Winning the Inner Game of Investing with Psychologist Denise Shull
Denise Shull, CEO of The ReThink Group, leverages her background in neuroscience and modern psychoanalysis to solve the mental mysteries of successful investing, trading, competing, and leading teams. Denise is the author of Market Mind Games, describing how investors who prioritize emotion and the resolution of psychological roadblocks make better decisions and achieve superior performance.
Denise joined Chris for a conversation on how top-performing investors win the mental game.
See below for the audio recording, resources mentioned, and conversation transcript.
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Topics:
(05:51) Intuition, impulse, and the spectrum of confidence
(17:10) The power of story
(25:28) Psychological capital and leverage
(36:19) The importance of interoception
(44:00) Tracking your decision making
(45:52) Q&A
Conversation Transcript
Note: transcript is slightly edited for clarity.
Chris (00:05): Welcome to Forcing Function Hour, a conversation series exploring the boundaries of peak performance. Join me, Chris Sparks, as I interview elite performers to reveal principles, systems, and strategies for achieving a competitive edge in business. If you are an executive or investor ready to take yourself to the next level, download my workbook at experimentwithoutlimits.com. For all episodes and show notes, go to forcingfunctionhour.com.
Today on Forcing Function Hour I'm joined by Denise Shull. We're going to discuss how elite investors win the mental game. Denise Shull is the CEO of The ReThink Group, and author of Market Mind Games, a book that had a massive impact on both my investing game and my poker game. Market Mind Games shows how investors who prioritize emotion and the resolution of psychological roadblocks make better decisions and achieve superior performance. At the ReThink Group, Denise leverages her background in neuroscience and modern psychoanalysis to solve the mental mysteries of successful investing, trading, competing, and leading teams.
Forcing Function Hour, we have a fireside chat followed by a Q&A. If you're joining us live, we're taking questions via the Q&A function at the bottom, so upvote the questions that you want to hear. With that, let's get started. Thanks for joining us, Denise. Great to see you again. Excited to do it again.
Denise (01:32): Hey. Glad to be here. Thanks for asking me.
Chris (01:35): Absolutely. So let's start it with Market Mind Games. What would you say is the key insight that led you to start writing Market Mind Games?
Denise (01:43): Oh. That traders and investors have what—and hang with me here for a minute—an unconscious transference to the market. So like, in psychoanalysis, and even in general psychology, we know that, you know, people in our adult years will react to a partner or a boss the way that they might have reacted as a child. Or they will create the same experience. So like, I knew that. I had a master's degree in neuro-psychoanalysis before I ever became a trader. But I didn't know until I inadvertently started coaching that people use the market—In psychoanalysis, it's called a transfer object. But basically, it's like a—It's like a Rorschach blot. You know, people project onto the market their self-image, basically. And I actually figured that out after I started coaching, like I just said. So then it was like, "Oh my gosh, I have to write about this."
Chris (02:42): So this idea of projecting their self-image onto the market. I think that's really profound. I would like to hear an example of how an investor could do this to their detriment.
Denise (02:53): A fairly common one is expecting to be wrong, expecting to be criticized, and so therefore, always second-guessing themselves, and you know, reacting out of that impulse to avoid the criticism. But in doing so, like, literally never being able to hear their intuition or unconscious pattern recognition. I mean there's—You know, it is like fingerprints. So like, if I look at your fingerprint versus my fingerprint, to me they look pretty much the same, right? But they're obviously very different. So it is like that with—I mean, I think it's fractal in that we have these small experiences, and you know, we experience those experiences in bigger and different circumstances.
But like, perfectionism—I have a client who I would normally say, and I almost answered thinking of him, like he grew up, he wasn't criticized, he was always the smartest kid in the class, he was actually very happy-go-lucky, he can talk to anyone. And he just expects it to work. Like, he's always expected it to work, from when he was twenty-two years old and got a job at like an investment bank being a sales trader.
It's recently come to light, though, down deep underneath all that just expecting it to work, which has brought him to where he is at forty-some years old, there's like a perfectionist buried in there. Which—I've been working with him since March of 2019, and it's news to me just in the past month or so. Expecting to be criticized, attempting to be perfect, in a market environment. Which is so uncertain, right? And unknowable, and unpredictable, and there's no such thing as perfection. It's a really common personality trait that comes before a person's experience before they were twenty years old, and in most cases before they were ten. Because they don't really realize, you know, they're 'trying to come up with the perfect model,' when they're really just trying to avoid somebody criticizing them.
Chris (05:01): One paradigm that was a real red pill for me was control theory, that whenever we're acting some way that doesn't feel like it's in our best interest, what we're doing is actually serving ourselves, right? We're just not serving ourselves in the way that we think we are. We're satisfying this higher-order urge. And reading Market Mind Games, this is a real epiphany, is that everyone thinks that they're playing poker or investing to make money, but their actual intent can become decoupled from that in the moment, where they're looking for validation or they're looking for a rush or they're looking for an opportunity to prove how smart they are or to make the perfect decision. Talk to me about that. How can we become aware of when our in-the-moment urges become divorced from our long-term intentions?
Denise (05:51): Yeah, there's a couple of ways to attack that. One is to first always think in terms of, "Is this intuition," (I mean, we can divine intuition, but like, for now, let's accept it's a valid form of knowledge), "or impulse?" And if it's intuition it's calm, by the way, and it's an actual expectation about how things will unfold based on one's experience and how many times they've seen those set of factors come together and price do X, Y, or Z. Impulse is—it's really acting out of feeling that's irrelevant. So the trick is to learn to know yourself well enough to know which feeling is truly impulse and which is irrelevant, you know, impulse. Jennifer Lerner, of Harvard, who has studied emotions and decision-making, calls them integral (that's intuition) or incidental, meaning, you know, just incidental. Like, kinda irrelevant.
Another way that I think of it and try to help people is like, think in terms of some spectrum of confidence or—"Conviction is hedge funds, confidence is traders." Probably poker players are—but it's the same. Like, this feeling that you're right. Well, that feeling that you're right balances on kind of a triangle of fear of missing out, fear of future regret, need to be right, you know, need to avoid criticism. And then it gets a little bit more personal. So, it's layered. Like, all those feelings, just like intuition and impulse, are going to, most of the time, coexist. The trick is to know what they are, and then figure out really which feeling you want to have in the future, but which feeling is giving you a piece of information. And then having the courage, essentially, to act on that information and just being able to tolerate the other feeling, not act it out. I think I answered.
Chris (07:54): That seems like a key challenge that we have. Obviously, that becomes more difficult today, is the discerning signal from noise, or (as you put it), what is relevant? Right? We have all of these feelings or intuitions, and trying to discern which of these are actually giving us information that's relevant for our decision, and which of these are actually, you know, deep-seated things that are affecting us or maybe steering us aside? I love how you talk about the power of externalization, that if you have this query you can get at, well, what is the information that will actually change my decision? That's a very simple one that I've done with clients. You mention conviction. Well, I say, "Well, from zero to a hundred percent, what's your level of conviction?" Just put a number on it. The actual number does not matter all as much as, "Okay, well what would lower your conviction? What would raise your conviction?" And if there is a feeling or new information that wouldn't change it, then by definition, it's irrelevant.
Denise (08:54): Yeah. There's a whole body of work called emotion differentiation and emotion granularity, and what that basically means is the more you can differentiate among your feelings and emotions—which we can consider synonymous, it's just a matter of intensity—the more you can be granular. So differentiate is like, is it fear, frustration, disappointment? Granularity, it—Well, take the fear category. Is it worry or is it panic, or terror? Or, on the other hand, bulletproof. You know, the opposite. I think that fear-to-confidence thing exists on a spectrum. But just being able to put the feeling into words.
And even the attempt to put it into words. Like, you mentioned to me earlier, "What am I feeling and why?" Like, what am I feeling and why? It's a simple thing for me to say, right? It's not that easy to do. But if you do it, and you've learned to get it right or mostly right, you'll get more information. If you get the impulsive feeling correct, like, "I feel like this because I'm afraid of that," it oftentimes loses its motivational energy. Which, you just go, "Oh. Well, I don't want to do that because I want to prove to my mom that I'm as smart as my older brother." Or whatever, that has nothing to do with this. But until you externalize it, to use your word, it has an urgency that it wants you to act it out. And then you go, "Why would I do that?"
Chris (10:29): It seems to me—lemme know if I'm understanding this right—that we need to feel our feelings. That if we deny their existence or don't discern what the source is, we're doomed to act them out in contexts we might not want to, but if we give ourselves an opportunity to admit what's going on, to understand it, to work with it, presumably we can de-fang it. Right? It no longer holds power over us. Is that what you—
Denise (10:55): You have a shot at, you have—Like if you suppress and don't want to feel it, sooner or later you're going to act it out. Period. I don't care how many days or weeks or months in a row you're disciplined, like, you're going to act it out. Or you're going to act it out outside of trading, or you're going to act out something outside of life into trading. A much better way is, like, to feel it. It's a skill to feel one's feelings, and quite a few people have been so trained not to that there's a process to learn the skill. And there are inhibitors also in the process, in addition to having learned not to. But yeah, just literally the first step is—I'm gonna say this, because some people are already wondering, I know—is just be willing to. Like, "I'm willing to feel all my feelings." Like, nothing bad's going to happen actually, believe it or not. We fear feeling them.
You know, I'm a big Cleveland Browns fan, so I'm in Browns Twitter, and someone was just tweeting at the Browns that "they need me," you know. And I'm like—Look. In their attempt to be fearless, they're just showing they're afraid of their fear. Which is what happens. You know, it's respectable to say we're fearless, but really what you're afraid of is feeling the fear, like somehow if you feel it you're going to act it. And it's literally the exact opposite. So, yes. Feeling our feelings, putting them into words, understanding what they're really about, being able to sort and categorize, like, "Well, this one's about that, and this one's about that." Or what often ends up being the case is you have a strong feeling, and some percentage of it is your psychology, is your self-image, is your fractal, but another sixty to seventy, eighty percent of it is your market read, and being able to say, "I'm going to tolerate my fear of being criticized, because I actually cognitively know that's irrelevant, and I'm going to act on this pattern recognition. And I'm going to be damn nervous when I'm doing it, but I can be nervous. Like, the sun's not going to crash or anything."
Chris (13:01): So this improvement of a skill. I think that's such a valuable framing for anything, is that you can develop the skill and improve that skill in anything, and it feels like a lot of motivation to continue to invest effort into something, is to realize that we're making progress. So I'd love to hear more, you know, how is this skill trained? How, what have you seen work for someone to improve at this, and how does someone know that they're making progress?
Denise (13:27): Well, from the moment I started speaking publicly about this, I have noticed that sometimes people hear it and they can do it. You know, it clicks and they start listening to their feelings, and they end up saying things like, "You know, I was kind of always using my feelings, but I couldn't admit it to anyone." You know, and all of that is however they were raised, it wasn't so shunned for them to be able to—Other people can really dive into learning about it and get better. Other people (a lot of people, admittedly) you know, need help. You need another human being to help you understand this very human facility. So someone you're talking to who's asking you questions and who can see from the outside that you're probably feeling one thing even though you think it's another or you think you're not feeling anything. You know, and then it becomes, "What's that person's method of helping you and how do they ask questions and is it effective and how do they interact with resistances and defense mechanisms that were originally there for good reason?" It's a question of, you know, maybe now as a forty-year-old adult, do they really help you anymore?
So honestly, it's everything from some people can hear it and make sense of it to other people are coached for years, and kind of everything in between.
Chris (14:57): I got this one from my partner, actually, when she coaches me, as all good partners do. It's, "The more rational you are, the better you are at rationalizing your current behavior." And so what you describe is needing someone who can call you out and listen to what's going on. Right? Because especially when we're worked up, when we're being overcome by fear, disappointment, frustration, one of these emotions, our perception becomes distorted. So needing someone who has the implicit permission to call us out and to call awareness to what's going on, we would normally just overlook or overwrite that part ourselves.
Denise (15:35): Mm-hmm. I mean, there is such a thing in psychoanalysis—Or at least in modern psychoanalysis. Modern is different than Freudian in a lot of ways. Like, Freudian would try to bust through all your stuff to like exactly what in your childhood has caused you to do this. Modern is not so much that way. It's like, work with the person and just help them to have new emotional experiences that they can draw on. But any event, there's something—And I know modern at this point better than Freudian, but—called the intellectual defense. Some people have the answer for everything, and it makes perfect sense to them. That's like the trickiest client. I had a guy, he's a private equity guy in a firm with like twelve partners. They opened a new fund, and he's one of the few that didn't get the bigger, newer title. So he hired me to help him like improve his leadership and his communication. He's wonderful, I've been working with him for it'll be two years in January. But intellectually defended is, against really understanding—Like, an answer for everything. I've gotten to the point where I just tell him that now. "You've got an answer for everything."
But I know with my modern psychoanalytic training that you don't actually want to bust directly through someone's resistances. Like, I don't want to hit him over the head in the way some other famous coach might do. It doesn't do any good, really. Not going to help the person along. You've gotta kinda guide them little by little.
Chris (17:10): In Market Mind Games, you talk about the power of story, and something that I've witnessed in my own poker play and trading is as soon as I get caught up in a narrative about what's going on, I'm in real trouble. So I think about this as paying attention to the chart or how I'm doing on the current session or the current quarter, whatever scoreboard you want to use, and trying to get back to where I was before or to keep this current narrative going. What strategies do you use to help clients keep their eye on the long term and not get caught up in some of these stories that can distort their decision-making?
Denise (17:50): I try to ask really good questions. And sometimes I might say, "I don't know. It sorta seems to me like maybe—could that be?" You know, and I put it that way specifically, so as to not raise the defenses. But like, it brings to mind, I have a professional athlete client who's incredibly self-critical. I mean like, and I've been working with this person for a long time, and they are really seriously successful in their sport. But we were recently talking about their publicity. They don't get the publicity they deserve, given their—And I pointed out that someone I know in finance PR, you know, looked at their Instagram, looked at their publicity, and thought, "Why doesn't this person got a way bigger profile?" And then instead of saying, "Oh, great idea! Can I work with this person? What can we do? What are his ideas?" "Oh my god, I screwed that up. I hired the wrong person." I was like, "Yeah, no, you did not hire the wrong person." But that's getting caught up in that narrative. Like, whatever. It's a learning experience. You know, you hire somebody that doesn't work out, you find somebody that does a better job for you. It's not—you didn't make a mistake, but totally absorbed in the narrative.
And that's what people do in the market, because you know, you're taking trades or investing and the market's doing what it's doing, and you can put any narrative on that you want, and the market's going to participate. Like, it is. And if you're just in your own head, you have like no way to get out of that. Right? And what people will almost always try to do is perfect their system. Right? Add another indicator—add another model, like, do more work. I mean, I've seen that in hedge funds so many times. You know, "Stay up all night tonight and do all the analysis on what so and so and so in China is doing and come back to me in the morning with a recommendation."
Agh. In any event, I mean it's human nature to tell a story, and we all see ourselves in a story. Back to, we all have a self-image of where do we fit and then how is authority going to treat us in the mark as an authority figure? You know, like how you expected to be treated by authority or you know, really famous people or people with high authority—what you expect to get from them is gonna be what you expect from the market. So it helps to know that you have this expectation going in, which is irrelevant. And I'm like, the market doesn't know you exist, and it can pay you or not pay you.
Chris (20:31): The quote that I love is that expectations are a prison. Right? Once you place this frame around what's going on, you're only going to find evidence that confirms that frame. You're gonna miss anything that goes against it, so being very careful about using your expectations to determine your perception. It seems like a lot of this, what you talk about, the quest for a perfect system, is almost trying to regain a sense of control or to cope with the inherent uncertainty and ambiguity that goes with trying to predict an extremely complex adaptive system, which can't be done. Are there any strategies that you've seen for helping people cope with this uncertainty ambiguity to have a healthier relationship with it?
Denise (21:21): I've actually had people—How do I—I've done this in workshops, where I've had people create some piece of art around their distaste for the ambiguity/uncertainty. So like, write a song, write a poem, draw a—I mean, I can't draw to save my life, but, literally. But anything. Literally, no one knows, and what we do know is ambiguous. I say that. I like, remind, you know, serious people who manage billions of dollars. I remind them of that on a regular basis, and almost every time I say it, "Well, you know, you don't know right now but no one else does either." There is silence. There, and you can tell—
Chris (22:08): Inconvenient truth.
Denise (22:10): Yeah. You can tell, they're going, "Grr, wait, wait." No. You don't know. Like that's actually an advantage, if you can just remember that you don't know, neither does anyone else, so let's navigate it as best we can. And that's it. Like, you've gotta learn to love the adventure of it. Well, you don't have to, but it's helpful if you learn to love the adventure of it. Which by definition, you know, has to leave you open to being wrong. So, back to the art. You know, write a poem—there's somewhere buried on our website, 'cause it was like over a decade ago, there's a poem that a client wrote in a workshop about ambiguity, and it is hysterical. I had, I did some workshop, you know, it was like online, and it was like online on Friday, a week apart, and that was one of the assignments. And this guy came back with this poem that absolutely was a hands-down winner.
I can't recite it. And I couldn't even find it on my website. If Tasha wants to find it—Oh, look. Just like that. "Ode To Ambiguity." Tasha, you're amazing.
Chris (23:13): It seems like the largest narrative of all is the narrative of identity, and what you describe is this, how do you stay in this game for the long-term is almost separating your identity of who you are as a person and who you are as an investor and a trader, and that way mistakes being wrong aren't threats to your own identity, and if you're able to maintain that separation it allows you to be curious and it allows you to explore what reality is actually telling you versus what you actually think is going on. So I wonder about your thoughts there. I mean, obviously, psychology has so much to say about our identity and our self-image and how we see ourselves affects how we do things. Do you see that with successful traders, that they're able to maintain this separation of who they are as an investor and who they are as a person outside of the game?
Denise (24:11): Would you be mad if I said, "No"? You know, the thing that I'm constantly reminded of is we're all human beings and we all by definition have some sort of insecurity, 'cause, you know, by virtue of being a human being, in an environment that's like from a decision point of view impossible, yet some people do it. Right? So I take it from the other point of view. Let's dig into that identity, and figure out which parts are really about your market performance and which parts about who you were when you were twenty years old, and who you were taught to be growing up. And so that we know, like, "This set of feelings goes in that bucket, this set of feelings goes in that bucket, this set of feelings goes in that bucket." And we can tolerate the hits to our identity (I've called it a tick-by-tick assault on your ego) in deference to a more here-and-now prediction about what this price action or these set of factors is telling us.
So, there may be other ways to do it. Like, better ways to do it. But like, people can detach. That never worked for me personally, being an introspective only child who had nothing to do but think about why she was the way she was growing up. Not a random thing that I have a master's degree in psychoanalysis. So I just take it from the other angle. But what you get ultimately is you can neutralize that somewhat. Or you can neutralize it enough to navigate the market, and then as you do well you create a new emotional experience that can be an antidote to the early emotional experience, and you start to gain a different sort of view of yourself.
Chris (25:58): Talk to me about the concept of psychological capital and psychological leverage. I thought these were so profound.
Denise (26:06): You know, when I started trading back in '94, I read all the trading psychology books, and yeah. I get it. Plan the trade, trade the plan. And I was always by nature a disciplined person anyway, being an only child who had nobody to play with and nothing better to do than my homework. But I could see that like there was a point at which it doesn't work. Then I learned from an economist that when you're faced with uncertainty, like, your brain is compelled to make a decision. This is a big deal, everyone should listen to this. When you're faced with uncertainty, it's physically uncomfortable. Like we were already talking about. Like, we don't like it. And if you make a decision, it momentarily makes you feel certain, so it momentarily puts the discomfort of the uncertainty aside. So you feel better. And then you go, "Why the heck did I do that?" Well, because you were actually assuaging the uncertainty.
So, anyway, back to the question of psychological capital. When I first talked about this, it was literally just because I had heard that you had to have emotion to make a decision, based on Antonio Demasio, Descartes' Error, frankly. And some other actual academic research he did. And I was like, "That changes everything." And then when I started to think about it, I was like—"Wait a minute." Plan the trade, trade the plan, be a hundred percent disciplined, take it—all of that is asking us to be a robot. But if we were really a robot, we couldn't make a decision. So there's this whole other dimension, and it's the other dimension that makes us successful. Granted, you have to have a decent plan, like, or decent understanding of the market. But it's how you execute. And I'm like, wait a minute. If it's how you execute, then there's this whole other kind of capital that supports how you execute that's separate from your plan.
And so I just like, that's psychological capital. And it's the thing that makes it—Makes you do what you want. Now that was before, long before I knew that the brain is always predicting, and always predicting a future feeling. And what really happens is we have our data, analysis, and I don't—Whatever method it is. Whatever method it is. You think you make a decision on that data. You make a decision about how you feel about that data and how you think acting on it will make you feel in the future. That's what makes you do something. You don't know it, but that's what's making you do something. So that's this whole other category of information over here that can be analyzed, understood, leveraged, or ignored to your detriment.
Chris (28:51): And that it's multiplicative. I have a post called "Play To Win" where I said that people think of just, "Okay, I'm going to have this great strategy." Well, no. You've gotta think, how many, what are your opportunities to apply that strategy, and what's your ability to execute upon it? And if you have a low score in any of these three dimensions, you have a low score across the board. That your strategy is only as good as your ability to execute it. So ignoring this whole emotional side of the plane is completely shooting yourself in the foot.
Denise (29:23): Absolutely. Like, absolutely. And, look. The market is actually not that complicated. You know, it goes up and it goes down and it goes sideways depending on your timeframe. And depending on your timeframe, like, it can go down before it goes up or up before it goes down. Like, it doesn't actually do that many things, and there's an unlimited amount of opportunity. So there's a million ways to play the market and be successful. If you're going to have edge or leverage, make it yourself. Everybody can learn some method that a person who has the right mentality would be able to make money with. So do something that not everyone is doing, but is the thing anyway. Right? I mean, yeah.
Chris (30:15): And it's something that you talk about. Everyone's reading the same books, everyone's seeing the same Twitter feed. That you need to find a different dimension that others aren't competing on in order to find your edge, and this is the one that almost everyone is neglecting, and there's almost infinite depth in order to improve. So if you can put yourself in the position to make good decisions, whatever that means for you in terms of having the right energetic approach, having the ability to focus to go deep on things when you see a thread that's worth pulling on, that gives you the ability to trust the process, and that your portfolio, the performance at the end of the day will take care of itself if you put yourself in this position to make good decisions, but if not you are completely susceptible to that ability, and many times it will hurt you more than it helps you if you don't put the necessary attention into it.
Denise (31:17): Yeah. Yeah, yeah, yeah. Yeah. I totally agree.
Chris (31:21): And you really make the point that—This was another big paradigm shift for me in poker. So, background for you, Denise. In poker, everyone thinks of this in a similar way, is trying to create this perfect strategy. They're running all of their models, they're doing all of their regressions, and having this strategy that they can just robotically execute, and they're surprised when the results they have when they actually play are very different than the results they projected on their models, because they forget, "Hey, there's actually a human clicking the buttons." And the whole other meta-dimension of this is there's a human on the other side of the screen who has these feelings, who has these in-the-moment urges which can diverge from their long-term desires. And so my approach has been understanding that person on the other side of the screen and thinking about this psychological leverage that I have on them, that I can both make better decisions, be more disciplined for longer periods of time, but I can also sense when these urges are diverging and take advantage of that, because everyone's urges diverge.
Denise (32:29): Yeah, yeah. So when I first started trading, these guys were really fabulous to me, and they had all been on the floor but they were trading upstairs. It was 1994 in Chicago and they would always talk about, "Well, can't you see what they're doing? Can't you see what he's doing?" And of course to me at that point it was still a bunch of numbers on a screen, right? And I was like, "Who's the ‘he’? And who is the ‘they’?" It didn't make any sense to me. And then I did have some talent for it, which is how I landed there, 'cause these guys thought I would. But I didn't know why. And then this research was done at Caltech that showed basically people who were good at predicting price action were using theory of mind, which is a psychological term for you have a theory of the other person's mind. So I was like, "That's it." And that was the ‘he’ and the ‘they,’ and oh yeah, really, it is all other people, and even though there's a lot of algorithms, behind those algorithms there are actual people. And I've had drinks with them, and they talk about recalibrating their models, sometimes on a daily basis. Which means it's like discretionary trading with a robotic arm.
So you're exactly—It's a social game. There's only value because people say there's value. There's only price change because somebody thinks the price should be different. So thinking of it in terms of who's gonna pay what is like—the brain research shows that's the thing to do. And whenever you talk to these guys who manage billions of dollars, they've learned to think in terms of sentiment. A word I've heard this year that I haven't heard so much in previous years, but seems to be everybody's word this year, is "positioning." Well, positioning is driving this move, meaning other people are in this trade already or other people are short—Wherever. People.
I mean, we did an intuition brain game around this study, this theory of mind study. That's on our website, too. It's really hard for people to play, because you basically have to totally divorce yourself from any thought and just answer with what your body tells you. But it uses the classic theory of mind experiment, which is shapes moving around a page, and if you can not listen to your cognition, not try to figure out the answer, your body will tell you what those shapes are going to do. Why? Because you've watched people walk down the street your whole life, you know, because we have this unconscious sense of story that we can analyze. And that's what price action is, is just which kind of market players are doing what.
The beginning of the year, you know, during the whole GameStop thing I had journalists calling me and like, "How can this be?" I don't know. There's I don't know how many millions of day traders on Reddit that maybe not any particular one of them has a lot of money, but, and they're trading as a group. That's a new group. Melvin Capital probably wishes they had more respect for that group than they did.
Chris (35:29): A lot of things that go on to be big were dismissed for a long time, right? Dismissing things that feel like toys, that feel like play at your own peril. You bring up an interesting point around noticing emotion in your body. I imagine a lot of this audience tends to be—they tend to lead with their mind, and I know personally I forget the rest of my body is there. It's like I'm just a floating brain in a vat. So something that I've actively worked on that, you know, yoga and meditation have assisted with, obviously, it's a long journey, is just being conscious to my body and the signals that it's telling me. I would love to know personally or observationally what types of signals you see where something happens in your body and it tips you off that there's something that's going off in your emotions?
Denise (36:19): Yeah. So just as a backstop to all of it, there's actual research that shows the better you are at interoception, which is knowing what's going on with your body, the better trader or investor you are. So there was like research done in London, the better traders could track their own heart rate, the better trading decisions they made. You know, George Soros is famous for saying he got a pain in his back and he knew he should get out. You know, again it's like, be willing. Practice noticing outside of trading. Like my classic example is your wife sends you to Home Depot on Saturday, and you're like, "Oh my god." You know? The traffic and the lines and all of that and like you're gonna be annoyed and irritated and wanna get back to watch the football game or whatever. Like, notice. Because your heart rate got up, or your palms get clammy. Like, learn to pay attention. In the way that golfers do. Like, we don't want to pay any attention to our feelings, but man, we'll pay a really indescribable amount to learn to swing a golf club. To, what? Our bodies. It's the same. You know?
Now you have a sense of something. You know, hot or cold. Then you have a feeling, which has got a little bit more intensity. Like it's got some meaning. Like, "I feel like I should hit that ball to the right of it, 'cause the wind seems to be coming from whatever direction you would want to hit the ball to the right," to, "Oh my god, I can't believe that happened." Those are all physical experiences, just at different level of intensity with a different amount of information about a different thing. You can develop a dictionary on yourself of what kinds of you know, experiences below chin you have in different circumstances. And the more you do that, the more you're able to act out of the sense feeling that is unconscious pattern recognition and less do you have to act out of the impulse which is some very energized thing to avoid some disaster in the future, generally. Imagined disaster.
Chris (38:38): Yeah. This mindset that everything we do is an opportunity to be aware, to practice. And getting away from this mindset of, "I'm going to turn it on when I need it." That the more examples, the more evidence that we have that we can tap into this, the more we will be able to trust this intuition, and thus to act upon it. Because all of these opportunities are temporal. We can't wait for perfect information in anything, but if we have evidence, "Oh, the last time that I felt this way it went really well," or, "The last time I felt this way I really overlooked that thing," that can act as a trigger for ourselves to go deeper. To kind of snap us out. So yeah, something that I try to think about is if I want to be a high performer, I can't just be a high performer in one area of my life, it's everything ties into it. Everything is this opportunity to practice.
Denise (39:36): Yeah, yeah, yeah. I mean, you know, that saying, how a person does one thing is how they do all things. It's really true. It's really true. I was gonna say something, and then I forgot what it was. So.
Chris (39:49): You—Do you think that context plays a large role in decision-making? So where we are, who we're with.
Denise (39:55): Well, context in markets is what—Let's just take the sort of cleaner version. You know, no price means anything except in relation to previous price. Like, if it didn't you wouldn't know if anything was up or down, just to be blunt, you know, black and white about it. But like a price five minutes before U.S. unemployment has different meaning than ten minutes after. Like, the implications (which is what we're always looking for) are always colored by the context, by the pretext, you know, by what came before. I mean, you can't—Everybody try to think about it. Pick a price of any asset. Glean nothing about it other than that price. What would you know? Wouldn't know anything. If it's cheap, expensive, up, or down, you would know nothing. It's that way with everything. I mean, the latest brain research shows, you know, we're always predicting, always predicting a future feeling all on past experience. It's only the past that gives anything meaning. Like, because it's all relative to either what's already happened or what we've learned from the past.
Now, what does that mean? There's an opportunity in there to use being more in the present, which will still be using context, but untangling your own personal past or the last trade or investment or the fight you had with your teenager or whatever, like, from the moment of your making the risk decision. There's context and there's the feeling and emotional context, which I talk about in the book. Which is like the vast majority of the decision input.
Chris (41:54): And it seems you're saying that it all begins with developing a sensitivity to it, that that becomes a license to be able to change it, to create a context which is more favorable.
Denise (42:07): Well, yeah. My way of looking at the world and what, you know, what I've done to help people is to sort out what's what. You know, which expectations and which feelings that go with those expectations are really about your market context and not really about your self-image context. 'Cause in a perfect world, if we could divorce our self-image from the expectation that'd be great. Except that we generally can't do it.
Now, people are going to say, "Well, I know so-and-so and I know so-and-so." Like, what happens is you go from a novice to an expert, you develop confidence. And what confidence tells you is you've faced these challenges before and you've come out okay or on top or you've won. Like as you learn to play poker, you develop confidence that you knew how to play poker. Like, that allowed you to, what? Play poker better. Like, that's the process of going from amateur, novice, to expert. You develop competency, you have an ability to succeed in some set of circumstances.
So someone who looks like they have no emotions or looks like they're totally fearless or resilient, they just feel like it'll work out. Why do they feel like it'll work out? Maybe like my client I mentioned earlier, you know, he had a growing-up experience where everything worked out 'cause he was like forty times smarter than everybody else in the room. But most of us don't have that experience, right? So we go through some process to develop confidence like you do—Think of it like a sport. Anybody that's done any sport, you went from not having a clue how to hit the ball or ski down the slope or you know, to knowing you did that well. Like little by little you develop confidence that you can do this thing.
Um. I don't remember what you asked me. 'Cause I got off on my confidence kick. But.
Chris (44:00): I love it. Last question, and then I have a couple from the Q&A before we wrap. We talked about externalization before, and the power of having an objective record of our decision-making so we could go back and improve our process to be able to capture some of this context so we can be better recognizers of patterns in the future. For someone who's looking to begin or amplify this practice of tracking their decision-making, what recommendations would you have?
Denise (44:31): One of my favorites is—And this may happen in other programs, but Microsoft OneNote lets you tag. Like you write some text and tag it. And you can even create custom tags. So like, back when I was trading I had my trading journal in Microsoft OneNote. You know, each week was a section or, I don't remember. But, then I'd tag it, and then like, "That was stupid, Denise," or bought right before it made a new high as opposed to—Whatever. You can create them. You can go pull a chart out, and then you can see not so much the text, your cognitive explanation of what you did, but you can see a chart of your tags which is kind of like a tagging a chart of your psychological capital. You can see which mistakes you made the most often.
What I would find is that I would be, like, mad at myself for having a so-so week, and it was inevitably like one or two trades out of fifty. Like, that tells you something when you look at your actual data and see it's those one or two times you got stubborn, you know, but forty-eight out of fifty times you did a decent jobs, like, well, I really don't wanna get stubborn anymore. But that's my best single tip for that, is Microsoft OneNote and tags. Or any other sort of software that does that. That's the only one I know.
Chris (45:52): Cool. Got some good questions here in the Q&A. Let's start with this question from gt. So, gt says, "What's the best way to change your self-concept from a successful small trader to a successful big trader? Is there something that you've seen that people are afraid of taking the next step and going big, and thus they hold themselves back?"
Denise (46:12): Oh, that's really, really, really, really common. You've gotta figure out why. Like, what would it mean if you got to the next level? And usually it means, like—There's usually threats within it. You know, how will family and friends feel about it, what will my obligations be, you know, who will want money from me. There's a series of threats in the next level. Figure out what they are, and if you're ready to tackle them. You know, we can get more complicated than that, but I think that's a good next step for someone trying to make that next step. "What's the threat to me?" And what would you have to do to navigate that threat? I can get more complicated, but
Chris (47:00): Yeah. It seems like it goes back to acknowledging what's going on and being able to deal with these perceived threats can allow you to be more confident in what you're doing, to move from an avoidance mentality to more of an approach mentality.
Denise (47:15): Yeah. And lemme just say this, it's a truism (and I realize I'm talking my book here) but it's also true: almost everyone has feelings they don't realize they have. And it's helpful if you have someone helping you figure out, without any judgment, just what they are. You know, they're below the surface of consciousness, or they're semiconscious and you're avoiding them or they're completely unconscious. Like, and those are—You know, that's where the true leverage is. Like, ideally resolving some of them. Like—I just say, you know, I've had clients over the years who are conflicted about their family in small-town Nebraska, if they make another million dollars and continue to live in Sweden for another five years. Like, they don't really know it, they just kinda, they say, "Oh, I miss my family," or, "My family misses me." It's more like, "Do I fit?" "Who am I?" You know, back to the very first thing we talked about. Self-image.
But you start with, really, let's—first of all, just try to imagine the next level. Often you can't imagine it. You want it cognitively, you can't imagine it emotionally. But like try just, you know, courageously, and go, "Well, what would it feel like? And what would happen?" And don't judge any of it. Just try to—You're just trying to figure out what's in there. And then go—Sometimes, you've gotta—What you think would happen, you're like, "Oh, I'm not really afraid of that."
Chris (48:40): Next question's from Jack asking about how to trust his feelings more. So, Jack noticed that sometimes some trading decisions he makes he feels very calm, but other decisions feel forced or rushed. What recommendations would you have for Jack, who's had this realization of very different feelings depending on the trade?
Denise (49:04):Yeah. What am I feeling and why? Just start asking yourself that constantly and writing the answers down and then correlating it to what happens in the trade. And to connect it to what we just said a couple minutes ago. You can do it in Microsoft OneNote and create different tags for different types of feeling experiences. And then you start to have a better dictionary on yourself of which feeling means what to you.
Chris (49:32): Yeah. And just recognizing that these feelings have data. If you're feeling rushed or stressed about a decision, maybe that can be a trigger to pause and to take a step back and, as Denise said, if you can figure out why you can figure out something that will allow you to get past that, or perhaps prevent you from making something that you might regret later.
Denise (49:54): Yeah. I was gonna say, well the rushed is probably impulse and the non-rush—But the way he asked the question I wasn't sure that was the case. It sounded like maybe all of those feelings could lead to good trades. I will say this, over the years—I mean, this is anecdotal from this side of the chair, but it seems like over and over and over and over again, the best trades come out of this calm sense of, "I'm sure I'm right, and I must be wrong 'cause it can't be this easy." And being able to like navigate through the coexistence of those two feelings.
Chris (50:32): Yeah. I think it's something that's implicit, but it's worth stating, is that all behavior, all feelings are relative to a baseline. So if you understand how it usually feels, you can be more sensitive to any deviations from that. And again, the importance of the record, because is a rushed decision a bad decision? Maybe. Maybe not. Is a calm decision a good decision? Maybe. Maybe not. But if you have past evidence that you've found correlations between feelings and results, that contains a lot of information.
Denise (51:04): That's the—If you have the evidence. If you've paid attention to yourself, tracked yourself, you know, recorded it, contemplated it, and then you know, like—I just got that feeling, 'cause I just got these three pieces of information. "Okay, that means—" That might be rushed, but it's not, really. It's the result of a lot of work you put into that moment.
Chris (51:26): Cool. Question from Al. I think everyone's interested in this, we've covered a lot of ground from psychology, as we always do with Denise. Any books or academic literature you'd recommend for someone who wants to go deeper into these topics, particularly the difference between impulse and intuition?
Denise (51:44): Emotional Agility by Susan David is really good for that. I will tell you lately, some of my clients have been complaining about her audio voice, complaining about the tone. So I don't know about that, but her basic idea that you have to have all of your feelings and learn to sort through them. Another one is Lisa Feldman Barrett, Seven and a Half Lessons About the Brain. Lisa's gonna say you're always predicting, you're always, always, always predicting. She is not going to deal with unconscious emotional predictions. That's Brian Knutson of Stanford, but he hasn't written any popular literature yet. So. I mean you can look him up, but like even I get lost in some of his most recent meta-analysis summary paper he's putting together.
Chris (52:32): Last question is from Steve. Steve wants to know, what do you think is the best time to engage a coach, someone to be this objective third-party observer of yourself and uncover some of these emotions, some of these biases, some of these ways that you're steering yourself in the wrong direction. Is there a prerequisite, is there a correct timing with this? What have you found works as far as initiating this type of relationship?
Denise (52:55): I think it's when you—You know, at least, you know, you have a sense of what you're doing, you've had some success. You know, or like you can be successful for part of a day and not for another part of the day, or you know, but you can see that you don't always do the things you wanna do. Get somebody to help you. I mean, if I think back to my—Well, I kind of had a built-in coach in a way, though, where I was trading, so I guess that doesn't really count. I will tell you, when the—most of the professionals, you know, these guys that are managing more than a billion dollars, most of them call when they've had a bad streak. Some of them call in advance. Like, I just got a guy that left one fund to go to another fund that's gonna let him manage a fund within their fund and then they're going to back him to spin out his own fund. And he's like, "Okay, I finally got into this like goal I've had, and I'm gonna get a coach."
So either—Like, I don't know. If you have some sense of what you're doing but you can't always do it, a coach can probably help you. If you need to get out of a mistake, for sure. I'll just give you a really quick—Like, if you're in some sort of slump, go back to when it started and forget everything in the middle. Figure out why it started, and which part of like, "Oh my god, I'm so mad at myself for back then." Because you're trading off of that, you're trading off of your feelings about that, and then you're just spiraling downward. It's true for traders, athletes, whatever. Go back to the beginning.
Chris (54:25): And not thinking about something as trying to fix it, but more the positive frame of, "I'm already doing well, but maybe I could be doing even better." And when you're in something that's really competitive, any edge counts. You don't know what you don't know, and especially when it comes to emotion, to feeling, assume that there are things that you are doing that you are completely unaware of, so you don't even know how you can be helped.
Denise (54:56): That's the truest thing that was ever said here. Assume you are doing things that you are completely unaware. I mean, it's a different way of saying what I said, we have an unconscious and we don't know it. But like, it's the truth. Everybody wants to spend more time on their system, but it's usually not where you get the most bang for the buck.
Chris (55:13): Opportunity cost. Everything that we're doing is coming at the expense of what we're not doing. It's very tempting to go back to the well, to do the thing that gives us a sense of control, that we know we can do. It can be a little bit scary to wade into the waters of the uncertainty and the ambiguity, but that's where a lot of the opportunities lie.
Denise (55:34): Absolutely.
Chris (55:36): Great. Thank you so much for being here, Denise. Wonderful opportunity to talk with you, to go to the source. Any final thoughts, any place you'd wanna send listeners?
Denise (55:44): I mean, you could stop by our website. We are doing a workshop. I'm gonna do a comprehensive public workshop in a way I haven't done before, which is Market Mind Games Live, but there's zillions of books and interviews and whatnot on there if you wanna study on your own. But I will just say, "What am I feeling and why?" Like, learn to answer that question accurately. And it's like I said, easy to say but not so easy to do. But if you do it, and when you do it—I'll say one more thing. Like, if you're really agitated, and you can't—And you know, something's distracting you or whatever. Try to do this. "What am I feeling and why?" When you get to the real "why," you will no longer be agitated.
Chris (56:28): Love it. Thank you so much, Denise. Thank you all for joining us. At Forcing Function, we teach performance architecture. We work with a select group of twelve executives and investors teaching how to multiply their output, perform at their peak, design a life of freedom and purpose. If you want to learn more, you can download our peak performance workbook for free at experimentwithoutlimits.com. Subscribe to our newsletter to find out about upcoming events with amazing guests like Denise. Our next Forcing Function Hour is going to be on November 10th, so mark your calendar. I'm gonna be talking about sizing your bets using Kelly Criterion with Nicholas Yoder. Hope you can join us. Thanks again, Denise. Thank you guys. See you again soon.
Denise (56:56): Thank you, Chris. Appreciate it.
Tasha (56:59): Thank you for listening to the Forcing Function Hour. At Forcing Function, we teach performance architecture. We work with a select group of twelve executives and investors to teach them how to multiply their output, perform at their peak, and design a life of freedom and purpose. Make sure to subscribe to Forcing Function Hour for more great episodes, or go to forcingfunctionhour.com to sign up for our newsletter so you can join us live.