofeedback techniques.” This technologyholds great promise for investor performance enhancement, but it willbe some time before we have reliable results across individuals given thelogistical challenges outlined above.
In essence, neurofeedback techniques promise to be a sophisticatedtype of performance-enhancement. Neurofeedback gives users a frame-work and structure for the exercise of psychological tools, and it demon-strates the immediate results in a real-time brain image.
While there are likely to be therapeutic beneﬁts for investors usingneurofeedback in the future, there is no need to wait to begin positivechange in your investing, or in your life. The other techniques mentionedin this chapter, such as yoga and meditation, have been in use forthousands of years, and classes are widely available. Additionally, CBT,coaching,journaling, social support, stress management, and healthylifestyle choices (such as regular sleep and avoiding nighttime alcohol)are straightforward and accessible. Cultivating gratitude, visualizing yourbest possible self, and looking for the positive in your day will improveyour sense of well-being. Incorporating any of these changes into your lifewill be an adjustment, but there will be positive outcomes for your stockportfolio and beyond.
MAINTAIN “LEARNING GOALS”
Stanford University psychologist Carol Dweck has spent decades studyingthe role of mental attitude in success. She realized that while it is importantto success to have an optimistic mental attitude, it is more helpful to beinterested and curious in personal growth and learning. What motivatespeople to be curious and open?
Dweck examined the effects of ﬁxed external versus dynamic internalgoals on performance. She used EEG to monitor cortical electrical activityin one group of students who had primarily performance goals (and ﬁxedbeliefs of achievement) and those who had predominantly learning goals.Previously Dweck had found that performance-oriented students were lessable to learn from their mistakes and performed more poorly on challeng-ing tasks. On EEG exam, they showed more attention to negative feed-back and reduced time remembering and learning from such feedback.24Dweck’s evidence suggests that one who tries to achieve a goal (such asﬁnancial gain or high investment returns) will experience worse outcomesthan one who pays attention to learning and growing into the process ofsuccessful investing.
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Dweck performed a study at the Life Sciences