Emotion is something of a taboo subject in the asset-management industry.  The fact that there is general consensus that emotion is bad makes the subject worthy of deeper investigation.  When an asset class or sector is easily dismissed and generally disdained it often represents an alpha-opportunity for those with sufficient insight and courage.  The same is true of the subject of emotion.

Daniel Goleman, an authority on emotional intelligence, suggests that humans have two semi-independent seats of consciousness situated in different parts of the brain, which evolved at different times.  The more recently evolved part is the rational, thinking mind, which is located in the neocortex of the brain. The other is the emotional, feeling mind, which is located in the limbic system of the brain.  

They process data differently: the processing speed of the neocortex is slower than that of the limbic system, and the limbic system gives up some accuracy of processing in order to be faster.  The limbic system is great for getting you out of the way of an oncoming truck, but not so good at finding a solution to a complex mathematical problem, that’s a job for the neocortex.

Despite their differences, these two minds mostly exist in harmony with one another.  However, when you experience elevated levels of noise, as you might in a domestic dispute, there is a tendency for the limbic system to hijack the neocortex with all sorts of ugly consequences, like a night on the couch.  

Importantly, emotions are short-duration phenomena, they naturally exist for only a few seconds.  Unless you consciously or unconsciously sustain or amplify them through your thoughts or actions, your intense emotions will quickly peak and subside of their own accord into less intense but longer lasting moods, or they will dissipate altogether.  

Emotion is a secondary internal phenomenon that is usually triggered by a primary external stimulus.  The originating event, such as a sharp decline in the price of a share that you hold, activates a set of cellular algorithms or biochemical codes in your body, which you experience as an emotion, such as shock or fear.  If the noise generated by an event is sufficiently acute it can give rise to intense emotions, during which time it can seem virtually impossible to think clearly or act constructively. 

It is conventional market wisdom that there are two ways to deal with emotions, one bad and the other supposedly good.  

  • Overwhelment.  You can allow yourself to be overwhelmed by your emotions, which is clearly not a good idea.
  • Suppression.  You can try to be an emotionless automaton, which seems to be the only other available option.


When you are in the grip of intense emotions, it is as if you get swept along by an irresistible force, propelled by its own internal logic, compelling you to act urgently, but seldom intelligently.  The actions that you take when you are under the influence of intense emotions are almost inevitably actions that you will regret when your emotional state has stabilised.  

Virtually every investment professional has experienced difficulty in thinking clearly while in the grip of emotions, especially one of that troublesome pair, fear or greed.  And the more intense the emotion, the cloudier the judgment. Therefore it is little wonder that it is part of orthodox investment mythology that emotion is the arch-corrupter of pure rationality.  Emotions seem to be the enemy, to be defeated at all costs. This myth logically calls for the vanquishing of troublesome emotions, for suppressing them out of existence.


You quite rightly do not want to be overwhelmed by emotions.  Every time you pull the trigger when you are in this state you are virtually guaranteed to destroy alpha, unless you are profoundly lucky.  And it’s quite understandable that you would go to extreme lengths to ensure that you are not overwhelmed by your emotions. But although it is understandable and seems to make sense on paper, it is not the smartest approach to the problem.

As a strategy, the suppression of emotions has two unintended consequences.

  • More Velocity.  Attempting to suppress emotion can actually amplify and prolong the very emotion that you are trying to suppress.  It’s a bit like what happens when you put your thumb over the end of a running hose pipe: you create additional pressure that makes the water squirt further.
  • Less Information.  To the extent that you are successful in suppressing emotions, you deprive yourself of a potentially valuable source of information.  Perhaps think of your emotions as the proverbial canary that coal miners used to take underground to give them advance warning of lethal gases.  If you choose to kill the canary because it’s troublesome you also snuff out the possibility of gaining valuable information. The canary is not the enemy.  

There is a simple way to transcend the two extremes of overwhelment and suppression.  With intelligent awareness, you can ensure that you are not overwhelmed by an emotion, nor feel the need to suppress it.  You can remain sufficiently in touch with the emotion so that you can extract the valuable information that it offers. This process is not dissimilar to the martial art of aikido, where you remain centred and aware, and use the energy of your assailant to disarm him without undue violence.  

Much like you would manage the exposures in a fixed-income hedge-fund in response to market turbulence, you can manage your exposure to troublesome emotion.

  • Fractional.  The emotion is only one part of your total experience, it is not you.  When you remind yourself that it is fractional you deleverage the emotion. 
  • Transient.  The emotion is transient, it is not a permanent state.  When you remind yourself that it is transient you shorten the duration of the emotion.

When you reduce your exposure to a troublesome emotion, you’re in a position to re-engage in clear-headed analysis and constructive action faster and better than your competitors.  

In the market domain, high emotion can lead to a destruction of alpha, but it can also be a source of alpha, precisely because emotions can cause decision error.  If market-related noise triggers a troublesome emotion in you, it is probable that others in the market are also experiencing a similar emotion. To the extent that they are less skilled than you at managing the emotion, they will make decision errors that represent alpha-generating opportunities for you.

In the people domain, much of the noise that originates in relationships is a function of your inability to read the other person’s emotions.  If you know what you’re feeling and you’re able to manage those feelings, it puts you in a position to have a sense of what the other person might be feeling, which is valuable information that enhances your power to shape outcomes, especially in challenging circumstances.

  • What emotion is most troublesome to you?  In what ways is it troublesome?
  • Under what conditions does this emotion take hold?  What are your present conditions?
  • When will you begin to take these simple steps to make it less troublesome?