Investors are always looking for an edge and ways to improve returns. Advances in neuroscience and the decision-making process have helped to reshape how traders think about the markets and the decisions they make.
Denise Shull, M.A., decision coach and performance architect at The ReThink Group, knows investors can often be their own worst enemy, letting fear and emotions drive bad investment decisions. As a former trader, she was looking for ways to improve her decisions. But not until after she realized why she was making those decisions did she become better trader.
Ahead of her keynote speech at the 10th annual Inside ETFs conference (tickets are still available; register here) in Hollywood, Florida on Jan. 24, Shull explains to Inside ETF’s John Swolfs how she’s working with traders and investors to help them improve their decision-making process to help clients achieve better results.
Inside ETFs: Why don’t we start with a description of what a decision coach is?
Denise Shull: What we have learned through psychology and neuroscience is that decisions include a combination of factors. That means decisions are actually made through a prominent combination of what we think about, what we analyze, what we feel, both consciously and subconsciously.
As a decision coach, I help people understand the emotional and mental aspects of a decision. Most people have not been taught to analyze decisions in any sort of systematic way that includes what we are feeling. A decision coach helps people understand all the aspects that actually influence their decisions.
Inside ETFs: If people now are capable of looking at their decision-making process, how will that process change?
Shull: First, it is a learned skill, and better understanding your decision-making process will certainly influence the decisions you make. For one, you’ll have more insight into what drives your decisions, streamlining the time needed to make a decision.
On top of that, you’ll be able to better predict other people's decisions. That has countless benefits for advisors; for example, it might help them better position solutions for clients if they understand the decision-making process. In essence, you’re able to understand the aspects of perception and judgment that influence everyone.
Inside ETFs: You’re a big believer in the X factor for human performance under pressure. What is the X-factor? Or is that indefinable?
Shull: Oh I don’t think it’s indefinable at all. The new term for it is actually “emotional agility” or an awareness-of-your-feelings state. Think of emotions as just one type of feeling, and feelings give you information. What that means—and this is based on research—is that the more emotionally and socially aware people/investors/traders are, the better the results. That surprises people.
We also have information showing that the more that athletes can understand an emotion and invoke an emotion—not just confidence, but all emotions—the better they're able to focus. Traditionally, we’ve been taught to set aside emotions and focus, but the better one’s emotional agility, the more likely they’ll be able to deliver performances—whether it’s in the market or in athletics—that look like they have that X factor.
Inside ETFs: Our audience is made up more of financial advisors, who build long-term asset allocations for clients. Would the same principles you described still be relevant?
Shull: Yes; 100%. In fact, maybe more, as your decisions will play out over the longer term, which means they actually matter more. First—and the key for advisors here—is understanding that both their emotions and their clients’ emotions matter.
Instead of setting emotions aside, they can use emotions to gather information leading to the best possible decision. Trying to understand the client’s emotions and helping the client understand their emotions can help remove fear, stop impulsive decisions and stay focused on the long-term plan.
Inside ETFs: You’ve mentioned a few times now that we shouldn’t avoid emotions, but are all emotions equal in the decision-making process?
Shull: To some extent, all emotions play a role in the process. What advisors or investors have to develop is emotional knowledge. This is learned over time, the ability to recognize what the emotions are, learning how to label them and apply them properly.
That’s the hard part for people: It isn’t easy to identify, label, separate, organize and categorize their feelings. From there, you can pick and choose the bits of information you need from each emotion.
Inside ETFs: Fear is often associated with leading to bad decisions or preventing investors from making a change. Can positive feelings have a negative effect on the decisions we make?
Shull: Overconfidence is just as problematic as fear. Overconfidence tends to show up in other ways. Perhaps an investor might rely too much on their gut feeling, since in the past, that’s had positive results. This is where we need to learn to step back and look at each decision we make as a new decision. Since we feel confident, we’re more likely to rush into a bad decision.
In reality, negative emotions in their pure form—fear, anger, etc.—are meant to help us. Since these emotions are unpleasant, we want them to go away as quickly as possible. On the other hand, confidence feels good, and we want to hold on to that.
Inside ETFs: How would you sum up how investors and advisors should look at emotions and apply them to their decisions?
Shull: It’s a data point and nothing more. That said, it takes several data points to make any decision, and that’s where the ability to identify, label, separate, organize and categorize their feelings will really aid investors in their decision-making process.
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