Decoding the Information in Emotions to Unlock Performance

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If you want to make better risk-based decisions and perform better under pressure, get really clear on answering this question: What am I feeling and why am I feeling it? Hi everyone, I'm business coach Steve Sandusky for Barron's Advisor, and welcome to Actionable Intelligence. My guest today is Denise Scholl. Denise is the founder and CEO of the Rethink Group and the author of Market Mind Games: A Radical Psychology of Investing, Trading, and Risk. Denise leverages her background in neuroscience and modern psychoanalysis to solve the mental mysteries of successful investing, trading, competing, and leading teams. In today's conversation, we explore the role emotions play in decision-making and performing under pressure. And while most people focus on the positive emotions, Denise drills down into the negative emotions and how a better understanding of these emotions in yourself is like adding a superpower to your toolkit. So let's get started with Denise Scholl. In your work with clients, you spend a lot of time dealing with emotions and how our emotions affect our decision-making and our performance under pressure. And I'd love for you to start by setting some context here in terms of where our emotions come from, and how you came to incorporate exploring emotions as a key part of the work that you do with your clients.

Where they come from is surprising to most people. They are actually our core signaling system to keep us safe. But we haven't been taught that, and we don't know how to use it very well. How I found this out, though, was I had been a trader and running trading desks. And, you know, read all the standard investing and trading psychology about keeping emotions out of it and tried to do that, you know, to some moderate degree. But I was sort of fascinated by the fact of traders who would make a lot of money and then blow out, and I'd be like, how could you do that? Like, what drives that? In another area of my life, I was taking classes in a little institute of modern psychoanalysis, and they wanted to publish my master's thesis. And I did master's research at the University of Chicago in something that's called neuropsychoanalysis, but all that What that really means is like, how is a pattern stored in your brain? Like, that was what I was trying to figure out. Like, how do people have patterned expectations and characteristic behaviors? So anyway, when I went to update it in 2003, a group of scientists led by Antonio Damasio, really, who's now at University of Southern California and wrote a book called Descartes' Error, by the way, had shown that basically without emotion, we can't make a decision. And I was like, oh my goodness, that changes everything. So I literally just started talking about this research, and then someone asked me to write an article about it, and I wrote an article in Stocks, Futures, and Options. And then the Chicago Board of Trade, Chicago Mercantile Exchange, asked me to give a talk on it, and it resonated with people. They would say things like, well, I've always used my feelings, but I never told anybody because I didn't want them to think I was weird. So that was 19 years years ago, literally now. And what I came to find is that the science is really supportive of the fact that you have to have emotion to make a decision. In fact, you're always predicting a future emotion, and that's like the mechanism that keeps us safe. The world's been mistaught, really, for centuries, which was the point of Damasio's title of his book. You know, Descartes said I think, therefore I am. And Damasio is like, no, it seems to be I feel, therefore I am.

Now, we have different types of emotions, though. So we've got positive emotions. So you've got Martin Seligman, who's talking about positive psychology. But I think your work focuses more on the negative emotions. So what is particularly important to you about the negative emotions, why you focus on that, and why you think that's important for the types of clients that you work with? Because I think a lot of your clients are like hedge fund managers, investors, people that are, you know, dealing in high-stakes situations, athletes. So what's important about the negative emotions?

Well, the first is what I said, like emotional discomfort. And I'm going to say in its pure form, and we can come back to what I mean by that, is meant to help us. So fear keeps us safe. Disappointment, you know, what could I have done better to prevent this disappointment, you know, frustration, anger, something's not right here. But no one's learned to work with them as valid signals. And in fact, for the most part, they are denigrated. And there's— I mean, Seligman's work is great, but there's this pressure to be positive. Meaning override any of these signals. And what the research also shows is when you override an uncomfortable negative emotion, so to speak, that has fundamental meaning to you, when your unconscious is trying to get you a message, you know, through an uncomfortable feeling, and you ignore it or just try to turn it positive, the volume goes up inside your head. It gets louder. Not softer, because there's something in there trying to help you. So from my point of view, it's like people don't really know how to deal effectively, you know, generally speaking, with their fear, frustration, and disappointment. And they've been given a lot of tactics that, you know, some may work in the short term, but they ultimately backfire. Some may sort of seem like they work, but the volume of the negative emotions goes up. So That's a problem in and of itself. So I think there's this, you know, there's this huge edge in knowing your emotions matter and then knowing how to deal with the difficult ones that very few people speak to. Now, I could go one step further and say I learned from the modern psychoanalysts, which are different than Freudian psychoanalysts. I mean, they believe we have an unconscious, but after that, they kind of deviate. They use the phenomenon of unconscious anger to get really good results with really severe mental disorders. So I mean, that's a very serious topic. When I first heard of it though, and first understood what they were saying, I was sitting in a class and I did say, well, if it could help the schizophrenics, it could help these crazy traders I work with. And I don't mean to be disrespectful to people with severe mental illness, but that was like my first thought. Well, I mean, the traders are crazy. Like maybe there's an angle here. So that was actually what got me started way back in like 2001 or 2002 on the, gee, what's the value of negative emotions? And then I came to learn at the same time I was realizing that you had to have emotion to make a decision. I was learning how there was information in these so-called negative emotions through various decision researchers and neuroeconomists. I went to the Society for Neuroeconomics for a while to hear the academics talk. I don't so much go anymore because I kind of got the idea of it.

Now, I definitely want to go deeper into these negative emotions, but before we go there, I do want to see what value you think there is in these positive emotions or even mindset. We hear a lot of people talking about you got to have a positive mindset, you got to have this kind of mindset. Does that factor into your work at all as you're working with these hedge fund folks and decision-making, the mindset or the positive emotions?

Is—

do you see a role for those in the work that you do?

Yeah. So, I mean, it's obviously true that if someone feels optimistic and confident in the face of any challenge, I mean, pick any challenge, that gives them a benefit. To a point, right? Obviously overly optimistic and overly confident backfires all the time. We see that in sports all the time. But generally speaking, if you're facing a challenge and you feel confident that you can rise to the challenge and optimistic that it will turn out well, that helps you in contrast to being overwhelmed with anxiety that you can't. The problem is you can't say, I'm going to be confident. You can't use your intellect to just create it. What some research shows is that you can use your intellect to create the feeling that helps you when the situation doesn't mean that much to you. So my perennial example is going to your in-laws for Thanksgiving. You know, it's like, okay, let's get through these 3, 4 hours with, you know, Uncle Teddy, who's going to be obnoxious. Like, it'll be fine, we'll have a nice meal, we'll watch some football, like, you know, you can change your attitude. But if it's the market going against you and you're losing money, like, there's a fundamental deep-down survival threat to that, even if it's not, you know, like, you have plenty of money, but the part of your unconscious that wants to keep you safe perceives that as a threat. So when you try to override the anxiety in that case, it often— you'll often fail. It will get worse because it's trying to say, hey Steve, you know, I want to make sure you've paid attention to this threat over here, and you've adequately addressed it. So I don't talk about positive emotions because everybody does, right? Like, that's nobody's problem. Like, the problem is that, you know, the fear, frustration, the anxiety, the, the self-doubt, all the things that people don't know how to deal with. And with the emphasis on positive emotions, one of the things that happens is if people do have self-doubt, worry, frustration, whatever, and they try to be positive and they fail, they feel guilty, they blame themselves. And so what happens? The negative emotion actually, you know, spirals and becomes worse because they don't have any actual mechanism to sort through, okay, what's this feeling telling me? Like, I'm always telling people, learn to answer, what am I feeling and why am I feeling it? Accurately. It's a very easy thing for me to say, easy for you to understand. To answer both sides accurately isn't all that easy, generally.

Well, you know, George Soros, he's famous for saying that when he was getting worried about things, his back would start to hurt, and that was sort of an early signal that maybe he needs to get out of a trade or something. And so we feel this in our body. And I think what I find really fascinating about your work is that as you talk about these negative emotions you're not just talking superficial negative emotions like my back is hurting, and maybe that's not so superficial, but you're going deeper in some cases to why am I sabotaging myself? Why am I, right as I'm on the cusp of this huge winning trade, that I do something stupid when I knew better because I'm acting out something that happened 20 years ago? So if you could explore that a little bit in terms of how you work with people, how in your experience you've seen people that aren't tapped into their emotions, they don't know it well enough, like, what am I feeling and why am I feeling it? You help them really understand, you say, both sides of that question. And once you shed that light on it, or they see the light on it, all of a sudden it's like things flip and things get much better. Is that essentially how it would work?

Yeah, I mean, sometimes at the end— Tuesdays are always my busiest day. And I, at the end of Tuesdays, I've often thought, what did I What did I actually do today? And what I actually did was help these professional money managers listen to themselves, listen to, like, what I call their intuition, which is just their unconscious pattern recognition based on their 20, 30 years of education and experience in the market. So it's really finding that sense of expertise. But how do we do it? We do it by, like, sorting out the worries and the anxieties and the frustrations and attaching them to whatever their real source is. So maybe they're worried, like, they didn't have a great year last year, they have a major investor, you know, if they don't have a great January, let's just say, you know, is that investor going to start to think about pulling their money? Like, okay, that's a fair question. But what I would often find is even their assessment of did I or did I not have a great January it's usually not accurate. And what happens is I think these emotions exist in a layered— I draw it as a triangle. So in the market, there tends to be fear of missing out. You know, this thing's moving and I'm not in it. But if you really unravel fear of missing out, it's usually fear of future regret, meaning I'm not in it, I'm not going to make the money, I'm going to be mad at myself. Somebody else is going to be mad at me, you know, my partner, my client, my investor, and I'm going to feel bad that they're mad at me, and I'm going to be embarrassed. So fear of missing out is usually some form of an expectation of regret. And then that expectation of regret is infused really with our self-image, like, how often can I be right? You know, do I need to prove I'm smart? Like, how much success am I comfortable with? How much success is my family comfortable with me having? What are the conflicts around success? So I have a team also at Rethink. We help people, you know, I think of it as a spaghetti bowl, pull those strands apart so that they can neutralize that, like the self-image feelings, for example. And even that fear of future regret, you know, you're worried that someone's gonna be mad at you and think you're not that smart, right? So that's a self-image connected thing. It's not relevant to the market. But you got to have someone help you basically extract it so that you can hear that expertise that you've developed. So it's that kind of process. If there's one thing I've learned in almost 20 years of doing this now, people show up, I guess, like children with personalities., you know, and with a way of interacting with the world. And that's their way of interacting with the world. So like at Rethink, we don't have a set way that we interact with you. We just know that we're going to help you try to sort your world out and sort what's in your conscious versus your unconscious and how like your personal history and your self-image and your expectations about success and your fam— like how all that could be merge together and how we can unravel that and let you hear your expertise. Does that make sense?

It does. And the first part of your question, what am I feeling? Let's talk about that here for a moment. So we could say, well, I'm feeling fear. Well, that's a pretty general, generic emotion. But I think you go a lot deeper with that in terms of, well, what kind of fear are you feeling? So tell me a little bit about how each of us can answer the first part of that question. What am I feeling? How can we get more granular? I think is maybe one of the, the ways that you look at that.

That's a great question because literally there is literature on what's called emotion differentiation and granularity. And the more someone has the skill of differentiating and being granular, the more money they make as an investor. At least in the studies that I can cite. I always say, like, what's the worst that can happen? What's in the person's imagination is never— they're never really conscious of what they're predicting. So what the science really shows now is we're always predicting. Like, the mechanism of perception is prediction. So we both speak English. You don't know it, but your brain's, like, expecting the words that are going to come out of my mouth based on your knowledge of English language or based on knowledge of of my work. And in particular, we're always expecting a future feeling. We're always predicting a future feeling. It's called anticipatory affect. Brian Knudsen at Stanford has done the most work around this. So you said, okay, I'm afraid. Someone says, I'm afraid. I'll say, like, of what? Then they'll say, losing money. It's never losing money. It's never losing money. It's like, well, I'll be embarrassed. Someone will be mad at me. And there's a very, very human tendency to catastrophize. I lose money on this one investment in this difficult month. People do. My investors have pulled their money. I've lost their job. My spouse has left me. My kids hate me. And I'm old and homeless. Now, we catastrophize because at its core, Like, our brain is just trying to keep us alive. But because we don't know how to navigate the fear— back to when I said that it gets amplified— it gets amplified into these disaster catastrophe scenarios where if we just know how to like, okay, I'm afraid, what am I afraid of, what's the worst that can happen, what am I predicting, what level of fear is it— like, I teach people to come up with scales of fear, for example. So like panic or terror may be on one, you know, like concerned may be another minor level of that scale. Why? To help people do this emotion differentiation and granularity. That was like a 3-minute answer. The short answer is figure out what you're predicting and let yourself be willing to know the truth. 'Cause what happens is we're afraid to admit that we're really afraid of like that disaster scenario. What usually happens when people reveal the disaster scenario to themselves is they laugh 'cause they can see that this one trade or this one investment or this one month doesn't equate to their life becoming completely wrecked when they're, old and helpless. But it's such a common fear. So we just like— in some ways, I just think of it as exposing it to the light of day, you know, like sunlight and disinfectant. Let's just figure out what's really in there, because you don't know it, but that's motivating you. And once you shine the light on it, its ability to motivate you is severely curtailed.

Yeah, and I've had numerous recent examples in working with clients where your point about asking, well, what's the worst thing that can happen? And I've asked that question. Let's say they're looking at making— this particular one I'm thinking of was going to be making a marketing investment, which was reasonably significant for this person. And I said, well— and they were a little nervous about it— and I said, well, what's the worst thing that could happen? You get like zero new clients from this. And if that were to happen, how different would your life be? You spent that marketing money, you got zero new clients. Are you still going to have food on the table? Well, yeah. So, like you say, when you shine the light on it, it's like, oh, well, the worst case is not that bad, and the chances of the worst case happening are so slim, and the upside is so great, it's like, well, why wouldn't I do this? So, you know, getting behind that emotion, like you say, trying to put some words to it and asking what's the worst thing that could happen, I think that's a great technique.

First of all, in the, in the era of, you know, positive thinking, people don't feel like they can talk to anyone and they can't be honest and admit they have that like crazy disaster scenario. So just making it a safe space for them to admit like that they really have this worry, that almost as soon as— I'm sure if you experience— almost as soon as it's out of their mouth, they go, well, that's not going to happen. Like they didn't realize it was in there motivating them. But that's because we have these innate survival instincts that want to keep— want to help us, keep us safe. And so those instincts are saying, you know, realize if this went wrong and then that went wrong and then that went wrong, that, that would be bad. Like, that's your unconscious literally just trying to keep you safe, and you can't actually override it. Like, it's built into the operating system. So you realize it, like, and then you realize it, and then you are able to use your intellect to put a probability on it and have a plan, which, you know, and then you become more in the here and now. But people don't want to admit it. So, like, one thing advisors can do is make it okay to admit. Now, because the whole world is uncomfortable with fear, frustration, and disappointment, oftentimes anyone doesn't want to hear someone else's fear and frustration. It, like, makes them nervous, makes them worried. Oh my gosh, if my client's really afraid, then, then they're not going to do anything and they're going to pull their money. Like, no, you got to let them. If you can be an empathetic listener and ask, like, okay, what should we do about this? How could we address this? How realistic is this? If they feel heard and understood, then what? They're going to feel safer with you. They're going to tell you more of their situation. They're going to trust you more. You're going to have a better relationship with them.

So there's a popular phrase in this, I think was in a book from maybe 30, 40, 50 years ago feel the fear and do it anyway. But how do you make a distinction between— and you touched on this a little bit earlier when you, I think you said intuition— how do we make the distinction between an emotion that we're feeling, and let's say it's fear, that is like intuitive fear, like I've seen this before, I recognize this pattern, I'm feeling it, it's like, this is not a good thing, versus say an impulse, which is more, I'm just in the moment, this isn't a big deal, I just need to shine a light on this. How do we make that distinction by better knowing our emotions?

Yeah, so I oftentimes phrase this work as like knowing the difference between intuition and impulse. So generally speaking, impulse has a lot of energy and urgency and, oh my gosh, I gotta do this. And intuition is just like, yeah, I know the deal there. Like, it's quiet and it Intuition doesn't usually mind if you override it. Impulse, like, Steve, do this, do this, do this right now. Now, that's useful in a disaster scenario, right? Like in a car wreck or, you know, it's useful. But in the market, it's usually not that useful. But the trick is when you can do the what and why, it oftentimes dilutes the impulse so that it's just not doesn't have the same urgency, particularly when people can connect it to whatever their life stories, i.e., self-images. So like, I have a client runs a lot of billions for a huge, you know, one of those trillion-dollar asset managers, grew up in a situation where no matter what he did, mowed the grass, shoveled the driveway, like, he always could have done it better. Always, always, always, always, always. He's a talented investor, but no matter what decision he makes, literally, I spend 2 hours a week on the phone with him, helping him work through what he could have done better. And the truth is, it's usually next to nothing, but he can't shake that feeling because he heard that so many times. You didn't put the shovel away right. You didn't put the— he heard it so many times. But what we've been able to do with him just talking through those feelings, he's able to tolerate them. So he feels like he's making a mistake, but he can tolerate that feeling and make the market choice that he knows how to make, and they coexist. They had a really nice year last year. He's had a really decent January. I usually aim to help people get over those kind of historical expectations and patterns that they just got from growing up, that most people get some of that in some way, shape, or form. In his case, I'm pretty much resolved to I'm never going to get him over it. I do say things like, well, of course you think you screwed that up because, you know, you didn't put the shovel away right. And then he'll laugh. Other clients were able to like puncture that kind of historical expectation, and they really do start to see that that's just their history, and not here and now at all. But again, it's talking through the feelings and us asking, you know, Socratic method kind of questions. And they end up with their intuition.

And earlier, you talked about how you can't suppress the feelings. So in your work, how would you help someone feel the feelings? Because I've read a transcript from one of your earlier podcasts, and you said, If you suppress and don't want to feel it, sooner or later, you're going to act it out, period. So how do you get them to feel it, to process it in the body, not in just an intellectual way in their head? How do they feel that so that you and they could say, you know, I felt that emotion, I processed it, I think I'm over it, and I can move forward now? Does it work that way?

Well, first of all, I understand it with no judgment, because there is literally an emotional logic to everything, like if you understand the person and what their perception is. By doing that for them, I try to impart that they can do that for themselves, like that there's no thought or feeling they have they should judge. We just need to understand how the jigsaw puzzle of thoughts and feelings fit together. And then like I will encourage people to write, you know, if they have a bad day or a bad week, to write it out. There's real research that shows, particularly with athletes, that if they write about a failure, they get over it faster. You know, it's just a more specific form of putting it into words. I can't overemphasize though the no judgment. Like, everyone wants to say some version of, but I shouldn't feel that way. It's a waste of time. You feel how you feel. Like, let's just sort it out, because once you sort it out You'll understand it, like it makes some sense. So there's a good example of that right now. It's during the Olympics when we're recording this, and I coach Olympic snowboard racer Lindsey Jacobellis. And Lindsey is somewhat famous for having snatched silver from gold in 2006. And we did an article in the New York Times for 2018, so I'm not telling any secrets. You know, she of course is still mad at herself for that, right? She's in her 5th Olympics right now. She's going to give it her best. Like, maybe she'll win the gold. But in any event, I mean, she was a very young woman at the time. And, you know, superficially she was just celebrating, right? She flipped her board up and grabbed it and she actually fell. And the German girl, this girl, passed her. So the press just beats her up. And she couldn't do very well in the Olympics, even though for the subsequent years, even though she was winning everything else, she's got the most medals of anybody in snowboard cross. When I started to work with her, I helped her realize, you know what? Like, if you really think about that in the context of a 20-year-old female who had spent her life becoming a snowboard cross racer, you could have been the 20-year-old female who'd gone to college and dated the wrong guy that your parents didn't like as a matter of defining who you were. 20-year-olds define who they are. I said, in a way, that's what you were doing. You were like, I'm taking control of my own destiny here. Granted, it was self-destructive, which has to do with what happens when you're angry and you, and you can't work it out. But that's really what you were doing. And once she could see it that way, because that is what she was doing, like any 20-year-old, she was able to forgive herself a little bit. And she did really well in the '18 Olympics. It's a tough sport. But what we don't realize, and this applies to her and it applies to investing, applies to anything, we do our analysis of a situation based on what we know. What we do, we do because of how we feel about what we know. If you accept that, you can take any human behavior, choice, decision, decision pattern, and figure out what's the logic in there, because there is. To the person. But the transformative aspect of this is to just stop judging it. You just stop judging it. In its pure form, those emotions are meant to help you. Like, they get messed up because people don't know how to handle them, and we have this wrong idea that our intellect is superior. We're back at what am I feeling and why with no judgment and trying to get the answer right.

So this is a really interesting example. So you've got the benefit of hindsight now. That was 2006. If you could go back to 2006, she has this peak pressure moment. So I did an earlier podcast with Dane Jensen, and he wrote a book called The Power of Pressure. He delineated pressure with a peak pressure moment, which is right now, this is a high-pressure situation, and then the long haul, which is more like long-term stress. How do I deal with that? So she's on the starting line there for a peak pressure moment. Knowing what you know now, what would you say to her going into that peak pressure moment, knowing what you know about emotions? Is there anything that you could have said to her to think about going into that downhill snowboard that might have helped her have a better outcome?

I would have tried to get her to realize all the emotions she had about it. It was the first time bordercross was in the Olympics. You know, young, beautiful, extraordinarily talented blonde. She was getting massive amounts of attention that she was going to dominate this brand new sport in the Olympics. But she didn't have all positive emotions about that, right? I'm sure she wasn't allowed to talk about her worries or her fears. People have complex about attention. We all want it, but then it scares us. I would have done what I always do, try to help someone figure out what's the truth of what am I feeling and why. Knowing that I think she had just turned 20. If she were able to tell me her fears and her worries and her frustrations. Being an Olympic athlete is not all it's cracked up to be. There are stories out now about how the village and You know, Beijing isn't so great, and the food isn't so great. Like, it's tough behind the scenes. If she'd been able to get all that out, she wouldn't have had to express it in what turned out to be not in her own best interest, right? But if she would have felt that she could be fully herself, and someone understood and validated her confusing, conflicting feelings about being the golden girl in this brand new sport, and being an Olympian, et cetera, which she and her family had dreamed of, dreamed of, you know, for as long as she and her brother were alive. She'd have been able to have the conflict and talk about it. She would have been way less likely to act it out. I mean, superficially, she was just celebrating early. You could make the argument like her coach should have taught all of them to never celebrate early and wait till you get over the finish line. You know, that's a different question, albeit true. But like, I've coached a young He's now actually going to leave the sport, but he was a young, almost professional soccer player who kept getting injured. And it ends up being pretty clear that he kept getting injured to get his mother's attention. She's kind of, let's just say, a little bit self-absorbed. And so he was having his mother take care of him like any child wants, right? Now we've sorted through all of that. I mean, I don't know what Lindsay would have said. Back then, although I can sort of conjecture. That's a very long-winded way of saying I would've done the same exact thing. Try to get her, what am I feeling and why? And get all the feelings out on the table.

Now, maybe this is getting off on a tangent, but since we're talking about sports, we're talking about, she actually, it sounds like she had a great performance and she just blew it at the very end by trying to celebrate early. But then we also have people who are like, hey, they're supposed to win the gold medal, but then they choke. So is there anything in your research that points to the role that emotions play, maybe the negative emotions that they play in, quote, choking in a high-performance situation?

Well, it's this, you know, sports psychology is very focused on positive thinking and be confident. There's not a lot of place for the actual anxiety and worry. I mean, in the plethora of people, right? The coaches and the wax techs and the assistant coaches and strength coaches, like, People can't deal with the worry. They can't deal with the anxiety. So the athlete just does not, unless they have a really good sports shrink. And a lot of them are taught positive thinking, you know, positive mindset, positive mindset. Like, yes, we want to believe we can win. But if the little voice in your head is going, I'm supposed to believe I win, but I don't think I can. Like, I'm really worried that I won't be able to do it. And you don't have anybody to talk to. That voice just gets bigger, particularly that if they make you feel bad about that little voice, which is natural. That voice is just trying to make sure you're prepared. Try to turn the volume down, it goes up. So choking is always acting out an emotion that the person hasn't been able to actually feel and process. Or slumps. Here's one. You want to get out of a slump, and I don't care what it is— baseball, investing, I don't care what it is. The solution to a slump is to go back to the beginning and actually figure out what you were feeling after it happened. When you blew the game, when you blew the investment, when you blew whatever. And I don't care if that slump's gone on for a day or a decade. Like, go back when it first started and figure out, like, okay, I was embarrassed that I blew the game, embarrassed that I didn't make the hit, embarrassed that I didn't do the whatever. And work through the negative emotions, and the slump will end. I've done this so many times, and I, you know, I'm a big sports fan, so I watch all kinds of sports on television, and I have to just go, ah, I know the person's being told to rub dirt in it and get over it and put it behind them, and they can't because that little voice in their head is going, you might do that again, you might blow it again. What if you blow it again? It's going to be so bad. And nobody lets them work through that feeling, which in its pure form is just trying to— what did you need to do differently to not blow it the last time? That's what that voice is about. How do you make sure you avoid that mistake? But they don't get to even get to that because they're not allowed to have that feeling or talk to anybody about it or get any help, you know. Or maybe one strength coach tells them, but their regular coach says, you know, you just got to believe in yourself. Every once in a while When the right person tells you to believe in yourself, it helps a little bit. Generally, the little voice in your own head, everybody's insecure in some way, shape, or form. I'm going to flip it around, deliberate practice. We talk about deliberate practice, and I actually work with investors on this and traders, like deliberately practice when you're choosing to enter the market. Make some entry decisions that are just about getting the entries right. Nothing else matters. Like, are you happy with where you bought that? Like, and isolate the pieces. Athletes do this all the time, right? Isolate the pieces. What's that about? It's about building confidence. It's about building the feeling that you can do it. But we never talk— we talk about it as deliberate practice. Deliberate practice is meant to build a feeling that you can do it.

Yeah, well, since you mentioned deliberate practice on practicing, like, when to enter a trade, I'm going to ask you for some advice here. So I think I'm world-class when it comes to entering a trade, but I am terrible on exiting a trade. So what does that mean? I mean, and I think I get fearful, you know, if it turns out money-losing, I want to cut my losses as opposed to, you know, I'm— so that's a whole nother episode. But I'm a great entry, but I'm a terrible exit when it comes to investing.

Well, look, all exits are painful. So first of all, recognize that, like, if it doesn't work, it's painful, right? I mean, on some level, you know, a little bit of pain, a lot of pain. Doesn't work, it's painful. You then have to deal with, well, if I get out now, will I be giving up the rebound? Like, will I get out at the worst possible moment? So you're like predicting, you know, future disaster or embarrassment. If I don't get out now, it may go further against me. So if it's not working, they're all negative. But the thing is, if it is working, they're all negative. That's what people don't realize. You get in the market, it's working really well. And when you go to choose the exit, you're choosing between negative emotions because you're never going to exit at the maximum excursion of the price. I mean, except for luck once in a blue moon. So no matter where you exit, you're either going to get out early and it's going to go further, or you're not going to get out and it's going to pull back and you're going to lose some of what you had. So literally all choices in exiting make us feel bad. So if you know that, you can get more granular about what form of bad, which form of bad are you willing to tolerate, and you can choose. Which one? But most people don't expect to feel bad. You think it's working, I'm making money on this, I should feel good. But you're doing that predicting that something may go wrong. Then if I were working with you, we'd attach that a little bit to, you know, whatever your own history is, like we've been talking about everybody else.

But right, and there's a history there, you know.

Well, it's good we repeat problems, right? So people will say we act them out. Yeah, yeah, we act them out. I don't want to look stupid. But yeah, Denise, I really did look stupid in that situation. Like, you're telling me I'm not, but I really did. And if I really will, like, yeah, yeah, I know, I know, I know. But let's just unravel it because there will be something that makes sense somewhere in there. Great.

Since we're talking about investing, I do want to ask you about, in your experience, what separates one great investor from like an average investor. So let's take someone like a Paul Tudor Jones. I think everybody listening to this knows who he is. Wonderful investor. What do you think might separate him or other people like him from, say, a run-of-the-mill hedge fund manager that you're never going to read about in the papers?

The underlying human skill is called theory of mind, and it's predicting other people. So, you know, there's all these different ways to analyze markets, right? But what do any of us want to know? We want to know what everybody else will pay for this thing next month or next year or the year after that. That's all we want to know. Some people are really good at seeing like the waves of human perception and the factors in the market that drive that for different groups of market participants. So Paul is really good at that. Now it helps to have learned way back when, you know, when the market was simpler and there weren't as many algorithms and there weren't as many individual traders and that, you know, there were fewer groups of money and people were a little bit more pure about reacting to like increases in interest rates. But still, it's— that's what it is. There's actually research at Caltech that showed short-term traders, the more they were using theory of mind, the parts of their brain associated with people prediction, the better they were. And oh, by the way, in that experiment, they weren't using math at all. Now, there's a whole argument about parts of the brain that's subsequent to that. Professional hedge fund managers will talk about positioning. This move is happening because of positioning. And what do they mean is, well, people are in that trade or they're getting out of it, or people are short that trade and they're covering it. When they use the word positioning, they mean who else is doing what. But the people who are best at just like an intuitive understanding of positioning, where the money is and where it's going to flow, are going to be more like Paul. And by the way, everybody has that fundamental skill. We all have theory of mind. We couldn't drive a car down the highway or walk down the street in New York City. You don't know it, but I don't live in New York anymore, but when I used to, like walking down Lexington Avenue was a hazard to your health. Like people are like, you're keeping track of who's going to, you know, You're doing that, you know, it's subconscious. You can— and so I will tell people, practice it. Practice being conscious of like, I realize that person's about to cut me off from the right, you know, get more in touch with it and play with it. Play with it like in the market. Someone once gave me the task of watching prices, leaving the screens for 5 or 10 minutes, coming back and saying, where's it going to be? It was stunning how right I could be. Now, I was a short-term trader, so I was watching it really closely, but we have natural skill to predict those waves of perception. But so many of us get caught up in financial analysis. I have a CIO, chief investment officer, of a $12 billion fund. He's got a team of 20 analysts. He's very— I mean, he's been in the markets for 35 years. He's very good. He does all his fundamental work. All his technical work, very successful, but he feels like his analysts, the term I always use with them, they expect the stock price to drop out of the bottom of the spreadsheet. No, whatever comes at the bottom of the spreadsheet is a clue as to how other people are going to perceive what the stock price should be, but it's not the actual answer. It's all in context, right? It's all relevant to what came before. It's all relevant to what other stocks in the universe are doing. Tech stocks up, tech stocks down. So you got to understand it as a poker game. And even poker's, I mean, at least poker, the cards actually mean something. Nothing ever means anything. Nothing's absolute. It's all relative to what came before. There's no absolute meaning to anything in the market. So it makes people really nervous and anxious because we want the answer. There is none. Maybe it's like surfing or sailing a little bit. Like you're sailing, the sailor's trying to figure out where the wind's coming, the surfer's trying to watch where the waves are going. So yeah, there's physics to that. There's actual answers to a poker hand. But the market's not even that certain of any of those things. It's just sort of like those three things.

Yeah, another aspect that I think is really interesting since we're talking about Paul Tudor Jones— so he's on the record as owning Bitcoin, and I think he said that he views it as the fastest horse in the race. I find Bitcoin super fascinating, both as an investment opportunity— but let's put that aside for a second— more so even as an observation on human behavior, because you've got some people who think and have said literally they will die on the Bitcoin hill. I mean, it is so important to them. And you've got other people who still say it's a Ponzi scheme, it's a scam, it's a blah blah blah. Any thoughts about how people might look at something like Bitcoin from an emotional standpoint? Are they like projecting things onto Bitcoin relative to their past, and that's how they view it? We don't have to go down a deep rabbit hole here, but I'm just wondering if you have any any observation about Bitcoin and what that might be suggesting about human behavior?

Well, my basic observation about Bitcoin is enough people believe it, so it's going to work. Like, and literally, that's true of any asset. People believe something has value, it has value. Like, and if they don't, it doesn't. Like, literally, it's black and white. You believe the tulips have value, the tulips have value. You know, you believe Pets.com had value, it's got value until it doesn't. So I think crypto will work and that Bitcoin obviously is that because so many people do believe it. Whenever any of us are like crazy intense about something, it's always a signal that there's something else going on. So the government's out to get us, fiat currency is worthless. We infuse our own personal needs into those kinds of things.

Yeah, and I just think it's such a fascinating study in human psychology. I think Bitcoin is something that's gonna be written about in psychology studies for decades, just because it's so, to me, fascinating how people respond to it in different ways. And like you say, these people that say, "I'll die on this hill," there's something else going on as well. And really trying to get to the root of that might be kind of fascinating. But I know we gotta wrap up here. One final question here, as you're looking at the future, are there some areas of research or work that you're doing that you are finding particularly fascinating right now?

I am interested in the, you know, just more research around this anticipatory affect. And we are anticipating an affect, we are anticipating a feeling, because while that is incredibly true to me— and oh, by the way, we're anticipating based on our past experience. You know, there are a lot of cognitive neuroscientists who aren't seeing it that way yet. So with every additional study that supports that, or for example, Brian Newton is doing this meta-analysis where he's showing how this works at each level of the brain, from, you know, brainstem to neurochemicals to midbrain, forebrain. The psychoanalysts have known this for a long time. We have expectations about what's going to happen to us in important situations based on our past experience. But it's a different thing for a neuroscientist to show that or a decision scientist to show that. So I know that that concept helps people every day, all day, because they don't realize that their behavior is coming out of an expectation of a future emotion. And when they do, they get more latitude to choose. Like we were talking about, choose sort of which negative emotion do you want out of a stock that's working or not. So anything around that arena. Great.

All right, Denise, well, this has been fantastic. So what's the best way for folks to stay in touch with you? I know you're active on Twitter, and how should people connect with you?

Yeah, yeah, I'm active on Twitter. My consulting company is The Rethink Group, and it's therethinkgroup.net. We have a newsletter that we sometimes send out. There's all kinds of, you know, blog posts. And I mean, I wrote a book called Market Mind Games. It's a decade old now. It still needs my voice to record it and the spelling mistakes cleaned up. But one of these days, maybe McGraw-Hill will do those two things.

Excellent. All right. Well, this has been great, Denise. Thank you. And congratulations on all the great work that you're doing.

Appreciate it. Thanks so much for having me, Steve.

My key takeaway from my conversation with Denise Scholl is that when you are facing an important situation and you're feeling emotional, ask yourself, what am I feeling? And why am I feeling it? The more granular you can get in answering both parts of that question, the better you'll be in facing and responding to that situation. All right, that's all for today. Make sure you like and share this podcast through your favorite social platforms. And for more great podcasts, visit us at barons.com/podcast. Take care and be safe.

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