Reprogramming the Mind: A Cognitive View of Stress, Performance, and Treatment for Wall Street’s Wounded
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The financial industry is an ideal crucible for studying psychological stress and its effects upon performance. Few professions involve such routine exposure to risk and uncertainty; even fewer measure performance success so tangibly. The recent deleveraging and the contraction of the industry have brought a variety of personal and professional stresses to investment professionals.
Consider the following scenarios, each of which is drawn from recent conversations with workers in the finance sector:
- Liquidity has dried up in a portfolio manager’s primary markets and strategies. Caught with a position that is hemorrhaging daily, she has become extremely averse to risk in her trading. Her research analyst continues to uncover and pitch new ideas, but is frustrated that few of these are expressed in the portfolio. When they are, it is with little tolerance for adverse price movement. Lately, the analyst has found herself feeling burned out; she recognizes that she is less productive, but none of her efforts seem to matter.
- There is talk that a prop trading desk might be shut down; the bank has reportedly made a commitment to preserve capital and minimize trading risk. Facing a brutal job market and weak housing market, traders on the desk spend much of the day talking with colleagues, frantically networking for job opportunities, and wondering what the next steps are. The tension is high on the trading floor; it sometimes seems as though more time is spent currying political favor than attending to markets.
- A futures trader in Chicago is caught in a massive short-covering rally. Instead of covering his position, he adds to it in a desperate effort to get his money back. By the time he liquidates, he has given back much of his year. No matter how hard he tries to focus on his markets, he finds himself caught in a spiral of self-blame and guilt. He cannot explain to himself, much less to his wife, how he could have been so imprudent.
THE DOORS OF PERCEPTION
Psychologists commonly make the distinction between stress and distress. Stress represents a state of heightened physical and cognitive arousal in the face of perceived challenge. It is that “flight or fight” response described in early behavioral research. To the extent that the stress response prepares us mentally and physically either to flee from danger or tackle it head on, it is highly adaptive.
Distress is the experience of negative emotional states, such as anxiety, depression, guilt, and anger. Not all stress results in distress. An associate may feel pressured and stay up all night working on a pitchbook for her managing director, but will not necessarily feel anxious or depressed about the experience. Indeed, as Richard Lazarus emphasizes in his pioneering work, the essence of coping is ensuring that the experience of stress does not generate lasting distress.
The distinction is important, because all too frequently we hear that the key to happy, healthy, and productive lives is to minimize stress. In fields such as finance, where risk and uncertainty are high, stress is unavoidable. The key to effective performance is possessing emotional tools that maintain psychological well-being even in the presence of stressful challenges.
It is common to think of stress as something that happens to us. We speak, for example, of time pressure and irascible bosses as “stressors,” and see them as the causes of our stress—and sometimes distress. Recall, however, that stress represents arousal in the face of perceived challenge. It is not just the objective qualities of the situation, but also our processing of that situation that determines whether we experience a particular challenge as stressful. If our overworked associate believes that she cannot get her work done in time to meet a crucial deadline, she might identify a threat to her career and respond with considerable distress. The equally overworked colleague who feels competent to turn the work over in time experiences no such threat. Her stress is not manifested as distress.
This transactional perspective emphasizes that stress is an interactive function of person and environment. Indeed, we can think of stress as the product of a situation in which a person perceives an important outcome and feels challenged to meet the relevant task demands. Such a situation can occur in unusually demanding environments (such as military basic training), but can also occur because of faulty perception on the part of a performer (a lack of confidence with a relatively simple task). While some environments tend to be more challenging than others, perceived challenge ultimately mediates our physiological and emotional responses. A layoff is far more stressful—and distressful—if a worker sees no employment alternatives than if he perceives opportunities.
OFF THE RAILS: STRESS AND CREATIVITY
In 2004, Mark Staal conducted a thorough review of the literature on stress and human performance and found that stress affects performance largely via the effects of stress upon cognitive processing:
- People tend to attend to negative stimuli preferentially to positive ones. Those in a state of nervousness or anxiety exhibit an attentional bias for stimuli interpreted as threats.
- Under conditions of stress, attention tends to be channeled toward central tasks, eliminating peripheral inputs, and potentially leading to tunnel vision.
- Working (i.e., short-term) memory is impaired under conditions of stress.
- Tasks that are well-learned and automatic are less susceptible to stress-related performance declines than tasks that are not routine.
- Perceptual-motor performance becomes impaired under conditions of stress.
- Under stress, judgment and decision making become more rigid, as individuals scan fewer alternatives.
- Stress impairs the work performance of teams, as well as individuals.
People become hypervigilant to threat under conditions of stress and especially distress. Their perception tends to tunnel, and their decision making rigidifies. However, in one particularly interesting study reviewed by Staal, work teams under stress were coached to flexibly consider many action alternatives. Those groups performed significantly better than the stressed teams that were not coached for cognitive flexibility.
We can think of the decision making of investment professionals as a joint function of analysis and synthesis. During the analysis phase, there is a gathering of information, much as scientists collect data in a lab. The research analyst visits firms and investigates financial statements; the portfolio manager talks with sales professionals, research analysts, and colleagues; the flow trader absorbs information from depth-of-market displays and price/volume charts. Just as the scientist eventually integrates lab observations into theories and hypotheses, investment professionals synthesize their data into market views and trading ideas. The successful investment professional is one who gathers fresh, unique information and synthesizes it in ways that stand apart from consensus, anticipating emerging events. At root, this is a creative process; how portfolio managers describe their “idea generation” is not so different from how scientists describe the model- and theory-building that guides their investigations.
This perspective suggests that stress affects performance among investment professionals by derailing the creative process. Instead of seeking information broadly, stressed traders and analysts narrow their vision, focusing on data that are readily available. This availability bias constrains resulting decisions and actions. Moreover, the stressed professional is more likely to synthesize data in rote ways, with an attentional bias toward information linked to the greatest threat. Instead of generating fresh perspectives that identify unique opportunities, the rigid, stressed professional is apt to behave impulsively, on the basis of limited data sets that are processed superficially.
This derailing of the creative process becomes particularly acute when stress becomes distress. Portfolio managers anxious about their positions are familiar with the feeling of being “glued to the screen.” With their vision narrowed to the tick-by-tick action of markets, they lose sight of broader risk–reward considerations and they enter and exit positions at poor levels. Similarly, the discouraged research analyst who has just been berated by a portfolio manager for a losing idea is apt to play it safe with future recommendations, holding back on outside-the-box concepts. Creativity requires a willingness to tolerate ambiguity and to immerse oneself in situations in which data lead to contradictory conclusions. It is impossible to achieve this immersion in a state of hypervigilance and narrowed vision. Just when the stressed securities analyst or trader needs to see forest rather than trees, the cognitive effects of distress lead to a focus on bark and leaves.
In Andrew Hargadon’s 2003 study of organizations that excel at achieving creative breakthroughs, he observes that these breakthroughs embody innovation, not invention. They are “recombinant,” reflecting new ways of assembling existing observations. Very often, the successful investment professional is not one who possesses unique information. Rather, she has found a fresh synthesis of existing information; a different way of weighting and assembling observations. Traders often report that they best recover from a period of poor performance by getting away from the screen and taking time off . During that period, it is possible to shift the focus from trees to forest, reconciling seemingly contradictory observations. At the moment when synthesis is achieved, confusion suddenly gives way to conviction. This conviction enables a securities analyst to pound the table during portfolio meetings, or a portfolio manager to aggressively scale into a winning idea.
Mihály Csikszentmihalyi’s research suggests that creative achievements are the result of intense immersion in and focus on one’s work. This “flow” state is pleasurable in its own right and an important ingredient of work motivation. During periods of distress, attention tends to be self-focused, as we appraise internal and external threats. Self-focus divides attention, destroying the flow. Performance is impaired when stress and distress disrupt the positive emotional experience that sustains creative thought and work effort.
SWAT THERAPY: NONTRADITIONAL COUNSELING FOR WALL STREET
Research into the treatment of post-traumatic stress has opened the door to innovative interventions that assist financial professionals under intense performance pressures. These interventions are grounded in the insight that the faulty coping patterns and information-processing biases interfering with performance are state-specific. That is, they reflect thought and action patterns that are triggered by specific physiological and emotional states. But conventional coaching, counseling, and therapy generally take place while the professional is in a relatively calm, collected state, removed from institutional and market pressures. Because such traditional interventions fail to access the states in which faulty coping patterns are encoded, they are limited in their ability to alter performance during times of high stress and distress. (For a readable account of the cognitive neuroscience of state-specific patterns, Joseph LeDoux’s The Emotional Brain is an excellent introduction.)
More promising than talk therapy is a direct behavioral reprogramming of unwanted state-specific patterns. This is the goal of exposure-based techniques that reproduce the stressful conditions faced by performers and then activate new, effective coping responses. A classic example from the treatment of post-traumatic stress would be teaching a rape survivor deep breathing and relaxation techniques, along with cognitive coping strategies that include a deflection of blame from the self and toward the perpetrator. By repeatedly practicing the cognitive strategies in a state of relative calm and focus, the survivor learns new state-specific connections: entering the relaxed state helps trigger the positive coping.
Once these connections have been made, the treatment of the post-traumatic survivor enters the exposure phase. Using vivid, guided imagery, the therapist helps evoke the very memories, thoughts, and feelings that the rape survivor has been trying to avoid. As much as possible, she is encouraged to relive the horrific experience—while maintaining the state of relaxed focus and while evoking the rehearsed coping methods. If she becomes overwhelmed at any point, the imagery temporarily stops, she regains emotional equilibrium, and the exercise continues.
Repetition is the key to the success of exposure work. Painful memories are rehearsed so often—usually in concentrated sessions—that they eventually become familiar and lose their emotional force. As LeDoux’s research documents, thoughts and feelings associated with highly stressful events tend to bypass conscious, explicit processing. Assimilated in their raw form, they are triggered by subsequent events that are similar to the initial traumatic situation, causing the flashbacks that are the hallmark of post-traumatic stress. Exposure work undoes this process by enabling survivors to reprocess memories explicitly, in a safe context that enhances self-efficacy. Eventually, with sufficient repetition, the trauma survivor can look back on terrifying events and maintain a neutral state of mind.
In addition to post-traumatic stress treatment, many training procedures in high-stress professions can be conceptualized as programs that achieve exposure and emotional reprogramming. SWAT teams and Special Forces units within the military, for example, rehearse maneuvers under increasingly realistic and stressful conditions until proper procedures become automatic. Football and basketball coaches create highly realistic scrimmages. Investment professionals, too, may benefit more from such training frameworks than from intermittent verbal coaching or counseling.
Key to applying this paradigm to stress and performance among the Wall Street workforce is the recognition that many highly stressful events differ from traumatic stresses more in degree than kind. The spouse who suddenly discovers the infidelity of a partner, the securities analyst whose career is threatened with a layoff in a shrinking job market, and the trader who loses a large chunk of his portfolio due to unanticipated volatility all experience stresses that disrupt schemas of safety and certainty. While not as dramatic as the traumas of war and rape, such incidents nonetheless leave their emotional scars in the form of inadequately processed thoughts, feelings, and memories.
This is a vital recognition for financial professionals and those who would work with them as coaches and therapists. Normal stresses—those that evoke reactions readily available to conscious reflection and control—can be dealt with through traditional supportive counseling. When those stresses evoke powerful reactions that escape awareness at the time they are triggered, however, talk coaching is apt to be ineffective. For investment professionals who look back on their performances and wonder how they could have overreacted and deviated so far from their usual best practices, nontraditional forms of intervention—those that reprocess the triggers for stress-related responses—may be indicated.
Sometimes these performance-impairing stresses can be evoked in vivo, enabling participants in financial markets to confront stressful circumstances directly. For example, after traders have experienced troubling losses, they frequently find that even normal adverse market movements scare them out of holding good positions. After teaching such traders the coping skills mentioned earlier, a psychologist can work with them during their trading on a simulation platform. This enables them to rehearse cognitive and physical coping skills in highly realistic situations without risking their capital. Once they are able to sustain emotional control and discipline in the simulation mode, they are ready to return to risk-controlled live trading and eventually trading with normal risk parameters. Such in vivo experiences are especially powerful in that they provide direct experiences of control and mastery that, with repetition, become part of the trader’s sense of self.
Other stressful situations do not lend themselves so easily to in vivo work. For instance, the sales trader who is worried about conflicts with clients on one hand and traders on the other cannot generate real-time experiences of worst-case scenarios. This is when guided imagery is invaluable in providing the exposure needed for emotional reprogramming. A psychologist might help the sales trader assemble a hierarchy of recent stressful experiences, from minimally troublesome events (portfolio managers who are increasingly unavailable to listen to ideas) to the most distressful ones (shouting conflicts with traders over execution).
The psychologist and trader would rehearse the cognitive and physical coping skills until those skills are part of a readily available repertoire; then they would begin at the lowest levels of the hierarchy with imagery-based exposure. The sales trader would maintain steady breathing, heartbeat, and muscle tension while vividly imagining getting a call from a client who is annoyed with the price received on an FX trade. By repeatedly walking through how to ideally handle such a call—while staying focused and calm—the trader literally trains herself to sustain normal cognitive processing during periods of high stress. When it comes to adaptation to high-risk, high-stress environments, such as those in the financial world, no amount of advice or discussion can substitute for the internalization of direct experience.
Csikszentmihalyi, Mihály. 1997. Creativity: Flow and the Psychology of Discovery and Invention. New York, NY. Harper Perennial.
Frankl, Viktor. 1984. Man’s Search for Meaning. New York, NY. Washington Square Press.
Hargadon, Andrew. 2003. How Breakthroughs Happen: The Surprising Truth about How Companies Innovate. Boston, MA. Harvard Business School Press.
Hembree, Elizabeth A., Deborah Roth, Donald A. Bux Jr., and Edna B. Foa. 2004. “Brief Behavior Therapy.” The Art and Science of Brief Therapies: A Practitioner’s Guide, edited by Mantosh J. Dewan, Brett N. Steenbarger, and Roger P. Greenberg. Washington, DC. American Psychiatric Press, Inc. 51–84.
Lazarus, Richard S. 1999. Stress and Emotion: A New Synthesis. New York, NY. Springer Publishing.
LeDoux, Joseph. 1998. The Emotional Brain: The Mysterious Underpinnings of Emotional Life. New York, NY. Simon & Schuster.
Staal, Mark A. 2004. “Stress, Cognition, and Human Performance: A Literature Review and Conceptual Framework.” NASA Technical Memorandum 2004-212824. Hanover, MD. NASA Center for AeroSpace Information.
Steenbarger, Brett N., Roger P. Greenberg, and Mantosh J. Dewan. 2004. “Doing Therapy, Briefly: Overview and Synthesis.” The Art and Science of Brief Therapies: A Practitioner’s Guide, edited by Mantosh J. Dewan, Brett N. Steenbarger, and Roger P. Greenberg. Washington, DC. American Psychiatric Press, Inc. 279–292.
–Brett N. Steenbarger, PhD, is an associate professor of psychiatry and behavioral sciences at SUNY Upstate Medical University in Syracuse, New York. Steenbarger is the author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), and the TraderFeed blog. He coaches portfolio managers and traders in hedge fund, investment bank, and proprietary trading group settings.
This article was originally published in the Winter 2009 issue of the Investment Professional.