We investors live in a world of doubt and uncertainty. It’s impossible to know how well a trade will work out at inception no matter how good the analysis or signal. I’ve taken countless rides on emotional rollercoasters over the years—oscillating between extreme nausea and terror when big trades went against me, to relief and elation when one worked. It’s not a job for the faint of heart. In fact, managing money and managing one’s emotions go hand in hand.
This is hardly a controversial statement. But what exactly does managing one’s emotions mean, and how can one do so? There are plenty of excellent performance coaches and professionals who can assist. However, over the years I’ve developed my own method for improving emotional intelligence. I call it DIVA. Perhaps with some practice, you too can manage your emotions with DIVA.
Please note that I am not a psychologist. I have no formal training in the subject nor have I read any of the literature. There is, after all, an entire field of cognitive psychology dedicated to this field of study. Thus, I make no claims as to the originality of my DIVA method or its efficacy.
What I can speak to, though, is my own experience. I’ve had much success using DIVA to understand and, more importantly, change my emotional responses. While it’s handy for investing, it’s applicable to everyday life.
If DIVA seems hard to implement at first it’s because it is. DIVA requires paying attention to things we typically take for granted—our emotions. That said, it gets much easier with practice, just like anything.
DIVA helped me improve my own emotional intelligence. I hope it can work for you too, but I can offer no guarantees or point to substantiating studies. Thus, consider this article information and entertainment only. Seek professional assistance if need be.
What Are Emotions
My framework for understanding emotions comes from Ayn Rand’s philosophy of Objectivism. According to Ms. Rand, emotions are “the automatic results of man’s value judgments integrated by his subconscious” (source). Also, “[an] emotion is an automatic response, an automatic effect of man’s value premises. An effect, not a cause” (source).
Note a couple of things. First, emotions are automatic responses. They just occur. Emotions are not chosen in the moment; they are reactions. Emotions simply tell us how we feel about things going on around us. Thus, it through our emotions that we actually live and experience the world which makes them psychologically important.
Emotions are not, however, “tools of cognition.” They tell us no facts about the world. Hence, emoting is distinct from thinking. Thinking requires the conscious application of reason which is how we learn.
Since emotions are subconsciously formed they are prone to mistakes. We err all the time and these errors can sink into one’s subconscious. Thus, emotions cannot be blindly followed. Unfortunately, they can lead you astray as much as they can save your life. Without knowing whether an emotion is consistent with positive action it should be questioned. However, once understood emotions are quite useful.
Therefore, emotions are information-laden and should not be ignored. We should experience, analyze, and learn to manage our emotions; not repress them. An active process of introspection and thought can bring one’s emotions in line with one’s chosen values. Only once our emotions align with our conscious thought can they be relied upon for action. This is the purpose of DIVA.
Developing One’s Gut
“I went with my gut.” This is commonly heard in investment circles. What is one’s gut feeling? It’s certainly not a well-developed investment thesis. Rather, it’s a subconsciously formed reaction to a situation; an emotion!
To be sure, experience can condition us to recognize certain patterns while trading and heeding these feelings can be profitable. But how can one gain confidence in trusting his/her gut? This is where improving emotional intelligence becomes a useful trading skill.
I define emotional intelligence as the capacity to notice, identify, and alter one’s emotions for the purpose of guiding one’s actions. The more aligned one’s automatic emotional responses are with one’s consciously chosen principles, the more one can rely on his/her gut. Applied to trading, high emotional intelligence might help one cut losses despite “liking the thesis” or assist in making a contrarian bet no matter how sick to the stomach it makes one feel. Thus, a smarter gut is worth developing.
The 4 Steps Of DIVA
My method for improving emotional intelligence is a 4 step process. DIVA is an acronym for each component. It stands for:
The first step is to simply detect that your emotional state changed. You should notice a feeling of either mental discomfort/angst or pleasure (in some variant form) as opposed to a neutral state. In other words, detection is the perception of an emotion.
While this might sound superfluous, it’s of utmost importance. The process of detection raises the instance of emotional experience from the subconscious to the conscious level. You can’t analyze what you are unaware of. Detection is also harder than it sounds given the automatic nature of emotions.
After detection comes identification. This is probably the easiest step. Ask yourself: How do I feel? Are you happy, anxious, frustrated, excited, etc.? Fully feeling the emotion and a little introspection is all that’s required. Even my 3 year old children were able to identify their emotions with a surprisingly high degree of nuance.
Now comes the hard part, validation. It’s not enough to consciously experience and identify an emotion. It must be evaluated. It’s important to note that emotions are neither right nor wrong. They simply are. But emotions can be proper or improper. Hence validation is a crucial process that requires the engagement of one’s cognitive faculty.
Once identified, an emotional response should be classified as either valid or invalid for the given circumstance (which can be done on spectrum of certainty). A valid response is one where the emotion is appropriate for the circumstance. An invalid one contradicts it. For example, feeling happy during a joyous even is a valid response. Feeling sad during the same event would be invalid (assuming you truly thought it was joyous). In other words, compare how you’d expect to feel versus how you actually do; are these consistent?
Please, do not morally judge yourself here. Just be methodical. The purpose is uncover subconscious information for self-improvement. Go easy on yourself.
If you made it this far along the process you’ve practically won the battle. However, we can’t declare victory yet. It’s not enough to deem an emotional response as valid or invalid. We need to take action to integrate the response into our psychology.
This final step allows us to act quickly on valid emotions and correct invalid ones. If the emotion was valid, great, it’s good to know and you can take action that is consistent with the emotion. If it was invalid, it’s important to consciously correct the emotion. You must override it and either change it to the appropriate one if possible, or simply try to return to a neutral emotional state. If practiced consistently, you might find yourself correcting the same invalid emotions less over time.
Don’t Be A Diva, Use DIVA
Emotions are powerful tools that we humans have at our disposal. However, few are taught how to make use of them. I find trading to be a constant emotional battle against self-doubt. A framework for handling them can be a significant edge. One’s gut can come in handy.
While I’m certainly no formal expert on the subject, I’ve spent countless hours trying to understand and properly integrate my emotions into my own psychology given what I do know. DIVA enables me to uncover and change reactions that I’d rather not have given the conscious choices that I’ve made. Just as important, this method also fortifies proper ones.
Don’t be a diva on the trading desk by letting your emotions run wild. Use DIVA to boost your own emotional intelligence and improve your gut instincts.
Example #1: Correcting The Invalid
Your brother asks to borrow your car. You reject his request as you will need it to take your wife to the doctor. You notice that you feel a little bad.
Ah ha, you’ve detected an emotion, and a negative one. Upon further introspection you identify it as guilt. You ask yourself if that is just; if that feeling of guilt is valid?
You value your brother a lot and would happily lend him your car. However, you value taking your wife to the doctor more in this instance. Thus, you determine that the guilt is invalid. That negative emotional state should be consciously rejected (perhaps even momentarily repressed). In all likelihood the guilt will subside and cease to eat at you for the rest of your day (note that it may take some time, but surely it will).
Example #2: Relishing The Valid
At a party an acquaintance mentions that she got a promotion at work. You think it’s a meaningless one and put down her achievement (in your mind) as being trite or insignificant. Then, you feel bad.
Upon introspection, you realized that you feel bad because you were “big timing” someone. That is not how you would want to react to someone’s joyous occasion. Thus, you identify this negative emotional response as valid; there was no reason to put this person down and belittle her achievement. It was an error and your emotions caught it.
Since you deemed the emotion valid it should be experienced and not repressed. Feeling bad is unpleasant but you deserve it. Raising this to your conscious awareness makes it less likely that you’ll repeat the same behavioral mistake. Your emotions served you well in this instance.
Example #3: Trading Application
You glance at markets and notice that your largest position is down 10%. You feel sick to your stomach and paralyzed by terror. What to do? You can’t turn back time. You can only buy, sell, or hold.
Once aware of this feeling, you fight the urge to act and settle down. Think. How do you feel? Sick. Why? A position is going against you.
Is this a result of an unexpected development? Was the position size too big for the amount of uncertainty you were accepting? If so, the emotion is valid and reducing your exposure might be proper. If this development is within your expectations and is a market overreaction then it might be a good time to add to your position despite your emotional reaction; your emotion is invalid.
Only by examining the emotion can you determine the proper course of action. Simply reacting to the negative feeling could lead your astray.
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