We have a tendency not to notice that our emphasis on numbers and logic leaves out a crucial part of the thinking processes we actually engage in to make decisions. In order to make the best decisions – and to perform at our highest levels – we need to get logical about the gap between where the numbers leave off and results pour in.

This gap contains many dimensions of what I can politely call “qualitative” data. It holds fragments of pattern recognition for example. These pull together to impart some sketch of the context of whatever uncertainty is presenting itself. A majority of the gap contains a “quantity” of the elements that lie on the spectrum of confidence to fear (or overconfidence to panic in some cases). Going a step deeper, this context of feelings – or the fC – contains a pattern, that is a multi-fractal representation of our basic world view, self-perception, expectations and beliefs.

Thinking at our highest levels – and therefore setting up our greatest successes – demands that we get systematic about understanding the gap at the end of the numbers – the messy, “qualitative”, feelings-context that we bring to all of our perceptions. It can be done.

The latest research shows that the long held “neuron doctrine” (neurons and synapses wire up and fire like a network) only tells a very very small part of the picture. Glia cells make up 85% of the brain, were present in Einstein’s brain at a proportion of 4x and do their work by broadcasting across the entire brain. It makes sense that the qualitative contexts of decisions and performance would be mediated therefore by this completely ignored (until very recently) part of the brain.

David Brooks as recently written about The Social Brain and R. Douglas Fields The Other Brain – both are good primers to understanding where the next leap in intelligence needs to come from – the gap at the end of the facts.

Earthquakes, tsunamis and literal fall-out – while we sometimes use these words metaphorically, we are now faced with their literal ramifications. We can’t escape the absolute uncertainty the world, and the tragedy-laden Japanese people, must deal with.

The first thing to do – if you want to make the best decisions related to however you are being impacted – is to embrace the uncertainty. Physically allow yourself to experience the anxiety it provokes. This will satisfy your brain that your conscious mind has heard the warning signal and it will lower the “static” so that you can think.

When faced with the unknown, the brain searches it databases of context to find a match. It tries to fill in the blanks with related information. Frankly, none of us have any true experience with this lack of contextual knowledge. Simply accepting that – consciously – will allow all of us to make the best decisions we can under the circumstances.

Our hearts go out to those already impacted and to those closest to the danger. Know that everyone around the world is pulling for you.

Oh how soon we forget…

The specially appointed Financial Crisis Inquiry Commission released their report yesterday and despite the importance of unraveling what really went wrong, the WSJ covers it only on page 4! Now of course, the economy is picking up steam and the stock markets are back above the levels of late 2008 … so maybe we can just forget the whole thing ever happened and…. but of course, almost all of us know where that leads… particularly in the era of QE2.

Phil Angelides, the chairman, says “The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire“.  Well yes of course, human decisions by definition must be at the heart of the matter. The question remaining however is what can be done to educate and induce better decisions – particularly in risk management – in the future.

Lots of talk right now focuses on behavioral economics – or the research that really tracks our choices. The idea that we make “rational” decisions obviously isn’t the real model of the human. What lacks however in the whole field of behavioral finance is the “why”. Generally the answer given is that we didn’t think hard enough but that just can’t be true. We thought as hard as we are capable – at least under the current model.

We are taught from early on to use logic, reason and by extension – math. But numbers look you in the eye and lie.

This strategy also doesn’t take into account what is becoming more clear every day – we make all of our decisions within a context of feelings. I call it the all-important “fC”. Those feelings – or these “fCees” (what is going to be the plural of that anyway?) – include our pre-existing beliefs, our confidence, our assumptions and our fears. Certain fears for example have been proven to be more motivating – the fear of missing out for one.

Understanding the financial crisis requires rethinking thinking itself. It requires understanding what an over-arching role feelings and emotions play in decisions about uncertainties in the future. This is what we are finding the brain does. It isn’t an argument I am making. It is how our brains fill in the blanks when not all the information we need is known. It is what our brain does when we are contemplating how things will play out in the future.

We need a revolution in our own conscious minds that makes us see ourselves as we are once and for all. We need to admit that how we feel makes all the difference in the world to what we do or decide.

This is the qualitative side of risk management. It is the missing piece that if employed by enough people, would prevent another crisis.

To quote The ReThink Group’s great intern, Clay Berry a senior at Rutgers, “The first speaker of the day,  Luiz Pessoa from The University of Indiana, talked about “How do emotion and motivation interact with cognitive control?” Pessoa noted how the older notion of emotion and perception/cognition being two separate entities was becoming OBSOLETE.” (emphasis mine!)

As we like to say around here, we need to re-think thinking altogether and this is why.

The implication of emotions (and feelings in our parlance) being part and parcel of what we think of as cognition and most importantly, intellect, are profound. It means that everything you were taught about overcoming, suppressing and disregarding your emotions is in fact not only wrong but puts you in the position of fighting the way your own brain is working to perceive, judge and decide.

This makes the trick however to re-learn how you think and to re-learn how to use your feelings and emotions as data first. The urgency to act you feel with emotion may be something else altogether. Maybe it is the urgency of a fire alarm to pay attention to a valuable piece of insight that otherwise if set-aside, you miss. And then your brain just turns up the volume!

Other cutting edge scientists have been saying that the old triune model of the brain (the one you hear about in behavioral finance and economics btw) – the higher cortex, middle emotional and old/back breathing-heart rate is out-dated. This is more evidence. Don’t believe it when you hear that your regrettable behaviors happened because your higher brain was been hijacked by your middle or lower brain. We mistakenly used the computer as a model for the brain – and we would NEVER say that the central processor was hijacked by the memory would we?

The computer model is wrong (something more more akin to a very complex network might be right) but the important part is to re-think the reciprocal and integrated role for body/brain/mind/feelings and emotions. Feelings and emotions are and can be treated as a separate, distinct entity – one with valuable information. None of us at this point in history were taught to work with them that way but it can be done. When you understand it, you have the whole user’s manual!

At the recent Neuroleadership summit in Boston, Lisa Feldman Barrett articulated a whole new view on the appropriate model for understanding our thinking and our feelings.

“Lisa challenged some of the most deeply held ideas about how the mind works in her session. She stated that Daniel Goldman’s theory on emotional intelligence is largely incorrect. Studies show there are no specific anatomical brain regions pinpointed for any of the emotions. The brain is a more integrated system than previously imagined, with thinking, emotions, mind and body all contributing to our experience in a holistic way.

We here at ReThink couldn’t be more pleased! This holistic view of “thinking” is what we are talking about with our tag-line of ReThink Thinking. We are glad to not be the only ones out there advocating for a total change in viewpoint!

The idea that emotions are old and separate and to be overcome just doesn’t cut it anymore. Logically it doesn’t make any sense anyway as to make any sort of decision, provide any sort of leadership or set out on any sort of adventure towards a goal you need some motivation and some confidence. Both are feelings! Motivation is wanting something and confidence is a feeling that you can get it or the decision will be right if you take it.

The new challenge then becomes how do you learn to work with the ephemeral and illusive qualities of feelings and emotions? How do you treat the physical, visceral experiences of feelings and emotions as data?

1. Truly change your mind about the conventional wisdom and decide that you will begin working with your brain/mind/psyche in this body/brain/mind way – no more dualism and no more tri-une model of the brain!

2. Begin tracking your feelings – feelings of all types: physical, emotional, intuitive.

3. Put yourself in situations where you can “hear” what you feel and continue the tracking (noting your observations).

4. Categorize these experiences. Name them (for yourself).

5. Resolve to always know the “fC” or context of feelings you bring to a perception, an analysis or a decision.

6. Use the knowledge of your “fC” to further inform yourself about your biases, expectations, nuances of knowledge and true reasons for believing in one option versus another.

This is a whole new strategy for many people. It is a systematic way to work with what seems VERY un-systematic. The irony is once you get solidly on the path you find that there are actually a relatively small number of feelings you experience and you can begin to use their categories to help you make better decisions and seize better opportunities. Most people also find that their personal relationships improve. (Honestly if I have gotten one comment to the effect of “My wife and family say I am so much easier to get along with… I have gotten a few dozen!)

This isn’t emotional intelligence, it is actually self and social-intelligence…  kinds of knowledge that can be leveraged in essentially an infinite number of ways!

… or so says the WSJ today. “It was 75% engineering and 25% a miracle,” said topographer Macarena Valdes as she was speaking of her own role in the rescue. I submit that maybe only 75% was engineering but the miracle portion occurred within Ms. Valdes’ brain!

She acknowledged using “gut instinct” to help guide the rescuers drills. According to reporters, “Even after about 30 probes failed to find the mark, Ms. Valdes stuck with a hunch: She always shifted the angle of the drill about one degree lower than recommended by geologists in the planning departments, to adjust for vibration in the drilling rig.”

Malcolm Gladwell wrote about gut instinct in blink but he didn’t really discuss it taking 31 tries to get it right. The focus there was on the “slice” or instant recognition. Think about it – how many of us would try 31 times without being overwhelmed with other feelings? Granted in a life and death situation, most of us would keep trying but the point I want to make is that our brains are very good at assembling pieces of relevant information into what I call “UPR” or unconscious pattern recognition. “UPR” is delivered to our consciousness via our bodies not our brains – that is literally why we call it “gut instinct”.

We however aren’t so good at systematically developing this skill so that we can use it reliably and pass it on to our junior colleagues. Because our brain is acting as a super-computer and processing enormous amounts of information, it is often hard for us to actually articulate what we are seeing or why. It is not impossible but we don’t typically take (or have) the time in corporate or trading situations to do so.

It pays however to take a look at how one can hone their instincts. Keeping logs of observations and the feelings or thoughts you have related to them is a good place to start.

For the past 50-60 years it has been popular to relegate the very relevant and powerful dimension of emotions to the category of “to be controlled”. On one hand, we talk all the time about how confidence, which is a a feeling more than anything, is so important in all domains: markets, politicians, sports…. and yet we fail to actually systematically and directly work with it or any of the other feelings that get in the way of performance.

What you say? We fail to systematically work with? Really? Aren’t there an endless number of coaches and methods for dealing with the vagaries of the illusive, ephemeral whims of confidence, fear and all of their cousins?

Well yes there are many people trying but I am really talking about an underlying coherent theory of what the subject matter is about and then the follow on logical approach to dealing with it. THAT we don’t yet fully have.

But we are close. The Boston ladies (forgive me in advance) Jennifer Lerner of Harvard’s Lab on Judgment and Decision Making and Lisa Feldman Barrett head of the Interdisciplinary Lab on Affective Neuroscience down the highway at Northeastern are both putting forward new conceptions around what we have relegated to “animal spirits”. Like me, these women don’t appear to be content to allow what on some levels we all realize is /the/ most important factor in all of our endeavors- the underlying context of feelings (or the “fC” as I like to cal it) – to continue going on being swept under the intellectual rug.

I encourage you to read both. We are going beyond animal spirits and we are moving quickly!

Here are a few links.

The Science of Emotion by Barrett.

A number of papers – but the “Government Executive” is a perfectly good place to start.

More importantly, I encourage to rethink feelings and emotions. Think of them first as data… then as something to be analyzed and understood and only third as something to fuel your actions – particularly when they are hiding outside of your awareness.

You hear it in the press and from ostensible experts all of the time – versions of “have no emotion”, “remove emotion”, or “emotion got in the way”.

What is so amazing about this is how they don’t notice that emotion is necessary for everything – perception, decision, action and of course, motivation. Somehow they think – well they really didn’t bother to think – that without emotion, basically everything is effectively nothing. You need confidence to move ahead, you need desire to get anything done, you need frustration to figure out a different solution to a challenge… and the list goes on.

What needs to happen is for the world to re-frame their view of emotion – completely and totally. Everyone needs to realize that emotions are only feelings – albeit feelings with information  – and that actions make things happen. Can we start saying “control your actions” while we start learning to use emotions as data?

A few moments ago, CNBC broadcast a weather report showing the best and worst case scenarios for the potential left and right track of Hurricane Earl. They projected it will “brush the East Coast on Thursday”. Weather channels, however, are saying “Friday” is the H-day. Who’s right?

There is literally no way to know – until it happens. And they have better data and models than any trader or quant on the planet. With markets, a flash crash or its cousin – the hedge fund implosion – can literally occur at any moment. A hurricane, on the other hand, will never take a sudden turn to the left or right…. never!

Why does this matter to market players? It matters because the human brain implicitly knows the difference between solving an algebra problem for X, predicting a hurricane and markets. In the latter two are successively higher levels of uncertainty and the brain is going to use context to make judgment calls about how to react.  Furthermore, a big part of that context is going to be in the realm of subjective level of beliefs regarding possible outcomes – some in NYC may say we haven’t seen a hurricane in years and some are going to be ordering from Fresh Direct for Wednesday delivery (me!). Why the difference? Beliefs basically … most will assume the recent past tells the future (the recency bias in behavioral finance). I on the other hand, as a consultant in better risk thinking, am trained to think about the risks others don’t notice. Having a very full fridge is a mild price to pay if the winds and rains become a real deterrent to going outside.

The point is that all market and trading models and plans need to explicitly leave room for judgment – judgment that also externalizes beliefs and confidence levels. Every model is uncertain – whether it be for Uncle Earl or for implied volatility. Getting comfortable with that up-front and NOT when you have to make a decision will serve your portfolio, your trades and your fridge quite well.

UPDATE -

30 hours later … and only two days from NYC and the forecast is LESS certain not more. Meteorological models now are showing a front moving in from Chicago that /could/ pull the storm westward and onto the NE coastline of the US.

Quiz – do we know more or less about Earl than we know about the markets? The Dow was up 250 or so points today…. what does that mean (besides bonds took the downward slope).

Two new terms you will (eventually) read in this book I am feverishly working on. (It’s true – I am having a blast and really want nothing else but to be able to work on it… hence, my choice of the word feverishly): “Travesting” – meaning the combination of trading and investing that everyone needs to be undertaking in order to manage their own portfolios and by extension their own futures and “fC” for the feelings context in which we make all of our decisions but certainly the reality with which we make “risk” decisions.

Others that might be new -

Emotion Analytics – internal and external – as risk management and strategy inputs.

Emotional Architectures – the basic reactionary/perceptual explanations we bring to any situation – both conscious and unconscious.