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Invest to Your Full Potential Even Under Pressure
September 26, 2013
In times of extreme pressure, athletes, students and investors have one thing in common: they occasionally choke. Whether it’s Rick Perry forgetting the third item on his list during the Republican debate or a favorite basketball player missing the basket in the playoffs, when stakes are high, people can fail to perform to their full potential.
Under the pressure of the markets’ volatile roller coaster ride, investors can choke, selling when fear is high or buying when feeling greedy.
The crucial difference, then, between success and failure is twofold: understanding why this happens, and learning strategies on how to prevent it from happening in the future.
Sian Beilock, a cognitive psychologist at The University of Chicago, has been studying why athletes, students and professionals choke under pressure, looking for strategies to help people overcome their fears and anxieties to perform well. This summer, she applied her neuroscience research to the topic of behavioral finance when she spoke to a room full of financial analysts at a CFA Institute seminar.
When the pressure to perform is high, people usually face three challenges: we tend to pay too much attention to all the details, we turn off the ability to creatively solve problems, and we let emotions take over. Here’s what happens in the brain during these times: "The amygdala bombards the prefrontal cortex with emotional and physical content, reducing the ability of the prefrontal cortex to operate," says Jason Voss, CFA in an article about Beilock’s talk.
Instead of letting your brain take over, she offers solutions for each challenge, especially geared for investors.
- Rather than being overwhelmed by details, focus on one outcome. According to Voss, Beilock provides a golf analogy, saying "Rather than focusing on the endless details of the perfect shot — such as the correct club, proper grip, turning your shoulders just so, and so on — focus instead on the single outcome: where you want to put the shot."
- Sometimes investors lack answers to a problem, such as what to do when markets quickly and unexpectedly rise or fall. When this occurs, rather than obsessing over a solution, it helps to walk away, think about something else or talk to someone. Often, "answers frequently appear as if by magic when we are doing another activity," says Voss.
- When confronted with emotional turmoil, such as when fear of losing money in the market is negatively affecting our decision making abilities, regain composure. "Try focusing your attention on the previous and painful event and objectively identify one thing that you did wrong. Next, force yourself to consider what you can do to change it," writes Voss.
Voss offers even more "powerful and proven" tips for better investment decision-making. I encourage you to check them out at CFA Institute’s web page.
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