Why Professional Investors Need to Understand the Concept of Regression

Regression:  Looking at the Psychology of Finance through a Psychoanalytic Lens

First in a Series

We often labor under the misconception that once we reach adulthood, our level of psychological functioning is more or less consistent.  A sophisticated asset manager or investor knows that he must contend not just with cognitive biases (anchoring, recency, loss aversion, confirmation bias and all the other little demons the behavioral economists have identified) but also with “dangerous” emotional forces- greed, fear, the herd effect and so on.  He has also made an effort to identify some personal and unique decision patterns—watching out for a habit of being too impulsive, or too conservative, or risk averse, or overly risk tolerant.

But it is useful to add to this mix the concept of “regression”—defined as the “reversion to an earlier mental or behavioral level” (Merriam Webster).  There is no such thing as a steady state of mental functioning.  We humans are inherently fluid and changeable.  No matter how experienced, mature or calm, everyone is subject to the phenomenon of psychological regression from time to time.

Think about it this way.  You know what you’re like at your highest level of functioning.  How you think, perceive, feel, decide, anticipate, plan and understand. But when you’re tired, sick, freaked out about something at home?  It is inevitable that there will be times when you slide down from your highest level of performance to a regressed, or earlier level of psychological functioning.  In that regressed state, your cognitive and emotional capacities are not working at their best– most critically, decision-making and self-control.

It’s important to know (1) when regression is likely to occur, (2) what happens when it does, (3) how to recognize that it is occurring, and (4) what to do about it.

When does regression occur?

Well, it’s complicated.  There are generic and expectable triggers for regression that no one is immune to—excessive fatigue, illness, preoccupying anxiety.  If your wife is just about to have a baby, or your husband just lost his job, you better know that your decision-making capacity is not going to be at its best and your emotionality is going to be heightened.

Then there are other triggers for regression that are less obvious but also nearly universal:  group pressure is a key example of this.  Another is an experience of shame or humiliation.

And finally, there are idiosyncratic triggers for psychological regression.  You can be in a more regressed state on the anniversary of a loss or traumatic event in your life.  Some people get regressed when things are too good, or too exciting.  You need to learn your personal thumbprint—when are you personally most vulnerable to regression?

What happens when a person is regressed?

Just as there are generic as well as idiosyncratic triggers for regression, there are universal manifestations of psychological regression and some that are unique to you.

First, this is what happens to everyone in a regressed state:  your ability to think critically and exercise judgment is inherently lessened and more apt to be swayed by emotion.

Specifically, in a regressed state you are more likely to:

  • Make impulsive decisions
  • Rationalize breaking your investing rules
  • Have blind spots to crucial information
  • Reveal too much
  • Jump on the bandwagon
  • Fail to notice and override cognitive bias errors

Let’s break down “thinking” into some of its components:  discrimination, ability to see the big picture, ability to compare, categorize, rank, assess and predict.  Judgment includes, importantly, risk assessment and anticipation of the consequences of your decisions. Perceptual capacity is altered in a regressive state, though at times intuition and creativity can actually be increased. Emotions are stronger and closer to the surface; discipline is diminished.  Memory can play tricks on you, subtly weaving aspects of the past into the present.  And you’re much more likely to act before thinking.

Now, what are some of the unique emotional and cognitive states a person can slide into when a regression is triggered?  The variations are innumerable, since they are dependent on the specifics of an  individual’s personality and life history, but here are a couple of examples.  One client of mine  would become pre-occupied with office politics, especially what he saw as injustices, and lose his focus.  Another gets rebellious, chafes at the rules imposed on his trading, even the ones he’s laid down himself, and makes impulsive trades.  Still another gets anxious about irrelevant factors and can’t pull the trigger on decisions.

Of course, there are degrees of regression. Some regressive states can be quite subtle but nevertheless have a significant impact on decision making.  And to make it even more insidious, unless alert to the possibility you may not even be aware that you are in the midst of a regressive process.

 How to recognize that psychological regression is occurring

Recognition requires some practice in self-awareness and reflection. On a day when you lose your phone, leave your laptop at the hotel, and your suitcase at the restaurant checkroom, you definitely know you’re regressed.  (No kidding, all this happened to me in one 3-hour period).  Physical symptoms can be a clue—headaches, GI problems, uncharacteristic sleep disruption.  A flurry of errors and oversights is another sign—sending an email by “mistake” to the worst possible recipient, going through a stop sign because you didn’t “see” it, or forgetting to make a promised call.   A general feeling of being confused or muddled, or overly emotional can be a signal that you are somewhat regressed.

What to do about it?

Often, merely recognizing the state is enough to get you on your way back to your normal, higher level of functioning.  Wait till it passes, because it will.  You will return to your usual level of functioning.  If you can, take a break, get rehydrated, eat something, go home.  Meanwhile:

  • Return to your investing rules and follow them rigorously —it’s no time for improvisation.
  • Don’t make major decisions.
  • Stop yourself from making significant judgments, including about yourself and whether you’re worthless or great.
  • Be very alert to your vulnerability to group psychological pressures—it’s not the time, if there ever is one, to jump on the bandwagon.
  • Postpone conversations with anyone who is in a position to judge you or anyone who makes you feel more confused.

Regression is not another word for “stress”.  It is a complex state where a person functions at an earlier, more emotional, less disciplined level.  It can be triggered by stress, and often is.  But it can just as easily be triggered by a big increase in your portfolio or positive recognition from your fund’s Manager.

Understanding regression, knowing when it is likely to befall you personally, and having a response plan in place gives you a significant competitive advantage—because regression happens to everyone, and not infrequently.  The difference can be you know about it and they don’t.


Copyright: Invantage Advising

July 2017





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