Self-Reflection - An Essential Analytical Skill with a Brief How-to Guide for Professional Investors

Self-reflection: Looking at the Psychology of Finance Through a Psychoanalytic Lens

Fifth in a Series

Self-awareness has tangible business benefits. It allows you to know your what your blind spots are, what triggers an emotional over-reaction, what makes you risk too little or too much, what psychological state you’re in and what the implications of that are and when you’re fatigued or not functioning at your best. All these psychological elements can distort your assessment of a situation and deform your decision-making process. Self-awareness also allows you to know how you’re perceived by others, an essential aspect of every successful negotiation.

While self-knowledge [i]comes more easily to some than others, there is a distinct, definable analytical process that leads to it—self-reflection. Just like investors develop analytical skills to interpret activity and anomalies in the market, learning and practicing self-analytic techniques can help you develop a greater sensitivity to patterns, trends, and anomalies in your psychic state. Self-reflection needs to be an ongoing mental process, operating most of the time in the background. It isn’t something you do on a fifteen-minute meditative break.

Reflection and insight are the foundations of psychoanalysis. They are teachable skills that can be learned and honed over time. Here is a how-to guide to get you started on penetrating the less accessible aspects of your own mental life.

Practice these techniques:

Practice turning your mental gaze inward and start asking yourself questions. What just happened? What am I feeling? What am I thinking? Why did I do that?
Try to let your mind loose—ask a question but don’t force an answer. Let a question like “What’s going on with me?” hover and see what comes to your mind. Avoid quickly foreclosing on an answer because the first answer is usually not the complete one. See if images, memories or thoughts pop up in your mind. If you are able to visualize your mind as a space, check the corners and out-of-the way spots to see if anything is lurking there in the shadows.
Don’t rush to a conclusion. Always ask “What else could it mean/be/signify?” “What else might have happened?” Ask “If this conclusion is wrong, what could be the answer?” Try reversing your assumption. For example, if you think “I felt anxious because my manager was mad at me”, try reversing it to “I am anxious because I’m mad at my manager” and consider whether that feels right.
Think associatively rather than in a linear manner. That’s how our emotional minds work. One thought or feeling is linked to another in an ever expanding and deepening network. Put something—an event– in the center of your mind—let’s say you broke one of your investing rules with bad results— and see what comes to your mind in relation to it. “I felt bored, and didn’t feel like waiting”. Or “I was pissed that my numbers were bad and I just wanted a win”. Do you remember Magic 8 Balls, where an answer would float to the surface? It’s kind of like that. Rather than the logical analysis we’re trained in, this is an exercise that allows different parts of your mind to make themselves heard.
When you’ve hit on an important and “true” insight it’s likely to connect with a thunk— “Oh yeah that’s it.” There should be a mild physical and emotional response that is absent with other hypotheses.
Once you think you’ve got something figured out (e.g. “I’m anxious because I’m angry”) go a step further. Ask yourself why that made you mad. Repeat the process of letting your mind loose (see #2). Rather than jumping to an answer, let your mind go and see what comes into it.
Keep going to more and more layers. Start with the insight “I’m anxious because I’m angry”. Then it occurs to you, “I’m angry because I was humiliated”. Good progress. Then, ask “Why was I humiliated to that intense degree?” Now you realize, “I was humiliated because I’m always extremely sensitive to exposure of a vulnerability”. Now you’ve got a useful piece of self-awareness you can work with. You know you can’t stand people seeing you as vulnerable, so you tend to overreact, become enraged; that makes you uncomfortable so you become anxious. Once you’ve gotten this far, it’s much easier to accept the feeling and control your reaction. You know, now, you hate being exposed as vulnerable, you’ll always be sensitive to that, but you’ll survive. This awareness gives you a chance to think before acting on your emotional reactivity. What really does the damage is the anger, anxiety and consequent impulsivity, not the fundamental emotional sensitivity.
Pay attention to sequences. Event>emotion>thought>emotion>action. Or emotion>action>emotion>event. Knowledge about your personal repetitive thought/emotion/behavior patterns is extremely useful because it gives you the ability to interrupt a destructive sequence. To get a handle on habitual sequences, start with an action you regret, like breaking an investing rule. Ask yourself what happened before that. “I had a conversation with R, another PM, and he got me feeling competitive. I wanted something to happen fast”. If you can identify that as a repetitive pattern, you can be vigilant, knowing that a conversation that makes you feel like you’re failing the competition is likely to lead to riskier bets. Alert to that, you can block action-consequences the next time you meet R in the hall and he makes you feel small. You’re basically substituting thought, in the form of self-awareness (understanding your emotional reactions) for impulsive action. The paradigm is “When I’m in this typical situation, I respond with this typical emotion which can lead to that typical action”.
Learn about different broad-stroke states you experience over time. Many investors cycle through periods of elation/ excitement/optimism and pessimism/deflation. Your mood cycles may or may not coincide with the market’s. Recognize what emotional state you are in, and know it won’t last forever. While you are in a given state, your thinking may be different. The cognitive biases you are prey to may not be the same when you are in an elated, excited state as when you are in a pessimistic state of mind. Learn how you think and make decisions in each different emotional state.
Accept that you are not rational. No one is. The point is not to make sense of your feelings or thoughts, but to get to know them.

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[i] I am using self-awareness and self-knowledge interchangeable. Take your pick. Self-reflection is the means to that end.