Have you noticed how people and systems polarise reality so it can be understood as being A or B? This fixed view of reality exists in our professional and personal lives. It is evident in areas such as education and sport. It is also the lifeblood of tabloid journalism. Through A or B thinking people are encouraged away from ambiguity and complexity into an emotionally low-risk world where reality is polarised. Hedge funds are not exempt from this. I was recently told that there are only two types of traders in times of adversity: those who are ‘mentally weak’ and those who are ‘mentally strong’. Some traders tell me that their trading behaviour is P&L driven while others claim that it is not P&L driven at all. There are traders who believe that they intuitively ‘feel’ the market in order to pull signals out of noise – others propose to be as close to an algorithmic black box as a person can be.

A or B thinking will always create limiting views of a person’s potential to achieve elite levels of performance. It will have a detrimental effect upon every trader’s ability to make money. Why? It prevents us from sampling or engaging deeply with what exists in the fundamental space between the poles of A and B. This space is where we have to confront not knowing and not seeing the connections that help us to make rapid meaning out of what we perceive. It is a place where we might discover evidence that challenges the core of our beliefs about who we are, what we do and the decisions that we make. It provokes us into acknowledging that reality is ambiguous, complex and unpredictable – just like the market – and this can generate high levels of emotional risk. Working with elite performers in markets and sport reinforces my belief that, if you want to be the best, you need to immerse yourself in the space between A and B. By doing so you will gain critical information about your own emotional capital: the domains and structures within your mind that influence your ability to be the best that you can be in terms of performance.

The straight line fallacy
In the business world there is a proliferation of screening tools for assessing a person in order to project how well they will perform in their task. Psychometrics and personality inventories are popular examples. Such tools are premised on a ‘one-size-fits-all’ orientation that purports to help us understand what reality looks like. Apparently, it is a straight line.

Lets consider the assessment of ‘risk tolerance’ in this context. Firstly, the concept is over-simplified so that it can be measured. What is in essence fluid becomes fixed. Judgments can then be made about where a person should be positioned on a continuum – with an ‘aggressive’ pole (high tolerance) at one end and a ‘conservative’ pole (low tolerance) at the other. Once a person’s tolerance for risk is calibrated, the outcome is presented to them, and their managers, as a form of absolutist truth about who they are. It has now become a personality trait. What totally vanishes from our analytic radar is what is really happening inside the mind of the trader. There are multiple interdependent and interrelated factors at play that influence individual risk taking. Some of these will be cognitive, emotional, attitudinal, situational and contextual. A person’s risk tolerance will affect, and be affected by, other related psychological concepts too. This type of activity is interactive, multidimensional and, without doubt, complex. It is clearly nonsense to represent it as a straight line.

Assessment tools that produce linear outcomes will only navigate you towards understanding what is happening inside a person’s mind. They will never help to understand the map that illuminates a person’s emotional capital. Conceptualising reality as polarised and psychological concepts as isolated will always provide barriers to elite performance. This is why hedge funds need new methodologies and insights to enable them to understand the psychology of what each individual trader brings to his or her task. There are evident business benefits also in hedge funds of funds having the same insights when selecting managers.

Mapping Emotional Capital
Elite performers know that it is in the mind where true competitive edge is achieved. Traders make money from their range of psychological skills, not simply from a bid offer spread. Each individual trader brings their own emotional capital allowance to a particular task. Although it is subjectively constructed, it can be mapped.

Through many years of research and practical application it has been possible to create, develop and fine-tune an empirically valid process to psychologically map individuals, teams and firms. Applying this unique process to high performance environments in business and sport gives a deep understanding of emotional capital. The map (see Fig.1) illustrates what is at the core of enabling elite performance: conscious knowledge of the individualised connections between thought, emotion and behaviour.

Each map has interacting domains. Some domains are central to how most people make meaning out of their world. These domains will emerge frequently during the mapping process. For example, a common domain that informs emotional capital might be ‘Life History’. Through the application of a variety of qualitative research methodologies and theoretical frameworks domains emerge relative to individual disposition. The domains illustrate and provide insight into individual meaning-making processes. The map outlines what a person focuses upon and how their focus expands. This could include levels of loyalty towards personal decisions or the neuropsychological construction and management of significant emotions such as fear, stress and greed that are relevant when needing to respond rationally to market volatility.

Each domain has structures. Structures within a domain might, for example, relate to engrained emotional response routines that have been learned over time. This is also relevant in volatile markets where seductive emotional traps can entrap traders. A person’s current structures may need loosening, diminishing or securing. New structures may also need to be put in place.

Individuals are psychologically mapped. They are not scaled or calibrated. Nor are they placed in pre-determined categories that create self-fulfilling labels. Maps are not simply tools for illumination either. Their aim is to show what the psychological performance landscape looks like so that better performance results can be delivered. Intervention integrates multiple psychological models and all intervention areas are mutually agreed with the person involved. Interventions creatively designed and applied from map data enable a person to raise their game to new levels. This applies equally to people performing at the perceived top of their game as it does to those who are encountering performance problems.

From navigation to destination
Figure 1 shows an anonymised map of a trader in a hedge fund setting. In this particular case, the real map and its pathways and interconnections are far more detailed. Confidential information including all structures relating to life history has been removed. The following domains emerge as being pivotal in relation to performance for this trader:

• Groundedness
• Risk Resilience
• Feedback
• Openness to experience

I would like to make some brief explanatory comments about the domain that I call ‘risk resilience’. Risk is a construct that begins in the mind before it ever becomes a series of behaviours. It is what lies behind the construct that interests me. This includes when risk becomes hazard, how internal and external parameters for risk management influence risk taking and the exact nature and intensity of emotional response to winning and losing. Risk resilience influences a trader’s ability to make optimal decisions about trade selection, execution, size, nurturing and exit. This domain connects two vital psychological constructs in trading: risk and resilience. I use resilience to refer to a person’s adaptive capacity when they are under pressure: how they can deal positively with the psychological drivers and associated behaviours involved in emotions such as stress and fear. It is an essential construct when tackling tasks that have the potential for frustration and defeat. Resilience processes are dynamic and enable a trader to express and embrace risk rather than tolerate it.

New levels of performance
Many aspects of the individual map (Fig.1) illustrate areas for intervention to improve performance. I shall comment on some but you will also notice many others. In one case, evidence emerged that a trader was over-focused on outcome (P&L). In sport, I usually encounter this orientation when self-belief becomes vulnerable and confidence begins to affect competence. Often the unchallenged assumption is that to improve the outcome you should focus even harder on the outcome: you can win by placing more attention on winning. This is problematic because you are looking in the wrong place and this results in doing the wrong thing. Doing the wrong thing but in a righter way willnever provide a solution. It is akin to trying to get to sleep by trying even harder to get to sleep. It doesn’t work. There are many commonalities between trading and high-level competitive sport and an over-focus on outcome when you appear to be unable to control the outcome is one of them. As in sport, the solution is to focus on process not outcome. This increases the likelihood of the outcome occurring. If you need to sleep, focus on the process of relaxation. If you need to make more money, focus on the process that helps you to make money.

Everyone has an internal process that works for them. You have to know it, respect it, pay attention to it and recast it when required. In this example, a theoretically robust practical intervention was created so that the trader began to focus on, and become more analytical about, the process that led to best performance. Psychological structures were remodelled to develop the trader’s mental skills and improve performance capacity. Consequently, the orientation shifted. This placed the trader much closer to positive and risk-responsible starting-point thoughts when selecting a trade – like “how big can I win here?” rather than “how much could I lose on this one?” Externally, adaptations were also made to trading processes. The application of the intervention saw an increase in P&L.

This trader was driven to succeed by a fear of failure. Superficially, this seems to be positive, as he was in fact successful. However, fear of failure (outcome) will always limit performance (process). One reason is that fear increases a person’s suggestibility and therefore feeds irrational thoughts and behaviours. You should not fear failure nor label yourself as a failure if the desired outcome goes against you. To perform at an elite level you have to accept that failure can happen and take action to prevent it happening. To make money you have to accept that you can, and will, lose it. Take what I term superiority bias. Research indicates that people will make the same mistakes over and over again. Superiority bias limits the reflection required to prevent repeated mistakes. Here it has been useful to work with a trader on understanding his perceptions of patience, stubbornness and denial and how they are distinguished. These constructs are at the core of trade exit decisions.

The way forward
My contention is that we need a new psychology for enabling elite market performance. Taken-for-granted knowledge has to be challenged and the space between A and B has to inform our lived experience. Individuals are complex – as is their perception of reality – therefore new methodologies are required that help us to understand how each person constructs reality. Psychological mapping does this because the map respects individual disposition and is about destination not navigation. Mapping is not a precursor to therapy or counselling. It is performance-focused and promotes an accelerated path from analysis to action.

Though trading has many psychological similarities to elite competitive sport, there is also a vital difference. A trader does not spend most of his or her week in training for a key performance. They have to perform all of the time. This makes the mapping process even more critical. Eliciting the map and applying interventions will make a positive impact upon both the process and outcome of an individual’s performance. It can also enable the best performers to be even better. I know because I have seen it happen many times.

Dr. Tim O’Brien is a Psychologist who works with hedge funds, global businesses and elite sports teams.

timob@btconnect.com