In dangerous waters
The same survival skillsapplytofinancialmarkets and the surf
I
recently took a family holiday to the
Sunshine Coast to take advantage of
the last few warm days of the year.
My teenage boys and I found ourselves
standing alone on an unpatrolled
beach, excited and full of anticipation.
As we always do before we dive in,
we studied the water, pointed out
where the forces coming in and
out from the beach were (the rips),
and talked through what we would
do if we got caught in a rip or found
ourselves in danger. In that moment I
had a realisation that the mindset you
need to keep safe at the beach was
very similar to the mindset needed to
confidently dive into the treacherous
waters of financial markets. Diving into
investments with the wrong mindset can
have devastating consequences.
The wisdom of the beach was passed
down to me as four simple rules. The first
rule, and by far the most important is, don’t
panic. Ever. If you panic you’re more likely
to spend unnecessary energy, make poor
decisions and make a bad situation worse.
Panic is the enemy, not the water. When
you are calm you are in a better position to
assess the danger and choose a course of
action that gets you to safety with the least
amount of energy spent.
People often panic when they get caught
in a financial rip and then make poor deci-
sions. They waste a lot of energy swim-
ming against the tide, doubling down on
bad investments or convincing others there
is no “rip”. The first rule to protect your
financial life is don’t panic. Be calm and
present in the situation.
The second rule is to assess the current
state of the beach before you swim. Rips
are created when energy (waves) comes
crashing into the beach and displaces water
that is already there. The displaced water
needs to go somewhere and so creates a rip
back out into the ocean. Financial rips are
also created when strong forces displacePhilSlade MIND GAMESS
Phil Slade is behavioural economist and
psychologist for Suncorp, works across
digital innovation, strategy, cognitive bias
and human-centred design with a key focus
on delivering new and improved customer
experiences. He has more than 15 years’
industry experience.ordisrupt. For instance, digital disruption
is challenging many companies’ shares
which were traditionally considered blue
chip investments.
You can’t always tell what’s going on
underneath the surface, but you can look
at cues that give a good indication of
danger. You can’t rely on recent history
either. While it’s important to learn
from historic events, history rarely
repeats itself and therefore it’s an unre-
liable indicator of future success. Look at
the financial environment for what it is.
Rule No. 3: don’t swim alone. Social
support in times of trouble has saved
many lives. Seek out trusted others in your
social circle with similar investments and
learn from each other. A word of warning,
though, about discussing investments with
others – watch out for group effects such
as group think, confirmation bias and herd
instinct when either of the first two rules
are broken. You often see these effects
when herds of people panic or get over-
excited. However, with this in mind,
realise that collective learning often
trumps individual brilliance.
Finally, test the waters. When you’re in
unfamiliar territory, don’t go in too deep
too quickly. Make some small investments
and consciously observe what happens. If
it’s more dangerous than it first appears it’s
always easier to walk out of the shallows
than swim out of trouble.
As you look to enter or navigate the
treacherous waters of financial invest-
ments, check your mindset. Be market-wise
in the same way you are water-wise – it
might just save your life.BETWEEN THE FLAGS
Two practical tips to help you financially
“swim between the flags”:- Focus your thinking. We have limited
cognitive capacity, so short sprints of
defined focus are needed to direct atten-
tion and remain aware. Over the course
of a week pick a particular investment to
research and challenge your current think-
ing. Find others with similar investments
to talk with and ask questions such as,
“What are the external forces impacting
the investment?” and “Are any changes
the result of others panicking or getting
over-excited?” - Create exit strategies and visualise
them. No one gets it right 100% of the
time. Have a clear exit strategy for any
decision and articulate the conditions that
would trigger it. Then practise making this
decision through visualisation. Imagining
the situation and yourself making the
decision lowers status quo bias and loss
aversion, helps recognise warning signs
early and reduces negative emotions that
undermine good decision making.