When it comes to investing, how we navigate a handful of periods of extreme volatility can make or break our success over decades. And yet, the pressure of these moments often leads us to make rash decisions that we regret later—selling when we should hold or buying when we should stay on the sidelines. In sport, they call this choking.
If we want to avoid choking and make better decisions under pressure, we need to have a plan in place to manage the root causes of pressure: uncertainty and importance.
We hate uncertainty—apparently enough that we prefer the certainty of physical pain to not knowing what is coming next.
Uncertainty is at the root of the discomfort of pressure because the human brain experiences uncertainty like physical pain. In fact, an experiment conducted by researchers at University College London demonstrated that people exhibit fewer signs of physical stress when they have a 100% chance of getting an electric shock than when they have a 50% chance of the same shock. We hate uncertainty—apparently enough that we prefer the certainty of physical pain to not knowing what is coming next.
As a result, our dominant impulse during periods of significant uncertainty is to act as quickly as possible to eliminate it, which can be very helpful. When we are preparing for an exam, our fear of the unknown is what gives us the energy to do the necessary prep work to know our stuff cold. But the drive to eliminate uncertainty can also lead us to take direct action that is counterproductive, such as when we panic and sell a volatile stock at the bottom of the market. We get certainty—but at a hefty price.
Instead of simply reacting to uncertainty, consider these two ways to insulate yourself from the worst effects:
Plan your criteria for action in advance—When I interviewed trauma physician Dr. Andrew Petrosoniak, he talked about the importance of the 5 or 10 minutes his team has between learning that a patient is on the way and having them arrive at the hospital. During that time, they review key decision points that might arise and determine how they will handle them: “We say, ‘OK, if the patient does not have a pulse or they lose a pulse, we are going to do X.’ That’s very helpful for the entire team and me to then hold myself accountable to what I might do,” Petrosoniak told me.
Consider doing the same for your portfolio: if your investments drop by 10% in a week, what will you do? When the market goes up, are there pre-defined levels at which you will take money off the table? Having established criteria for decision-making can reduce the discomfort of uncertainty and make us less reactive.
Check your investments less often—In “Fooled by Randomness,” mathematician Nassim Taleb illustrates the impact that frequency can have on uncertainty. Using the hypothetical example of a day-trading dentist who holds a stock portfolio with a 15% annual return and 10% volatility per year, he notes that if the dentist checks prices on his mobile phone each minute throughout an eight-hour working day, he’ll experience an extremely rocky ride, with “241 pleasurable minutes against 239 unpleasurable ones” in an average day.
If he checks it monthly, however, he’ll have eight good months against four bad ones, and—even better—if the dentist only reads the year-end statements he is likely to have 19 good years against one bad one. In short, as frequency increases it becomes much harder to distinguish the long-term trend from general volatility—and we are much more likely to respond emotionally to each and every twitch.
Managing the stakes
The second cause of poor decision-making under pressure is that we become overwhelmed by what’s at stake. In particularly volatile periods, it’s all too easy to imagine doomsday scenarios in which our financial security, our retirement, and our kids’ futures are at stake.
We need to recognize that the apps on our phone and channels on our TVs all have a vested interest in making us think unimportant things are important, and important things are dire.
When we mentally expand the stakes of a market correction from a temporary loss of net worth to a threat to our livelihood, it can lead us to panic and make decisions that in hindsight we regret. Many who liquidated assets in 2001, 2009, and most recently with the onset of COVID in March 2020, learned this the hard way.
To avoid becoming overwhelmed by what’s at stake, consider the following strategies:
Establish a margin of safety—Getting out of a panic state requires a good answer to the question, “what’s not at stake?” When we have important things that are not at risk amid volatility, it can counterbalance the fear of loss. Ensuring that you have a portion of your assets set aside that are not exposed to market volatility (or some that, like insurance, establish a cap to your downside risk) is an important hedge against pressure.
Practice good media hygiene—The attention economy has resulted in an arms race of “importance inflation” in the media—rooted in the realization that the more important something seems, the more likely we all are to click on it, read it, or watch it.
We need to recognize that the apps on our phone and channels on our TVs all have a vested interest in making us think unimportant things are important, and important things are dire. When we have cable news on in the background during our day and our Twitter feed open while we try to answer email, we are opening ourselves up to mentally raising the stakes of everyday volatility and events.
When we manage uncertainty and keep importance in perspective, we are far less likely to make errors that we later regret.
Dane Jensen advises senior leaders and their teams on how to perform under pressure in our disruptive world. As CEO of Third Factor, Jensen oversees delivery of the firm’s leadership development programs throughout North America and has worked with executives in 23 countries on five continents. He is Affiliate Faculty with UNC Executive Development at Kenan-Flagler Business School in Chapel Hill, NC, and teaches in the full-time and executive MBA programs at the Smith School of Business, Queen’s University in Ontario, Canada. In addition to his corporate and academic work, Jensen advises athletes, coaches, leaders, and boards in the Olympic and Paralympic sport systems. He lives in Toronto with his wife and their three children and is the author of The Power of Pressure: Why Pressure Isn’t the Problem, It’s the Solution (HarperCollins, Aug. 31, 2021).