Friday, May 1, 2015

Coping With Risk and Uncertainty

How do you cope with the risk and uncertainty that are built into markets, and are you
coping effectively? In this and my next article, I will be tackling these important
The topic of coping actually begins with the notion of stress. Stress is a characteristic set
of physiological, cognitive, and emotional responses to threat. Generally, these responses
speed up such bodily functions as heart rate, galvanic skin response, muscle tension, and
rate of respiration. For this reason, the stress response has sometimes been called the
"flight or fight" reaction. In the face of threat, our bodies prepare us for action: either to
attack the source of danger or to run from it.
What constitutes a source of stress is highly dependent upon our perception. If we define
something as a threat, we will experience it as threatening, and that will trigger a stress
response. For some people, public speaking is an everyday activity, not to be feared at
all. It might even be something enjoyable. Others view public speaking as a potentially
humiliating event. Their perception of threat triggers the stress response that we call
performance anxiety. Cognitive psychologists, however, remind us that it is not the
public speaking event itself that is generating the anxiety, but rather our processing of
that event. Take away the perception of threat and the anxiety diminishes.
Some of us view the world through lenses that emphasize the threat in life events.
Perhaps we grew up in an unstable home, perhaps we were overprotected and never
experienced life's hard knocks, or perhaps we learned to anticipate negative events as a
way of handling multiple setbacks during a difficult period of life. All of these scenarios
can lead to situations where stress becomes a way of life. Once we acquire habitual
thinking patterns that emphasize life's dangers, we fall into a chronic mode of flight or
fight. Continually mobilized, we can experience ongoing high blood pressure, muscle
tension, and jitteriness.
Psychologically, chronic stress is experienced as dis-stress. Anxiety, depression, and
anger are common consequences of viewing the world through the lenses of threat.
These emotional reactions, in turn, produce typical behavioral consequences, such as
indecision, lack of self confidence, impulsivity, and interpersonal conflict. We know
from cognitive neuroscience research that high levels of distress shift regional cerebral
blood flow away from the frontal cortex--our executive center of judging, planning, and
reasoning--and toward motor regions. This is why it is so difficult for people under
chronic stress to calmly work out their problems. Their perceptions of threat create
physical and emotional arousal, which in turn make it difficult to access the cognitive
capacities most needed at those times. Every trader knows how easy it can be to abandon
a well thought out trading plan in the heat of adverse market activity!
The term coping refers to the actions we take to deal with sources of threat. Broadly
speaking, there are three coping styles:
1. Emotion-focused coping - Dealing with dangerous and threatening events by
processing one's emotions and engaging others for support;
2. Problem-focused coping - Handling threats by focusing on the situation and ways
of dealing with it to reduce danger
3. Avoidant coping - Avoiding sources of threat or choosing to not think about or
deal with a problematic situation.
None of these coping styles are good or bad in and of themselves. Each can be used
effectively, and each can be misused. We know that a coping style is effective when it
reduces threat and produces positive outcomes. There are times when it can be effective
to sort out our feelings and deal with these, such as after the loss of a relationship. There
are occasions when it is very helpful to be problem focused and directly deal with an
immediate emergency. Other times, we need to suppress feelings of upset and
problematic situations in order to get by in a job or as a parent. In many respects, the best
coping style is one that flexibly incorporates all three ways of handling situations.
While all of us do cope at times by dealing with feelings, attacking problems, and
removing ourselves from situations, most of us have characteristic ways of dealing with
threat. Those are our typical coping patterns, and they are integral to our personalities.
For instance, if I have a significant problem, I very often will cease interaction with
others and become extremely task focused. At such times, my attention narrows
considerably and is concentrated on the problem at hand. This is useful in that it
generally accelerates the resolution of the problem. It is not useful in other respects,
particularly if it leads to others feeling shut out in a team-based work situation. If I
become locked into particular ways of coping that worked for me in one setting--or
during one period of life--and then bring these to new situations, there is a real risk that
the coping will no longer ward off threat and may even create new conflicts. My
colleagues at work who feel shut out by my problem focus, for example, may stop
collaborating with me at times when I want and need their assistance.
This situation is much more common than people realize, and it is a source of untold
trading problems. Coping strategies that worked well at one time or in other situations
are brought into the trading arena, where they wreak havoc. Very often this occurs when
the emotions evoked by our perception of trading situations (perceptions of failure,
danger, invincibility, etc.) trigger coping actions from an earlier life period where those
emotions were problematic. Perhaps, for example, I felt like a failure in my growing up
years because I could not make friends or develop relationships. This led me to cope by
avoiding social situations and retreating into my own fantasy world where I didn't have to
deal with others. As a child, this may have helped me through a painful and awkward life
period. Now as an adult, however, responding to market losses with feelings of failure--
and then retreating into fantasy--is not constructive.
Very often, our most problematic coping occurs when we deal with threatening situations
in ways that greatly differ from our normal coping styles. During normal trading, I might
be highly problem focused. In a volatile stretch of trading where I take large losses,
however, I find myself coping by exploding emotionally and then feeling guilty over my
outburst. Such out-of-the-ordinary coping generally is a sign that an earlier coping mode
is being activated. Something about the day's trading is triggering old memories,
feelings, or conflicts. As a result, we're no longer using our constructive, adult coping
capacities. Instead, we're mindlessly repeating a pattern from the past.
If you find yourself overreacting to a situation, there's a good chance it's not really an
overreaction. You are reacting to the situation--*and* to something previous in your life
that is being stimulated by the situation. The first step of progress you can make in this
circumstance is to remind yourself that you're not really reacting to the situation at hand.
"This isn't about trading," you tell yourself. "Something else is going on." Such a
reminder does not, by itself, eliminate the threat response, but it starts the process of
putting threat in perspective. That is important. Remember: threat--and stress--are
functions of perception. As you alter your perception, you alter your responses.
In my next article, I will focus on some ways of modifying stress responses and
improving coping. Until then, I invite you to join me for a free online chat that will cover
stress, coping, and much more. The Hotcomm session is sponsored by Woodie's CCI
Club and will be held Thursday, October 20th at 5:00 PM EST (4:00 PM for us Chicago
types). If you're not familiar with Woodie's group, I heartily recommend you check it
out. You'll find hundreds of traders helping traders. And that, after all, is a pretty
effective way of coping!

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