Risk ain’t what it used to be – if fact, most of the time it isn’t even risk at all. Instead it is something called Knightian Uncertainty – or the fundamental inability of humans to know for sure what will happen tomorrow. Yet we have to make decisions about tomorrow all the time.

Reams have been written in the last decade about how we decide but the truth is we’ve still only got a map that /maybe/ is the equivalent of a 19th century world map. And I specifically say maybe because there is so much we know that we don’t know.

Having said that, there are a startling number of things we are learning that turn the conventional wisdom upside down.

1. Context is everything. Even something as definitive as 2+2 = 4 is technically influenced by context. (Depending on the first language you learned, your brain will process that arithmetic differently).

2. Most of our thinking happens below or beyond our awareness – i.e. in our unconscious minds.

3. We have to have emotion to make any kind of decision at all – so trying to set it aside actually hurts us because in effect we are purposely choosing to ignore what may be the most important factor.

And that’s just the beginning.

So think about the implications – for leadership, for tough choices, for markets and for life in general. We literally need to rethink thinking itself – a task I offer a strategy for in MARKET MIND GAMES.

Jon Corzine, who those of us who watch markets have watched as he moved from Goldman to the Senate to being defeated for Governor and now being defeated – reportedly by his own doing – as CEO of MF Global, evidently made a series of very bad decisions. Now Corzine is a smart man with market experience so why?

If Nobel Laureate Daniel Kahneman is to be believed, Corzine was probably thinking “fast” and not “slow”. He acted on his intuition about what European markets would do and then when that went bad, possibly allowed some sort of panicked-driven cover-up. (Without rushing to judgment, they do say it is always the cover-up don’t they?)

But does this concept of thinking fast or thinking slow and the characters of the brain’s ostensible “system 1″ and “system 2″ really explain it?

First, all decisions require emotion. This is an indisputable scientific fact. So to deconstruct any decision, the question is what emotions was Corzine feeling when he made or authorized was now seem to be very regrettable decisions. The easy answer for most people will be “greed” but that gets us exactly nowhere. What’s missing from the “rational man” model of decisions is the reality of regret – or the worry or perception of future regret. In market decisions this turns into a burning fear of missing out. In trading cases, this makes the idea of “reversion to the mean” (or things are just too cheap), way too appealing.

When that doesn’t work, it makes, “well if I get out now I will take a big loss and it will come back” way too compelling. In disaster scenarios, it turns into, “I just need to buy time“.

But here’s the secret, if the emotion involved was routinely reviewed as relevant data then Corzine or anyone else will be less compelled to take action driven by it. Totally revamping emotions as data allows for the evaluation of alternative emotions like “what if I am wrong“. And that is the only way to get out ahead of any concept or fact of our brain’s ostensible “system 1″ and “system 2″

…and no it doesn’t say “PDA” although it may be that “it” is also all about that too.

I am talking – PERCEPTION, JUDGMENT, DECISION & ACTION – the sequence we all go through all the time. It is the sequence that we all want to improve in order to make better decisions and create better outcomes. It doesn’t matter if we are a manager, a money-manager an athlete or the CEO of a Pro-Football team. We all want:

1) More accurate perception

2) Better judgment

3) Decisions that take the right risks

4) Actions that embody those decisions in a way and time that further our objectives.

And guess what? MOST of what goes into this PJDA is … uh-oh… unconscious. So, how are we supposed to get better at each step if in most cases we don’t even know what is influencing each step? That seems impossible.

It’s not.

Brain research shows that feelings and emotions – conscious and unconscious – occur at and within every step. This means that all you really have to do is resolve to become aware of what your feelings and emotions are. Ultimately, you will find that you can learn the difference between an intuitive feeling (experiential learning and unconscious pattern recognition) and an impulsive one (one driven by emotional goals unrelated to the present situation, problem or people).

It is that simple – resolve to have a strategy to improve your PJDA through awareness of feelings and emotions with the goal being to be able to tell the difference when you are feeling one type versus the other. It works for everyone.

It’s easy to forget that markets are nothing more than a mechanism to transmit value and value is nothing more than perception. Hence markets are nothing more than perception. Likewise, it is easy to forget that in all of our fundamental, technical and economic analyses, we are trying to decipher and predict both current and future perception.

Perception is a human entity. It is context and belief driven and as such both ephemeral and illusive. It’s why looking at numbers feels so much safer.

But yet if the markets are perception only then what does that make the numbers? How about a language or a piece of art? In a language – take English – you have multiple versions, American, British and Asian at a minimum. The meaning of a sentence can only be known if you know which one you are speaking and in what context you are speaking it. Such is the same with say Dow 12000 now. It means something totally different that it did a month ago and something totally different if you are long or short biased.

The point really however is that all humans are good at predicting all other humans (males predicting females aside). We are naturally built to do it and if we consciously work at it, we will gain a much more robust context in which to make our market – or other uncertainty – decisions. Take today – anyone who does a little reading can make what I predict will turn out to be an excellent prediction on the behavior of the current key market influencers – the central bankers and country leaders of Europe.

Make yourself a social map of their motivations and ask yourself, what kind of events do you think will happen. Doing so will give you a better peek into the future – as long as you remember one thing, their timeframe might not be yours.

So Sunday night came and went without a market meltdown. And now the market talk is of “we all know they will make some kind of deal” so … what’s the big deal?

Let me ask you, what if they don’t? What if Congresspeople who truly don’t understand how financial markets function on perception decide that their own re-election trumps any reasonable compromise? What if President Obama comes to the same conclusion? Neither is that outrageous an outcome at this stage. And today’s run-of-the-mill sell-off only increases the likelihood that no deal – or a stupendously bad deal – will be made.

Why?

Ask the question in terms of the social-emotional context for the decision makers. What drives them – not from a logical or even ideological point of view but from the one that counts – the context of how they feel? Decision research proves you have to have a feeling to make a decision so in the end, what they do will be based on how they feel.

Sure they can talk about lofty goals but at the end of the day – particularly for the President – what happens now is about getting re-elected. And what happens on the side of his opponents is making sure he doesn’t – and they do. Both will be constantly calculating their predictions for this – as opposed to their true desire and obligation to vote in the best interests of the country. Obama has repeatedly shown that he has no core so he may blink but he now has the Senate substituting for him. (BTW – shouldn’t it have been the other way around – he stepped in, not out?)

Financial markets may be relatively sanguine now but that in an of itself should be a warning sign – they aren’t acting as expected. Whenever that happens – something else is afoot. Mapping the emotional trajectories of the decision makers provides a wide open window into the future.

The now vast field of behavioral finance can outline and articulate the mistakes we make in our choices. We look at questions that are in effect the same depending on how the question is worded, we evaluate the gain or loss of the same amount of money in a lopsided way, we can be primed to give one answer or another with every thing imaginable under the sun – including a simply hot or cold cup of coffee.

The typical answer is to think harder… to use our intellect to work harder at seeing and then behaving in a more theoretically and objectively rational way. But does it work? Furthermore, does the dilemma even fully describe the whole “problem”.

The solution to creating behaviors that we want is to put the right context back into our consciousness. Virtually every single one of the list of behavioral mistakes can be explained if one looks to see what emotional context was induced by what came just before. It really is that simple – what is the context of emotions the subject is experiencing? What context was induced either by the wording or the previous event or the manipulation of the subject’s feelings through experimentation with pictures or conversations or….

For a long time now, we have only looked at two dimensions of the psyche – thinking and behaving. We subjugated emotions to some deep dark and useless place. Ironically, they explain just about everything – if we will only elevate them to the same level of analysis as our thoughts, models, math and behavior…

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.

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.

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.