 Hi, and welcome to Bright Minds from Tick-Mill. I'm your host, Patrick Munnily, and in this series, we're setting out to answer some of the most commonly asked questions around investment and trading through entertaining and insightful conversations with seasoned insiders. As traders, we know that our motivations and incentives are driven by our emotions. From fear and greed to excitement and joy, the choices we make in our trading lives are, to one degree or another, dictated by our emotional reactions to market movements and our anticipation of good or bad outcomes. We also know that acting impulsively and reactively can be disruptive to our long-term investment strategies. A CASS Business School study suggests that the need to feel emotionally comfortable in our investment decisions can cost around 1.2% a year in loss returns, and a recent Dullbar survey suggested that number is actually nearer to 3-4%. However you view it, it is clear that avoiding short-term anxiety in your investments comes at a very real long-term cost. So what if you could harness, control, and use your emotional reactions to the market as a positive contributor to increase your returns? Rather than allowing your feelings to negatively impact performance, if by examining your emotional life outside of trading, you could correct or any potential negative impacts on your portfolio performance. Today we're speaking with Dr Andrew Minnaker. Andrew is a licensed clinical psychologist and performance coach working with high achievers. He's an experienced trader and has previously worked as a crisis management and threat assessment consultant for the US military and law enforcement. After moving into the financial world in the 90s, Andrew quickly identified a link between his previous work with the military and the world of investment psychology. He combines his experience in situational awareness and threat management with the latest neuroscience research to develop strategies and provide practical advice to improve performance. Andrew, thanks for joining us today. Could you get things started by telling us a little bit more about your career so far and your interest in the world of finance in particular? Sure, Patrick. Well, the first thing is a confession. I've never actually had a class in economics or finance. I found my way into this field partly by accident. I wasn't expecting to do it, but my first real job doing consulting with the Defense Department around threat assessment and some behavioral profiling led me to working with traders at Wells Fargo Bank here in the Bay Area. It was kind of a funny story. Well, it's not funny. It was a very serious situation. I was working at the Alameda Naval Air Base, which is no longer in existence. It's an island here in the Bay Area, Alameda. And one day, there was an employee that showed up making threats. He had called the local media, television crews were there, and the commander of the base actually asked me to come and see if I could resolve the situation. It was very stressful. I had no training in this particular situation at all. So long story short, the situation resolved itself. I was able to get this person's trust and everything ended peacefully. The event got into the newspaper and the media. Wells Fargo had heard about it. They were interested in my working with their traders and asked me to come in. And that's basically how it started. I told them I had no experience in markets, but I quickly did. And I got bit by the bug as soon as I got involved in working with traders and began trading myself. This has sort of been the dot-com boom in the 90s. I was very interested in trading after that. Wow, that's certainly an interesting path into the business, not one I've come across before. Andrew, could you briefly describe the field of neuroeconomics and what its aims are? Psychology and science is ever-evolving. The latest constructs, the latest theories, the latest research around decision-making, around conditions of uncertainty, risk and opportunity says that it's more than just psychology. The idea of how our brain is reacting, the biology aspect. So neuroscience and neuroeconomics is really the latest iteration around how we look at, how we can understand decision-making under conditions of uncertainty and ambiguity. But it involves a lot of the body, not just the brain. From your perspective, what's going on in our brains when we are in the position of having to make high-pressure decisions? The field of neuroeconomics says that the brain is a prediction machine, basically. So in that moment of, I call it the heat of the moment, should I get into the trade? Should I stay in? Should I get out? At those moments, the brain is trying to predict what's about to happen. And as a result, there's a whole host of biological functions occurring in the body and in the brain. And I'll just finally say that emotion is both a body state and a brain state together at the same time. Interesting. And I mean, obviously, in the world of investing in trading, the principle, I guess, challenge that people ultimately recognize is that you're operating in a totally ambiguous environment, regardless of your subconscious pattern recognition or, like you say, the brain's desire to put a predictive overlay to any market condition. What do you think is the main difference between uncertainty and risk? That's a great question. So under conditions of uncertainty and risk, what they have in common is the brain is generating anxiety. That's the brain's job. Under conditions of uncertainty, there's also a lot of ambiguity. There's mixed signals. We see some things that suggest that it's going to go on our favor and other things that suggest it may not. Plus, there's our history, our background, our personal experience. And all of that essentially serves to influence the, or actually constructs, generates the emotional experience that we're going to have. And so uncertainty is ever present. Anyone who suggests or thinks that there's a way to eliminate uncertainty in trading or investment decisions is unfortunately misguided. It's one of those realities that we have to learn to deal with. Same thing with risk. I'll just say this. When I work with a trader, a client, one of the things I'm doing initially is trying to get a sense of what is this person's default mode around risk? Do they tend to be more risk averse or more risk seeking in moments of high pressure? It's usually not always one or the other, but there usually is a tendency. And that's a good place to start with someone. Our lives outside of the world of trading can ultimately impact our operations or our market operations in the market. Oh, certainly. There's so many things outside of trading. I'll say this. In that heat of the moment, it's not simply about what we're seeing on the screen. It's our P&L, our account, how we feel about ourselves, how we feel that other people see us in terms of our degree of success in life. Those are some examples of things outside of the trade that affect the trade. Another big one, Patrick, I think you're probably aware of this, is it goes back to that biology piece, the amount of sleep we've had the previous night. That has a huge influence over how we perceive and tolerate risk. So these are all examples, and there's many others, things that are beyond the trade, beyond the screen, beyond the chart that influences what we see and ultimately what we do. Do retail and professional investors or traders encounter the same barriers to success, or are there different concerns for different levels of traders? I mean, I think back to my early days in the market, I would go through periods of hitting a certain level in terms of P&L, and it would almost be like a glass ceiling that I would hit that same level and then I would go through a drawdown that would take me back and I'd have to recalibrate, refocus, start again. But then as soon as once again, I drew close to that level of P&L again, something in my psyche kicked in and it was almost like self-sabotage to a degree. Very common pattern, Patrick. I've seen this over many, many years, over thousands of traders, is the ability to make money over days, usually a few weeks, a week to three weeks. And then, like you said, that ceiling, we hit that glass ceiling. We have the drawdown, we give the money back. There's a lot of different things happening in that cycle. One of them, of course, is perhaps we're not adapting to changes in the market. That's an easy one to suggest. Another possibility is that, do we feel as though we deserve the success? How do we feel about having that increased level of success, having that increased amount of money? Most people think consciously that they want it, but there's also other factors going on subconsciously around worthiness, self-worth, and many other psychological concepts that kind of come to bear right at that point at the end of that cycle. One of the things I struggled with in the early days was the idea that you had to have a trading plan rigidly adhere to that, almost in a robotic fashion. And what I started to realize over time was that there was a degree to which there was, the more time you spent in front of the charts, there was a degree to which you built up a subconscious pattern recognition. And it was like, I'm not talking about trading on gut feel, although I know people who do that pretty successfully. It doesn't work for everyone, but for me, it was understanding how to incorporate that in intuition aspects into my trading plan to understand that there were times when my mind would obviously see a pattern that I'd witnessed many, many times before and how to act on that in almost a planned fashion, if that makes sense. Yeah, what you just said, Patrick, is so important for people to hear. When someone is just starting off as a trader, maybe a year or two under their belt, the idea of having a plan is actually more important when we don't have that experience. The more experienced trader has, the more ability we have to recognize that there's a change in the market that we may have to adapt or alter our plan in the moment. For newer traders, I believe personally, it's much more effective and less damaging for them financially if they really have a concrete plan in the beginning. As they gain some experience, they will start to recognize that there are times when they need to alter that. But in the beginning, in other words, being more of a discretionary trader is dangerous with a lack of experience. The more experience you have, the greater possibility that you have of making better discretionary decisions. Yeah, and I guess moving on from that, the idea of subconscious pattern recognition, which I guess people can conceptually come to terms with, the idea of intuition in trading is a little bit more tricky. Concepts are nailed down. How would you define the term, Andrew? Yeah, it's a great question, Patrick. So first of all, it's actually a very important part of trading. The word intuition, the concept itself gets a bad rap in trading because most traders feel as though they think they are using their intuition when in fact they're actually responding to a fear, a hope or a fantasy. Very successful traders who have a lot of experience, professional traders managing money who I've worked with actually use their intuition a lot. They don't talk about it publicly, but what intuition is, it's an accumulation of implicit pattern recognition over time. Over time is the important part of that concept. It requires a lot of experience. So someone who's relatively new to trading, I would caution them from thinking that they are using their intuition. And even someone who has a lot of years of experience, you have to really learn how to differentiate emotion from intuitive feelings and thoughts. Very different. That's a lot of what my work is about with more experienced professional traders. Excellent, excellent insights. And talking about insight, could you give us some idea about some of the cutting edge research in the field of newer economics that's happening right now? Well, one of them is a somatic marker hypothesis which essentially says that emotion is not just a brain state, but it's a body state. And very often our body experiences the emotion before our mind, before cognitively, we recognize that we are in an emotional state. A rapid heart rate could be anxiety, could also be excitement, depends on how the brain's gonna interpret it. So a lot of the current research, the latest research is showing that in order to improve performance and trading and investment decisions, heart rate variability is increasingly becoming an important area for performance and trading and investing. It's an area that I've done a lot of work in over the years. And I believe that it is one of the more direct way of changing one's experience around uncertainty and risk. Yeah, I mean, that's a great practical tip. In addition to that, what are some of the other practical ways in which our listeners can use the findings of your economic research to improve their trading or investment performance? Another very important area is to understand that our emotional experience is information. And instead of trying to eliminate or suppress our emotions or view our emotions as a weakness, to accept that we are emotional creatures. As humans, we are emotional creatures. We need emotions. So that means if we can learn how to use our emotional experience as information, that's gonna be very helpful. And one of the practical ways of doing that is something that I teach is called live drill down writing, which is when you're in the heat of the moment, you're interacting with the market, is to be writing about on paper, what am I feeling? What's going on with my body? What are my thoughts? Why am I having these feelings? When is the last time I had these feelings? And what did I do? How does that work out? Should I be following this feeling or not? Engaging with your emotions, engaging with, I would say self-awareness, a practice of self-awareness on an emotional level is very, very impactful around performance in environments of uncertainty and risk. Excellent, yeah. I mean, some of the, again, going back to some of the early days for me, it was trying to build up an understanding of what was an impulsive response to the market as opposed to an intuitive or subconscious pattern recognition response, because the two can be disguised almost as the same thing. But if you actually, like you say, if you have that journaling aspect and you're able to go back and analyze and assess those behaviors and which then turned out to be not necessarily positive outcomes, but outcomes that are more in line with the plan or your trading practice, they are, that's extremely valuable information. Exactly, and I'll just build on what you were saying, Patrick, there's not just patterns in the chart that we're looking for, but it's patterns within ourselves, really is what was, I think, what you were alluding to. And that's really important part of performance, improvement for a trader. It's not simply understanding and paying attention to patterns on the screen, but keeping track of paying attention to and understanding our own personal patterns of thought and emotional experience, very important. And there's a lot of different ways to do that. Yeah, Andrew, to picking up on that point about understanding an emotional state and recognizing your emotional state and your emotional responses, I guess one of the key aspects for me in terms of development was developing a meditation practice and incorporating that into my daily routine as a trader. And that was invaluable to me. Is that something that you encourage clients to do or have had experience of yourself? Yes and yes, I had direct experience myself and it's something I do encourage my clients to engage in regularly, primarily because the idea of mindfulness, which is what meditation creates for us, a sense of being able to observe ourselves, hopefully in a non-judgmental fashion, when you're able to do that and you practice that on a regular basis, it's essentially what you're doing is you're building what I call your self-awareness muscle and the stronger your self-awareness is, the faster you're gonna catch yourself and notice a certain emotional state and you'll also be able to understand in terms of what the potential behavior is that you may engage in and also get a sense in the moment, is this something I wanna do or not? Excellent, really great. Andrew, thank you so much for joining us today. Is there anywhere our listeners can go to to follow you online or access your work? Follow me on Twitter, Andrew Menaker on Twitter as well as my website, andrewmenaker.com where I have a blog and some white papers that many people have given me incredible positive feedback on that have really helped people over the years. Thanks, Andrew. And those comments around meditation and mindfulness are particularly pertinent as we'll be exploring that topic in an upcoming episode. Thanks again for your time and thanks for listening to Bright Minds from Tick Mill. If you found these conversations useful, you can find us at youtube.com slash at Tick Mill Global. Let us know any questions or comments below the video or get in touch directly at podcasts at tickmill.com.