Denise Shull’s Revolutionary Approach To Risk

Managing RiskToday, the most common refrain you hear among critics of bankers and traders is this one word: GREED.

Plain and simple, these people say, Wall Street is too greedy.

To me, though, that analysis rings false. It’s hollow, and far too simplistic. If we live in a world where scientists have learned to split the atom, medical researchers are designing drugs that alter our body chemistry, major corporations are collecting individual data, and insanely complex high-frequency trading algorithms are killing the old-fashioned brokerage techniques, how can we justify summing up an entire industry, with countless parts and manifestations, in one biblical word?

In my recent conversation with Denise Shull, career coach, former trader, neuroscience student, and author of the new book Market Mind Games: A Radical Psychology of Investing, Trading, and Risk, Shull cleared up some of my confusion.

“Everyone thinks Wall Street is greedy,” she said. “But it isn’t greed. It’s the fear of missing out.”

In our conversation, Shull explained the number one fear that operates in almost every single trade, Wall Street’s true motivator (it ISN’T greed), and why people come to her for help: when they follow her advice, they make more money.

In the early 2000s, Shull was concurrently trading on Wall Street and working on her PhD in neuropsychoanalysis. She had written her Master’s thesis, The Neuroscience of Freud’s Repetition Compulsion, in 1995 at The University of Chicago. Though she never completed her PhD, she continued her study of neuroscience independently. It was an exciting time in the field, as new technology allowed for deeper study of the human brain than ever before.

So, Shull agreed to a request to publish her thesis several years after it had been written with the caveat that she would have to update it with new data that had been published in the interim. In doing so, she realized something:

“How we think about our own thinking is wrong,” she told me.

Traditional corporate and management wisdom holds that emotion is the enemy; only cool reason and rational decision-making are acceptable. Yet Shull’s research revealed that the human brain actually relies on emotional context at all times in order to reach decisions. So, in resisting emotion,  we actually distort our own thinking. Everything becomes easier and more clear if we become aware of our emotions and work with them rather than resist them.

Shull’s alternate career began when she published an article on her theory, which led to speaking engagements and a side practice of consulting with traders and alternative investment managers. In 2009, a spike in public interest driven by pieces about her published in Bloomberg and the Financial Times drove her to abandon trading for a full-time career of consulting and speaking.

“If I do what you say, I make more money.”

“But if I don’t do what you say, I lose more money.” This is the feedback Shull says she has received from Portfolio Managers and traders she coaches in her private practice.

What seemingly magical advice are her clients referring to?

“Constantly being aware of feeling and emotional context,” Shull says. The awareness goes beyond emotion to an “overall physical feeling.”

The hottest topic in neuroscience right now is mind-body cognition, which means we think with our bodies–including all of our feelings and our emotions. Shull teaches her clients to create an awareness of their own psychological state as a matter of course. This awareness revolutionizes the decisions about moving money and trading stocks. It is equally relevant in managerial decision-making situations.

In one instance, a private equity firm wanted to know if they should invest more money in a company in their portfolio, or if they should fire its current CEO. The firm’s management invited Shull to lead a consulting session.

“These guys were all very data driven. All they knew how to do was analyze numbers. But I took them through a morning of questions about how they feel about the situation. They came out with clarity about how they felt and a greater sense of confidence. Before they were pinballing from pros to cons and back again.

“Once they knew exactly how they felt and why, they were able to act,” Shull said.

It’s not Really Greed: It’s the Fear of Missing Out

“Everybody accuses Wall Street of greed. It’s not really greed,” Shull said. “It’s really the fear of future regret, or the fear of missing out, which comes from a basic competitive instinct.”

Shull believes that the fear of missing out is operating subconsciously in every decision made in the market. She first discovered the concept through her coaching practice. Almost everyone she met with spoke of being motivated by this fear, whether or not they recognized it as such. “The fear of missing out is the most common emotional state that people are unaware of,” Shull said.

Our number one motivating factor in decision-making is what will make us most happy in the future; it follows that we want to avoid situations that will make us unhappy. So, the fear of future regret can be boiled down to an instinctive desire to avoid feeling bad in the future.

In stock market trades, this manifests as an unconscious fear that warps one’s risk-management and instinctual judgement. You may realize that a stock is on its way down, but don’t want to sell in case it comes back in the future. You would miss out on future gains. Alternately, when a stock is heading north, you don’t want to sell in case it keeps going up. Anyone who has stood in front of a slot machine and watched someone win $500 and then bet it away until they walk away with empty pockets has seen this in action. “Entries are easy; exits are hard,” said Shull.

A prescient example of the fear of missing out operating in the markets? The J.P. Morgan Chase trading loss. “When people started to trade against them, they probably started with the fear of missing bigger gains, because they had done so well in the past,” Shull said. “When people moved against them, they didn’t want to get out because of the fear that they would get out at the worst point and the trades would then come back. They also forgot that all trades are social – another human being drives the price and you don’t want a herd against you.”

What It Means For Regulators And Compliance Professionals

“If regulators took on psychological risk management, and looked at markets to see where the fear of future regret is operating, it would help much more effectively manage risk,” said Shull. There is no practical, possible way for regulators to catch all of the oversize risk that is going on in banking. But if, instead of analyzing the markets for risk, regulators scan the managers themselves for psychological factors such as the fear of future regret, they have a better chance of catching risky positions, like JPMorgan’s whale, before they explode.

“I think we need to develop an actual scale and everyone should be answering to that scale all the time,” said Shull. “Supposedly the board of MF Global knew about Corzine’s trades and didn’t or couldn’t talk him out of them. If there was an accepted scale that measured the fear of future regret, and everyone had to say ‘where are we’ on it, we could prevent more losses. One of my dreams is to see that scale developed.

“Until Wall Street gets the message that there is a psychological piece and reworks how they deal with it, we will just continue to have unexpected losses like JPMorgan’s, and meltdowns like MF Global’s. It will continue to happen, because you can’t find this stuff in the numbers until it is too late, but you can find it through the human route much earlier,” Shull explained.

The Stock Market Is Your Parents

One of the most interesting things that Shull has observed in her time as a consultant is the way that nearly every trader’s interaction with the market is a virtual mirror of his or her childhood interactions with parents. For example, one trader grew up as the only member of a minority in his neighborhood. As a result, his childhood was filled with feelings of exclusion and not fitting in. Similarly, in his career on Wall Street, he felt that his colleagues and his bosses were constantly talking about him behind his back. This paranoia essentially crippled his career.

That man was only one example of countless traders that Shull has coached who were trapped in unconscious emotional patterns from their childhood that they continued enacting in their present life over and over again. Emotional experiences from childhood were so ingrained in them that they recreated these emotional experiences in adulthood. This is something that Shull calls “fractal psychology.” In nature, small patterns repeat into bigger and bigger patterns, as in a stem of broccoli or the formation of the human lung. Shull believes that “the psyche is fractal, at its core.” In fact, it comes into play in both areas of life, and for those on Wall Street, the stock market actually becomes a situation that feels the same as their parents made them feel.

Many people speak of carrying baggage into personal relationships, but how many realize that their baggage is blocking their career? In fact, it comes into play in both areas of life, and for those on Wall Street, the stock market actually becomes their parents.

“When people recognize that they’re getting stubborn because they’re trying to prove they are right to their father, then all kinds of doors open up—for them stop taking more risk,” said Shull.

Are They Buying It?

Shull’s book is titled a “radical psychology.” This is so for more than one reason. Does the Wall Street crowd actually buy what she’s selling?

Shull reports that seventy five percent of her clients are able to see the patterns operating in their life after meeting with her. “I’ve had some miraculous stories where people just get it and change behavior immediately,” she said.

The remaining twenty five percent laugh her out of the room.

Overwhelmingly, though, the people who do “get it,” get more than just career advancement and financial returns.

“They are constantly telling me how much it helps them in their relationships with their families, in sports. I hear that more than I hear any one other single thing,” Shull said.

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Beth Connolly is Editor-in-Chief of the Wall Street Job Report and the Compliance Exchange. She blogs creatively at When Nutmeg Met Basil. Connect with her on LinkedIn , Twitter, and About.Me.

Main Image Via Tribe

About Beth Connolly

Beth Connolly is Head Editor, Writer, and Marketing Coordinator at the Compliance Exchange and the Wall Street Job Report. She tweets @Bethconnolly and shares her love of the good writing life at her blog, When Nutmeg Met Basil. A graduate of Middlebury College in Vermont, she works in Manhattan and calls Astoria home.

One Response
  1. June 30, 2012

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