Here are the links to my thoughts on the needed new paradigm in risk management (All About Alpha) and the three things anyone can do to be more successful in the financial markets.

What were they thinking? From MF to LTCM

3 Things anyone can do better to understand the psychological side of the markets - the first blog post in Psychology Today’s new blog Market Mind Games

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.

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.

…everything we think, feel and do is related to this. ReThinking Thinking is about analyzing these evolving contexts – and understanding that thinking is hardly just about “smarts” – that is where we go wrong. …. Wrong in risk management, wrong in analyses and definitely wrong in perceptions.