We hate insecurity – probably enough that we prefer the certainty of physical pain rather than the knowledge of what comes next.
The cause of discomfort is insecurity, because the human brain experiences insecurity like physical pain. In fact, an experiment by researchers at the University of London College showed that people have fewer signs of physical stress if they have a 100% chance of getting an electric shock than if they have a 50% chance of getting the same shock. We hate insecurity – probably enough that we prefer the certainty of physical pain to not knowing what will happen next.
As a result, our dominant impulse during periods of significant uncertainty is to act to eliminate it as quickly as possible, which can be very beneficial. As we prepare for the exam, our fear of the unknown is what gives us the energy to do the necessary preparations to make our things cool. However, trying to remove uncertainty can also lead us to take direct action, which is harmful, for example, when we panic and sell volatile stocks at the bottom of the market. We get security – but at a hefty price.
Instead of simply reacting to uncertainty, consider these two ways to isolate yourself from the worst effects:
Plan your performance criteria in advance–When I interviewed Dr. Andrew Petrosoniaki, a trauma doctor, he talked about the importance of 5 or 10 minutes for his team when he learns that the patient is on his way and they will get to the hospital. During this time, they review the key decision points that may arise and determine how they can deal with them: “We say, ‘OK, if the patient doesn’t have a pulse or loses a pulse, we’ll do an X.’ It’s very useful for the whole team and me. , if I have to take responsibility for what I could do, ”said Petrosoniak.
Consider the same for your portfolio: if you make 10% of your investment in a week, what do you do? As the market rises, are there predetermined levels at which you take money off the table? Establishing decision-making criteria can reduce the inconvenience of uncertainty and make us less responsive.
Check your investments less often–InDeceived by chance, ”Illustrates the impact that frequency can have on uncertainty by mathematician Nassim Taleb. Using a hypothetical example of a day trading dentist with an equity portfolio with an annual return of 15% and a volatility of 10% per annum, he notes that when a dentist checks his cell phone prices every minute during an eight-hour workday, he experiences an extremely rocky ride, averaging “241 pleasant minutes 239 against unpleasantness ’.
However, if he checks it once a month, he has eight good months against four bad ones, and — even better — if the dentist only reads year-end statements, he probably has 19 good years against one bad one. In short, as the frequency increases, it is much more difficult to distinguish the long-term trend from overall volatility — and we are much more likely to respond emotionally to each move.
Another reason for making poor decisions under pressure is that we are overwhelmed by what is at stake. Especially in times of instability, it is too easy to imagine doomsday scenarios where our financial security, retirement and the future of children are at stake.
We have to admit that all the apps and TV channels on our phones are interested in making us think that unimportant things are important and important things are terrible.
If we mentally extend the stakes of market correction from the temporary loss of net worth to the threat to our livelihoods, it can make us panic and make decisions that we regret in retrospect. Many who liquidated the assets in 2001, 2009 and most recently with the start of COVID in March 2020 learned it hard.
To avoid overloading, consider the following strategies:
Determine the safety margin– Exiting from a state of panic requires a good answer to the question: ‘what not At stake? ”If we have important things during a volatility that are not at risk, it can offset the fear of loss. Ensuring that you have a portion of your assets set aside that is not exposed to market volatility (or a portion that, like insurance, imposes your negative risk cap), hedging is important.
Practice good media hygiene–As a result of the attention economy, there has been an arms race of “significance inflation” in the media – rooted in the realization that the more important something seems, the more likely we are to all click on it, read it or watch it.
We have to admit that all the apps and TV channels on our phones are interested in making us think that unimportant things are important and important things are terrible. When we have cable news in the background during the day and our Twitter feed is open, when we try to respond to emails, we open ourselves up mentally to increase our daily volatility and contribution to events.
If we manage uncertainty and keep importance in the long run, we will have far fewer mistakes that we will regret later.
Jensen from Denmark advises top managers and their teams on how to act under pressure in our troubled world. As CEO The third factor, Jensen oversees the implementation of corporate governance programs throughout North America and has worked with executives in 23 countries on five continents. She is an associate professor of UNC Executive Development at the Kenan-Flagler Business School in Chapel Hill, NC, and teaches full-time and full-time MBA programs at Queen’s University Smith School of Business in Ontario, Canada. In addition to corporate and academic work, Jensen advises athletes, coaches, managers and boards on Olympic and Paralympic sports systems. She lives in Toronto with her husband and their three children and is the author Compressive force: why pressure is not a problem, this is the solution (HarperCollins, Aug. 31, 2021).