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Coping
With Risk and Uncertainty
By Brett N. Steenbarger, Ph.D.
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
questions.
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:
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Emotion-focused coping - Dealing with dangerous and
threatening events by processing one's emotions and engaging
others for support;
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Problem-focused coping - Handling threats by focusing on the
situation and ways of dealing with it to reduce danger
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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.
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Brett N. Steenbarger, Ph.D. is a clinical
psychologist and active trader, writer, and
researcher for the past 20 years, Brett is the
author of The Psychology of Trading (Wiley;
2003) and numerous articles on trading psychology
for print and online financial publications.
Click here for full
bio >>
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