Stressed man on the phone.

Two similar significant events that occurred four years apart in my professional life elicited very different emotional reactions. The first event produced a highly stressful experience that made me question my confidence and ability and even whether I should change career. The second, four years later and almost identical in nature resulted in a very different response, and I experienced a massive reduction in the feelings of anxiety and stress, and consequently disruption to my confidence and output. These two almost identical occurrences and my completely different responses to these events calls into question what had changed in the interim period? On reflection I wondered about the reason behind the change. What had I done or been exposed to in the prevailing four years that had caused the reduction in the stress reaction?

I have spent 20 years trading financial markets, in London, Dubai and Tokyo on behalf of international banks and more recently for my own company utilising personal capital. This has given me a detailed insight to the nature of this environment and the stresses and strains individuals can suffer, including me. Trading requires a high level of decision making and the results can be virtually instant, a matter of seconds. This contributes, along with the pressure of having to be able to react and make decisions in a very short period of time repeatedly can cause high levels of stress that can result in negative effects on confidence and performance. My own experiences of this environment support this notion and I was subject to ups and downs in my own wellbeing as I felt the force of poor runs in revenue making, and these could result in prolonged periods of anxiety.

In 2004 I started my own trading company managing my own capital, something I had long harboured a desire to do, to test myself further professionally. After an initially successful 6 months I experienced a large and unexpected loss. This had a very negative effect on my confidence, the experience followed along similar lines to previous episodes, in that I felt stress, self doubt and anxiety but this time much worse. The loss added to the change in circumstances working for myself had resulted in such as; working alone, no regular salary, different systems etc exasperated the feelings of stress and anxiety and as a result it took a lot longer to return to profitability and regain confidence.

In the past I had been interested in books and articles on mainstream behavioural finance and had used the theories and concepts to develop my own trading strategies and understand those of the people I managed. However, these did not give me the solutions I needed to rebuild my confidence I lost after the first event and the downturn was significant enough to trigger me into sourcing a new solution. I began to research into academic psychology and decision making through the Open University library with whom I had been studying. This had almost instant results and I began to identify biases and influences that had been affecting my trading for many years, I quickly began to make fundamental changes to my approach. The result was a quick return of performance with enhanced consistency and ultimately strengthening of confidence. This positive event led me to continue to study this area and make the use of psychology and decision making an integral part of my overall strategy.

This leads me to my comparison point and how I came to realise that a by-product of my studies in psychology with the Open University has been a reduction in stress. Again I experienced a large unexpected loss when market conditions altered drastically in a short period of time. The lead up to the loss was similar to the previous experience in that I had made good profits, the loss was not larger than my risk management parameters nor did it exceed previous profits. What was different was my reaction, I didn’t really notice it at the time, and it was not until further reflection that I realised there had been a fundamental change. At the time some of the same thoughts entered my mind, such as questioning my ability, confidence issues etc but they did not elicit the same emotional response. They did not develop into anything more than a speed bump. I was able to get back on a profitable track much more quickly than the previous experience.

I think there is sufficient evidence to conclude that gaining an understanding of how decisions are influenced by hard wired heuristics, how these can affect the efficiency of decision making in my professional arena, financial markets, has resulted in a reduction in stress levels. It challenges the belief that exists in many high reward industries involving risk taking that this has to be accompanied by stress to merit a high salary. Significantly, being able to see the affects of decisions in an abstract form has allowed some detachment from the emotional influences experienced in the past. This could have equally interesting implications for industries where high levels of decision making is required and results are judged over short periods of time such as sport and medical diagnosis and treatment. However, in a general business environment the outcome of decisions may take longer to be valued and judged. It is more common for results to be produced quarterly or annually, meaning a much longer period of time will have passed between decisions and outcome. In this scenario accurate data from keeping a business journal would be essential to ensure accurate recall of the environment and conditions decisions were made in.

In January 2008, the press were full of reports of the impact of Jérôme Kerviel’s impact on world stock markets. This trader cost Société Générale €4.9 billion by hiding trading positions he should never have taken. The impact of these trades being unwound is widely believed to have been a significant factor in the decline of market values around the world. Press reports at the time such as this one in the Times were full of phrases like global crisis, panic, nervous traders fears’. This story unfolded as it was becoming clear that the impact of the overinvestment in poor quality ‘sub-prime’ housing loans in the USA was tuning into a major threat to economic stability around the world. The effect has been that institutions, which were once blithely lending money to all and sundry almost regardless of ability to repay, have become fearful of lending even to each other. As this story has unfolded there has, again, been an important subtext of emotion in markets (for example Buy Panic: Gene Marcial on How Market Meltdowns Can Be Your Ally).

New York Stock Exchange.
[Photo: Helico used under a creative commons licence]

Emotion in financial markets is not all about fear and panic. We know for example that, on average, prices on the New York Stock Exchange are higher on sunny days than on cloudy days. Sunny weather tends to make us feel more optimistic and it turns out that professional traders are no exception.

Meanwhile recent work by Cambridge University neurologists John Coates and Joe Herbert has shown a significant link between traders behaviour and the levels of hormones, such as testosterone, which have important links to emotion.

This is all in complete contrast to financial economists accounts of market behaviour which see investor decisions as driven by rational analysis, and prices as perfectly reflecting rational analysis of all available information.

So should we simply conclude that traders need to get a better grip on their emotions, calm down and start making rational decisions on the basis of considered analysis? Certainly my own research (with colleagues Nigel Nicholson, Emma Soane and Paul Willman) shows that learning to regulate their emotions is an important part of traders learning as they gain experience. As one trader told us:-

“I would cite myself as a great example of someone who started trading when I was 18 and got terribly emotional about everything, every loss; and I’d lie awake at night and think everything through and try and replay the tape - I wish it happened a different way … Over time you realize that nothing matters and you not only realize that nothing matters in here, it doesn’t matter outside here either. It took me a long time to get that.” 

However our research, which involved detailed interviews with 118 traders and their managers, also seemed to suggest that learning effective emotion regulation is not simply learning to set feelings aside. In the fast paced world of trading, rapid decision-making is at a premium; and the emotional cues and hunches that come from long experience can be an important aid. Rather than emotionless machines, high performing traders were often aware of their emotions. They used them as important sources of information; but were not at their mercy. Our findings are supported by a recent study by Myeong Seo and Lisa Barrett (220K PDF) who found that stock investors who were better able to identify and distinguish among their current feelings outperformed other investors.

As we learn more about the ways in which human cognition and emotion are inseparably entangled it is becoming clear that emotional competence is not just important to our relationships, it is a vital element of success in the world of high finance.

If you are interested in learning more about decision-making, you can find a free course designed by this author on Openlearn: Making decisions. You can also find a free course which gives a financial economics perspective on markets: The financial markets context.

About the author

Mark Fenton-O'Creevy is Professor of Organisational Behaviour at the OU Business School. His research includes investigations into the performance of traders in financial markets, and the problems that occur when management practices are transferred from one country to another.

He is also a National Teaching Fellow, and Principal of the Centre for Practice-Based Professional Learning.

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In common with other decisions to develop and expand large infrastructure projects (like road networks and large power stations or wind farms), there’s a lot of complexity and uncertainty being experienced in the decision situation. Decisions about such infrastructure projects are also deeply embedded in history. Through interconnections with other related decisions they can typically be traced back not just years but decades.  

Techniques such as predictive modelling of capacities and monetary valuation of costs and benefits can aid decision making. However, users of these techniques have different values and inevitably make assumptions that are not always made explicit.  One group of stakeholders might feel that everything that matters can be expressed in monetary terms whereas another group might believe that some aspects (e.g. habitat or settlement destruction or rights to livelihoods) cannot be weighed up in this way.

Much critique about expanding airports comes from an environmental point of view – from concerns about increased noise and greenhouse gas emissions. Many now argue for sustainable development and decision making that takes account of not just economic and social considerations, such as potential jobs or trade, but also environmental factors.

But what is meant by sustainable development varies a lot, and different issues arise at different levels. What might be thought sustainable at a national level by one group of stakeholders can differ considerably from what is thought at local or international levels by others. For instance, there are many examples from the UK where a new large-scale housing or tourism development has been rejected by planners at a local level, on grounds that it’s unsustainable. Yet the decision has been over-turned at national level, where it’s considered sustainable against a different set of criteria.

There are many ethical issues around how a decision is reached, including

• who decides
• who has responsibility for what
• which data are used
• what purpose data are used for 

Taking into account the perspectives of many different stakeholders in a situation can involve highly complex and time-consuming processes. Another challenge in decision making is in keeping tuned in to changing contexts. By the time a decision is actually made, about say expansion of transport infrastructure, the assumptions made might well be out of date, at least from some perspectives.

Despite the huge literature on decision making, there are no easy answers to finding decision-making processes that will meet the needs of different stakeholders in complex and uncertain situations. One group of approaches that has the potential to work well in situations of complexity and uncertainty are ‘systems approaches’.

Systems approaches tend to work by helping to make assumptions, purposes and worldviews explicit, and by valuing and working with multiple perspectives. They can also help in keeping interconnections and the possibility of unintended consequences in mind.  A scheme such as an airport’s expansion devised with particular purposes in mind might well have unintended consequences and be viewed quite differently from the future. One question for me when thinking of the Heathrow situation is ‘how systemic is the approach that is being used for making this decision?’

Links

• Systems practice - discover the benefits of a systemic approach
• The psychology of decision making - the thinking processes that help you cope with everyday life prejudice your judgements in other areas
• Video extras: Heathrow under pressure - watch the heads of BAA and British Airways give their perspective on Terminal 5
• Join the discussion - should BAA be allowed to build a new runway at Heathrow?

Courses

• Environmental decision making: a systems approach
• Diploma in Systems Practice

About the author

Chris Blackmore is a Senior Lecturer in Environmental and Development Systems in the OU’s Communication and Systems department. She’s involved in both teaching and research in environmental decision making and systems thinking and practice.

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