Critical Thinking Skill #4 – Emotional Intelligence

What Mike Tyson can teach us about Emotional Intelligence

When I talk about emotional intelligence with clients, they often think of it as having emotional control over their investing behavior. This is true, but it’s just one aspect of this critical thinking skill. Emotional intelligence is a broader concept. I’ll try to explain it with a thought experiment, using a boxing analogy.

The Thought Experiment

Do you know who Mike Tyson is? If not, take a minute to google him before you continue.

Now imagine that you’ve been given an opportunity to challenge Mr. Tyson for the world heavyweight championship. If you win, you will become instantly rich and famous. If you lose, it’s no big deal because everybody expects you to lose anyway.

Having accepted the challenge, you begin to diligently prepare for the fight. You’ll read up on boxing history, boxing techniques, and boxing strategies. You spend countless hours watching films of Tyson’s fights, looking for the smallest weakness in his technique. You begin to develop a strategy to use when you climb into the ring.

You work out every day, adding muscle and gaining endurance. Weight training, running, skipping rope, heavy bag, and special diet (to bulk up, not to lose weight). You hire a sparring partner so you can work out the kinks in your strategy. At this point, you’ve gone full Rocky Balboa.

By the time fight day arrives, you are in the best shape of your life. Your family and friends can hardly recognize you after the radical changes in your physicality and attitude. You look in the mirror and say… “I’m ready”.

At the morning weigh-in, you tell Tyson that you are ready to go, and that you have a killer plan for beating him. Tyson looks at you with a cocky grin. Then he leans in and whispers in your ear… “Everybody has a plan until they get punched in the face.”  You feel your stomach muscles tighten. Just a little bit.

Now What?

Now you have to make a decision. There are two paths you can take, after being subjected to his taunt. If you are emotionally intelligent, you will make an honest assessment of your chances, and realize that you’re going to get slaughtered. You will cancel the fight and suffer the shame and embarrassment that comes with it. But you can take comfort in the knowledge that you have made the decision.

If you lack emotional intelligence, you will allow your ego to do the talking. You fire off some snappy comeback, like “You don’t scare me, old man. You’re way past your prime and I’m going to own you today”. You naïvely believe that you can use his taunt as an incentive to up your game and be even more fierce than you were before. And then you proceed to drop to the canvas like a rag doll after his first punch.

What can we learn from this story?

People who are emotionally intelligent are very aware of both their strengths and their weaknesses. They gain this awareness by deliberately paying attention to the outcomes of their actions. They would never, ever consider taking on a challenge that was beyond their capabilities. They value self-preservation more than fame and fortune. They know the odds of every wager they make, and they avoid long odds.

They can also recognize when they are being played, and they are willing to walk away. They understand how dangerous overconfidence can be, and they work hard to avoid it.

They understand that ego is as much of a liability as it is an asset. They believe in what they do, and they are confident in their skills. But when they get the sense that a decision they are thinking about making is motivated by ego or pride, they back down. They live to fight another day.

Emotional Intelligence as an investing skill

It’s not hard to imagine how emotional intelligence is an important skill for an investor to have. Ego and pride are useful traits to have if you’re a politician or an actor or a drill sergeant. But in the realm of investing, there’s no room for ego or pride. The market doesn’t care how tough you are, or how aggressive you are, or how confident you are. Self-image and reputation count for nothing in the realm of investing.

Overconfidence is one of the top performance-killers in investing. It blinds you to the subtle signals that the market gives off, and turns you into a supplier of Alpha, rather than a taker of Alpha. Overconfident investors are the suckers at the table. They’re easy to play. And here’s the kicker: their over-developed ego prevents them from admitting to themselves that they are the sucker at the table. This keeps them locked into the pattern of making the same mistakes over and over again.

The polar opposite of overconfidence is humility. Emotionally intelligent investors make a concerted effort to practice humility and avoid hubris. The next time you hear someone bragging about a stock they own that doubled or tripled, try asking them to tell you about their biggest loser. If they can’t come up with one, you know you’re talking to someone who lacks emotional intelligence.

Can emotional intelligence be learned?

Yes it can. It’s really not much more than paying attention to the decisions you have been making as an investor, and asking yourself what motivated you to make them. If you’re willing to be honest about it, you can discover all kinds of biases, faulty logic, false assumptions, and shallow thinking. That might hurt your ego in the short run, but in the long run it will make you a much better investor.

About the Author

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.