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.

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:

  1. Emotion-focused coping – Dealing with dangerous and threatening events by processing one’s emotions and engaging others for support;
  2. Problem-focused coping – Handling threats by focusing on the situation and ways of dealing with it to reduce danger
  3. 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.