Decisions in the context of emotional arousal
During the last several years stunning news has rocked the financial markets around the world. Investors, and those that serve them, have often panicked and jumped into action, any action rather than reflection. We know that acute and chronic stress, panic, fear often results in maladaptive irrational thinking and problem solving. Financial planners have been told to sell everything, keep nothing in equities. Oil fields shut down and a new source of panic ensues in specialty markets. As the perceived values of equities plunge the price of gold has gone up 2 fold in less than 3 years. Home prices drop, foreclosures rise, housing starts are absent, the standard of living for the middle class continues to decline, and we are stuck with an economy that shows flat growth, high unemployment and discouraged consumers. What is the mode of thinking and decision making in a context of this economic climate? What are the cognitive consequences of panic, acute and chronic stress? How do we think, process information, make decisions under such high emotion conditions that can be characterized as ‘hot cognition’?
There is a large body of research that is available to help us understand the features of ‘hot cognition’, in contrast to the more usual ‘cool cognition’. Simply put, the brain foundations of hot (emotional) in contrast to cool cognition involve brain structures that allow us to respond rapidly with little time or resources for reflection and considered evaluation. The resources that engage the frontal and prefrontal lobes (cool cognition) are in recess while the evolutionary more primitive structure of the mid-brain drives our reflex quick hot cognition.
We have known for decades that when we sense danger the adrenal cortex is activated and secrets the hormone cortisol. The stress hormone cortisol drives us to rely on old habits that can be put into play rapidly. We act on the basis of reflexes without planning and evaluation (operations which take time and when we are in danger time is a luxury we can’t afford). Cognitive responses under such conditions are executed without the benefit of evidence and rational analysis. Under high stress conditions we old, well established, habits reign even though they may be highly maladaptive in the situation that has generated our stress. In addition our thinking is far more focused (which deprives us of considering alternative actions) and rigid further compromising the decision making process. By triggering old habits automatically we can respond rapidly and efficiently but not necessarily effectively. On top of all that high stress and fear exaggerates our aversion to risk.
Many studies have described this cascade of events. An old study reported in the 30 July 2009 issue of Science by Rui Costa and colleagues at the National Institutes of Health provides a wonderful rodent model of human decision-making and adaptation under high chronic stress state conditions. Rodents do what we do, or we do what rodents do in this stress experiment. The rodents continue to generate responses based on old habits and never learn how to avoid their stress conditions. Their behavior is maladaptive and they do not learn to switch to more effective behaviors. Decades ago Martin Seligman described this type of phenomena as learned helplessness. There is more bad news about stress. Like in rodents, humans are further disabled by chronic stress since cortisol is a brain toxin that destroys neurons especially in areas that are important in cognition such as the hippocampus.
What is our cognition, our decision making like when we have experienced a series of successful decisions. When we or financial traders are on a winning streak, then testosterone surges (but less dramatically in women) and this in turn can generate the euphoria of winners. The ‘cognitive high’ is often associated with a lack of appreciation of potential risks in the decisions we make. Judgments can be biased by a high that does not take into account of useful information that should be part of what we consider in our thinking. Because we are on a roll we respond rapidly.
How do we minimize the negative effect of adrenalin, cortisol, (and testosterone) on our thinking and decision processes? One strategy that financial decision makers have used is to call on mathematicians and computer science gurus for help. The financial trading programs that the mathematicians have devised generate decisions, outputs, based on huge amounts of data and sophisticated mathematical/statistical algorithms that can ‘make decisions’ and execute trades in milli seconds. The fallibility of hormone driven human thinking is extracted from the decisions that are executed by these programs. What we have witnessed during the last few years are the effects of high frequency trading (HFT) where stocks are held for seconds and then sold. The huge movements of stock markets that we have recently seen are the product of these HFTs developed by experts who frequently have no sense of the financial world but have the knowledge and skills to program emotion-hormone free trades based solely on powerful ‘proven’ statistical programs.
Perhaps as decision makers in the market place traders should have targeted training in knowing how to dampen their response to panic, stress as well as their response to spurts of testosterone. I realize speed is valued in making many decisions but it would seem to be of some value to slow the decision making process down so that it is not built on reflexive old habits.
Learning to effectively cope with stress is obviously possible. Learning to become expert at effective cognition even when others around us are in reflex mode of responding is a matter of lots of practice at dealing with stress. We expect leaders to have strong decision making skills that many of us do not have which that we too can become experts just like they are.
You could look at all this and say to yourself….”this is all stuff we have always known’ but I would respond with ….’so what’…..’the trick is to use what we know’ rather than simply recognize that there is nothing new here.
One other thought ….. Watching the broadcast of game 6 and 7 of this year’s World Series were exciting nail biters. St. Louis should never have been playing in a game 7 given the pounding they took from Texas through most of that game. The odds of St. Louis winning game 6 were close to zero (see statistical analysis of win probabilities as calculated on the well known sports website ‘fangraphs.com) after falling way behind and going down to their last out and last strike in the bottom of the 9th inning. They scored and pulled even. In the 10th inning Texas scored again and once more St. Louis tied the game. Again St. Louis fell behind in the top of the 11th inning only to ‘miraculously’ score and win in the bottom of the 11th. During the game the TV cameras often zoomed in on the opposing managers of the two teams. The St. Lois manager, Tony Laruso seemed cool, expressionless, regardless of what was happening on the field. The Texas manager, Ron Washington, was animated, waving his hands, jumping up and down, expressing lots of emotion, spitting sunflower seeds in every direction. Both managers were making decisions in every phase of the game. Both were successful mangers because they could make effective decisions even as the fans twisted, churned, screamed with emotions reigning as they watched their teams compete. While the facial expression and movements of the two managers could not have been more different but the stress of the game is unlikely to have marred their strategic decisions……but wait…perhaps the stress of the game did unglue their decision-making ability. Would we learn anything about what was going on in their head by asking them?