Psychological Stress, Cognitive Regression, and Training

High levels of stress can interfere with performance, whether in athletics, trading, or the bedroom. Psychological research suggests that moderate levels of stress can actually enhance performance, increasing vigilance and a sense of challenge. Beyond this moderate threshold, however, stress impairs memory, perception, and decision-making. This inverted U function between arousal and performance is known as the Yerkes-Dodson law. One reason training is so important in fields such as the military is that it helps performers adapt to stressful situations and retain normal functioning and performance. In a sense, training moves our inverted U curves further to the right, so that we can perform better under conditions of enhanced duress.

Interestingly, we can better tolerate high levels of arousal during simple tasks than complex ones. This is because the cognitive and physiological effects of stress interfere with concentration, impairing performance on the complex tasks. A very interesting line of research finds that experts differ from novices in their use of contextual information. The expert in any field of performance possesses knowledge structures that rapidly integrate present information into a broad context. This is true of the chess grandmaster, who sees an entire board, and the expert physician, who processes patient data in the context of historical data, diagnostic impressions, and test results.

When we become highly stressed, we move down the inverted U curve and, in a sense, regress cognitively from greater to lesser expertise. This is because the narrowed focus and attention created by the stress response (the worried trader hanging on to every tick in the market) takes our attention away from the context of our knowledge. The availability heuristic is, in that sense, a cognitive regression--an undue focus upon immediate data at the expense of context. Shorn of context, we reason more like novices, less like experts.

A cardinal principle of training in athletics, the military, and performing arts is to rehearse performance in situations that mimic real-life demands and pressures. Rarely, however, is this principle fulfilled in the development of the trader. Reviewing research, charts, or market data after the close or before the open hardly prepares us for the emotional challenges of a volatile trading market. Too, markets can provide us with scenarios that have not occurred in recent history, making emotional preparation difficult.

Rehearsing decision-making in market simulations using actual historical data is not perfect--like a practice athletic contest, it doesn't mimic all the emotional realities of game time--but it does bring us closer to dealing with the heat of action and maintaining focus and contextual awareness. I recently organized my market data by VIX regimes and began a process of replaying market days similar to the most recent days in volatility. This has sensitized me to patterns that occur in fast markets; as a result, those markets don't seem to move as quickly.

The key to such training is to force yourself to make decisions and follow sound decision-making during the market simulations. In a sense, you're training yourself to sustain focus in the face of uncertainty, so that you can perform as well in more complex situations as in simpler ones and shift your inverted U curve rightward. Biofeedback is an especially promising tool for keeping score of one's self-control during exposure to stressful market scenarios.

It is difficult to get stressed out by a familiar situation. Training makes unusual challenges familiar. In so doing, it helps us retain access to our cognitive capacities, so that we can draw upon such expertise as we possess. How do we know when a situation is familiar? Quite simply, familiar situations do not leave us cognitively and physiologically aroused; like a joke we've heard many times, familiar situations no longer evoke emotion. If we trade when we're aroused physiologically and emotionally, we leave ourselves open to cognitive regression: quite literally we begin to see markets and respond to them as rookies!

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