Market volatility has likely impacted mental health – and the past year has seen a rise in coaching for adaptive thinking, Piyasi Mitra hears.
Volatility will take its toll on portfolios – but could equally have a toll on the minds of those managing the portfolios. Mental Health First Aid England reveals that 83% of employees from the financial services sector have considered changing jobs due to the impact of work on their mental health.
“The demand for adaptive thinking, resilience and stress response management among fund managers has shot up post-Covid and the market shock of 2022,” says Ron William, cross-asset tactical strategist and performance coach at RW Advisory.
William points to a study that found a successful archetype for asset managers is the ‘NTJ’ type – or ‘intuitive, thinking, judging’ in the Myers and Briggs 16 personality types test. These types are strategic thinkers and objectively identify key patterns and cause-effect relationships.
Not everyone will be this type, but “market and mind” strategies can help professionals optimise behaviours, says William, and the instability of performance returns is prompting fund managers to seek mental alpha differentiators.
“The demand for adaptive thinking, resilience and stress response management among fund managers has shot up post-Covid and the market shock of 2022.”
While DNA programming is fixed, influencing survival instincts and ultimately risk or loss aversion, these ‘laws of nature’ can still be optimised using a mix of self-assessment training, applied best practices and performance coaching. Results normally start to show after a minimum timeframe of six to 12 months, says William, who is currently working with firms and supported by regulatory guidance.
Loss aversion might cause managers to underallocate to stocks or take profits too soon. There is also ‘thesis drift’ – the temptation to change an investment thesis to fit emotions, says William.
He and his team have developed the ‘A* Strategy’, which he says can help fund managers better navigate volatile market conditions and behavioural bias.
William’s approach is to assess the fund manager’s mindset or personality temperament alongside whether their strategy is active or passive. These factors are placed in the context of the market regime with reference to key drivers, such as macro, trend or volatility.
Ultimately, the blend of self-awareness, behavioural optimisation and peak performance should help to enhance the ‘behavioural alpha’ in a fund manager’s portfolio.
Behavioural biases can be overcome through mitigation strategies, which could include scenario planning for situations such as macroeconomic shocks, geopolitical tensions or a banking crisis. A concept with roots in the military, scenario planning is more about preparation than predicting the outcome.
Hijacking the cortex
Brain training, based on the principle of neuroplasticity, aims to incorporate changes at a cerebral level to achieve desired changes in response patterns.
It is difficult to stop subconscious feelings driving behaviour. Sarah Steventon, psychotherapist and founder of Psychological Capital Group, says the threat response will kick in when there is a perceived threat from adverse market conditions, at which point reasoning and planning in the brain’s prefrontal cortex gets hijacked. Decisions are then made based on emotions, and moves made during these times might not be the smartest, adds Steventon.
“Fear of missing out, walking away too soon, looking stupid, letting people down – the theme is clear.”
Much of the fear system is a memory or learning system. Learning occurs due to neuroplasticity, which involves the strengthening of particular connections between neurons so that those neurons can now talk to other neurons more robustly.
“When we are talking about the experience of fear being wired in, we are talking about synaptic strength. Neurons that didn’t previously communicate well now do so at lightning speed, analogous to going from a dial-up connection to a 5G connection – so, much faster and clearer. If a fund manager has a bad run, they can easily start to operate from a state of fear. They stop trusting themselves, making fear-based decisions, being too cautious – all of which can impact the alpha dramatically.”
However, Steventon says fear can be dampened through cutting-edge therapy techniques. “By leveraging the brain’s natural ability to adapt and change, we can regulate emotion to optimise brain function.”
“When we are talking about experience of fear being wired in, we are talking about synaptic strength. Neurons that didn’t previously communicate well now do so at lightning speed.”
Not all psychology or self-analysis is created equal, says Denise Shull, a performance coach and CEO of The ReThink Group. “Purely cognitive approaches are unlikely to be as impactful, both as reported by clients and as understood by neuroscience. How one feels is the most important data point to work upon.”
Shull says there is a misunderstanding between cognition and conviction. Confirmation bias, for example, is where people favour information to support their beliefs, but she believes it mostly stems from the anticipation of displeasure at being proved wrong.
There is magic in knowing what one is feeling – even when it is “bad”, says Shull. “One portfolio manager realised that a key part of what they needed, given their complex life, was an assistant. If we hadn’t dug into the depth of the frustration, that idea would have taken much longer to come to consciousness.”
There is no one-size-fits-all approach for managing feelings, personality and traits. Differences are real, says Sarah-Jane Last, CEO of The Work Psychologists.
Last cites a study by Barclays (Berthet V, 2022) that revealed fixed income fund managers tended to be more risk-averse and less prone to cognitive biases than their equity counterparts.
“Psychological assessment can help fund managers identify their strengths, weaknesses and cognitive biases they may be prone to,” says Last. She emphasises the role of mindfulness training in helping fund managers develop skills to stay focused at the moment, reducing stress and making clear-headed decisions.
“One portfolio manager realised that a key part of what they needed, given their complex life, was an assistant. If we hadn’t dug into the depth of the frustration, that idea would have taken much longer to come to consciousness.”
Self-analysis by monitoring investment decisions and tracking thoughts and emotions helps fund managers make insightful decisions, says Steve Ward of Performance Edge Consulting.
He says some fund managers will see volatility as a threat, while others will see it as an opportunity. This is a function of personality and experience and also of social context – in other words, the team or corporate culture around risk, performance and results.
Asset managers should learn to identify specific emotions underneath the pervasive label of stress – frustration, fear or anger. Ward says: “Labelling emotions helps to get some distance from them, lessen reactivity and reduce the chance of acting them out. Understand that emotions are data – what might these feelings be telling you? Is there any action to take?”
Awareness of risk personality can help determine how fund managers perceive, react to and manage uncertainty before making decisions, explains Ward. He focuses on helping fund managers develop “psychological flexibility and poise” – the ability to act effectively when faced with uncomfortable thoughts.
Reverend prebendary Dr Fiona Stewart-Darling, lead chaplain at the Canary Wharf Multifaith Chaplaincy, works with people in financial services, including on mental health, and urges them to remember timeworn tricks.
“Exercise regularly, get enough sleep, eat well and practice mindfulness. Engage in recreational activities and stay socially connected. Social support increases resilience to stress, so connecting with others can help to avoid feeling consumed by anxious thoughts,” she says.
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