We all live with risk and uncertainty in our lives to some degree, but nowhere is it more prevalent than in financial markets. Fund managers, traders and analysts have to cope with it on a daily basis. There are few other activities in life where an individual’s performance can be measured on a second-by-second basis, in percentage points or fractions of pennies, day after day. Furthermore, it seems that as each year goes by, markets and participants become ever more short-term, as competition intensifies and clients demand consistent high results.
Human beings, by and large, don’t cope well with risk and uncertainty and it can manifest itself in all sorts of ways (such as anxiety, stress, depression and anger) or physical effects (ulcers, heart conditions, etc.) depending on personality type. In one study1, testing traders in a live trading environment, changes in electrodermal responses and blood pressure were noted, but they diminished with the age of the participants - perhaps there is at least one advantage to ageing!
Companies and individuals focus most of their time on the technical and informational aspects of their business, but devote little thought to how they can deal with the psychological effects of risk and uncertainty.
Stressful occupations
Other occupations where risk and uncertainty is high are military warfare and sport - just ask a Premier League football club manager! The military now employs psychiatrists, psychologists and chaplains, and the sporting world is full of sports psychologists and mental fitness specialists. But I have yet to hear of any major financial organisation employing somebody to attend to the mental fitness of their major, and rather expensive, assets - their frontline staff.
Governments have to make decisions and judgments about the future all the time, and because they don’t have perfect foresight either, they make mistakes. Unfortunately, they hate admitting them and have a rather consistent way of attempting to ensure they don’t happen again - with new laws and rules which require further administrators to administer them. They become highly risk-averse, as mistakes bring bad publicity, but this comes at a high price: ever more control and bureaucracy, and more costly government.
Fortunately, companies cannot and should not attempt to behave like governments. Companies need to ensure that risks continue to be taken and losses accepted when things go wrong - that is the nature of business. It boils down to that rather complicated balance of taking risks in as controlled a way as possible. We have to live with risk and uncertainty - that is our business - but we need to understand it, recognise its effects and work at mitigating its adverse psychological effects.
A healthy mind…
So, given that risk and uncertainty are an inherent part of our activity in the financial industry, how can we attempt to mitigate some of the adverse psychological effects they inevitably bring to our lives and continue to maintain a healthy mental position?
There are a number of aspects we can examine at the organisational, team and individual level. However, it is important to say that we can’t totally eliminate stress and anxiety in our day-to-day jobs, and nor should we try to. They are part of competition and help human beings to maintain drive and preparedness, but it’s about maintaining healthy levels - too much and they start to adversely affect organisations and individuals alike.
At the organisational level, it is imperative that companies correctly align the responsibilities they give to individuals or teams with the authority and resources they need to effectively carry out the job. I am sure many readers have experienced times where they either haven’t had full control of the situation they were put in charge of, or simply weren’t given sufficient resources to do the job.
Having a clearly defined investment process that is compatible to assigned responsibilities also helps in lessening the psychological effects of risk and uncertainty. In historic battle formations, soldiers were taught to hold their ‘lines’. Experience had shown them that this was their best chance of survival. Once this discipline had been lost or was broken down by the enemy, panic usually ensued and chaotic retreat became inevitable. Having an investment process that is based on empirical rigour gives people confidence and a framework within which to operate. But of course, they don’t work all the time, and processes need to be constantly reviewed as information and evidence changes.
Senior management needs to recognise how difficult the job of managing money really is and how time-consuming it is, and therefore need to create the right environment where front office staff can focus on the job. They need to ensure - as far as possible - that potential time taken up by other functions like sales and marketing, compliance, equipment procurement and HR duties is kept to a minimum.
Management also needs to accept that the physical environment of trading rooms can affect financial workers’ performance and creativity. Studies have shown that such simple factors as lighting, desk arrangement, colour schemes and plants can affect cognitive ability!
Telltale signs
At the individual level, those suffering from the psychological effects of the job are unlikely to come forward to their employers to look for help; but it needs to be identified, for the sake of the individual and the organisation. So the organisation needs good managers who can identify those individuals who are suffering, or may be at risk, so that they can be helped. Naturally, those suffering from recent weak performance (whatever the benchmark may be, absolute or relative) are probable candidates, so they need to be watched more carefully, but even good performers may be setting themselves too onerous targets and not living up to their own expectations or their record. Telltale signs of sufferers tend to be changes in mood, appearance, speech or body language, higher absenteeism and generally ‘not being themselves’.
Individuals need to become more aware of their emotions and reactions to events and understand that they are not alone in these feelings, but that they need to better understand how to cope with them. One Harvard Business Review study2 focused on executives’ supportive competencies - endurance, strength, flexibility, self-control and focus. In typical ‘MBA speak’ the authors write about the need for executives to attain their ‘Ideal Performance State’ (IPS). But let’s forgive them for this, because they do make some valuable practical points that we could all use in our day-to-day lives.
Continued stress (energy expenditure) without recovery (energy renewal) is likely to lead to burnout and breakdown, and ultimately undermines performance. Demands on executives often dwarf those on athletes, as athletes spend a lot of time resting and perform only infrequently. Most executives spend 14 hours a day or more on the job for many years, with only a few weeks’ rest and, often, little training.
The study emphasises the importance of the ‘Performance Pyramid’, with the base being physical capacity. Executives often push themselves too hard mentally and emotionally and not enough physically. Exercise is not only good for the body, but also tends to lift mood. Good sleeping and eating patterns are also necessary for an effective manager. Eat light meals but often, and eat less as the day goes on.
Individuals also need to learn how to build up their emotional capacity to weather the stress from risk and uncertainty. It is often said that those who get to the top have high emotional intelligence rather than high raw IQ scores. Individuals need to ensure they have a balanced life that includes outside activities, friends, family and pets3, so that when one area of their life runs into difficulty, they have other support mechanisms.
You may be surprised to hear that I’m not going to suggest you simply think more positively. Interestingly, test results on this are rather poor4. When two groups of students were chosen randomly and one was told to use positive thinking techniques before an exam and the other not, the latter group actually had higher marks! It seems that the ‘positive thinking’ group relied on the technique and did less preparatory work for the exam than the second group.
Things need to be kept in perspective, and those who use humour in times of stress were shown to have particularly healthy immune systems. Better time management also aids in coping with stress, so individuals need to focus on what’s important to do the job and try to minimise time-wasting activities that put you behind the curve.
In summary, we work in one of the most stressful industries there is, because of the risk and uncertainty generated by the nature of the work. Companies, leaders and individuals all need to learn how to cope better with the adverse psychological effects. Of course, we can’t eliminate stress entirely, but we need to ensure we mitigate the worst aspects of it. We can all work at various levels to overcome this. n
Karl Hunt MCSI has more than 20 years’ experience in financial markets on both the buy and sell sides at various levels in the UK and, latterly, the UAE.
1. ‘The Psychophysiology of Real-Time Financial Risk Processing’. Journal of Cognitive Neuroscience, 2002, A. Lo, and D.Repin
2. ‘The Making of a Corporate Athlete’. Harvard Business Review, Jan 2001, J. Loehr and T. Schwartz
3. Actually, the test results showed that dog ownership specifically helped in coping with stress!
4. 59 Seconds - Think a Little, Change a Lot. 2009, R. Wiseman
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