INTRODUCTION

My late friend, Frankie Joe, called this business a war. But the field of war is the inner self, and the nature of the battle varies with the person.

Ive seen traders sit quietly, motionless, appearing in control while their minds are in such a twisted rage that they are incapable of closing a bad position that is going against them. Ive seen a man with arms like pencils heave a 15-pound time clock against a solid, two-inch thick wooden wall with so much force that it shook two entire rooms. Ive heard cursing that surprises even me, and Im no neophyte to foul language. Ive seen people curled up in their seats holding their stomachs in physical pain from stress. Ive been before the screen myself: palms sweating, blood pounding, face flushed, and adrenaline pouring through my veins as if I were in physical danger when all that faced me were numbers on an electronic screen. What is the inner enemy that makes this business such a battle? What are the forces within us that can bring out irrationality and even violence in the face of something as logical as numbers?

Answering these questions and leaming how to conquer the inner enemy is probably the singl e most important element of succeeding, not only as a trader or speculator, but as a person. Throughout my career, Ive worked with many different men and women. A few of them were consistently profitable, real pros, but most of them ended up losing money and are no longer in the business. For example, out of the 38 people I trained in the 1980s, only 5 made money and went on to pursue their own careers as traders. I taught each of them the knowledge and method needed to survive and profit in the financial markets. All of them had free access to any information in my office, including talking to me at any time, and yet most of them blew out in less than six months. In watching them and evaluating their actions, I began to see the cmcial difference between those who succeed and those who fail not only in trading, but in any endeavor.

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The difference is neither intelligence nor knowledge, but the will to execute knowledge. Acquiring the requisite knowledge to trade, or to do most things, is relatively easy. For example, consider the area of weight loss. You can walk into any bookstore and find countless books on the subject by experts who outline proven and healthy weight loss techniques. Yet, only 12 in 100 people who start a weight loss program actually lose weight, and only 2 of those 12 maintain the loss for more than one year. Thats a 2% success rate-worse than the 5% success rate for commodity trading!

Whether its trading, losing weight, or pursuing any other goal, the most difficult part isnt in knowing what to do or how; it is in making the decision to do it and stick to it. Any time we make a decision, we choose one out of at least two (usually many) altematives. When following through is difficult, it is because our minds are still in a state of conflict regarding which course to take. What is the source and nature of this conflict? Why is it that even when we know what we should do, it often seems impossible to do it?

I think the answer to these questions is brilliantly personified in the character of Mr. Spock on the old T. V. series. Star Trek. Half Vulcan and half human. Spock is a being at odds with his nature. The ancient Vulcan heritage, the story says, is one of savagery, barbarism, and violence. Only through the imposition of a rigid philosophical discipline totally dedicated to logic and reason were the Vulcans able to tame their barbarism and replace it with a dispassionate dedication to expanding knowledge through total focus on mental pursuits. So rigid is their dedication to logic that "pure" Vulcans are supposedly incapable of experiencing feelings and emotions. But Spock, because he is biologically part human, and because of his mothers emotional influence during his childhood, experiences emotion in spite of himself. The most compelling stories are those that depict him as a man tom between rationality and emotion, where he is forced to deal with his emotional reactions in making life and

The Spock Syndrome: Reason and Emotions at War

death decisions.

I think the reason Spock is such a fascinating character to so many people is that he dramatizes and makes larger-than-life a central conflict of human existence. In conversation, you will often hear statements like "My head tells me to stop, but my heart tells me to go for it," which imply a dualism in the nature of human beings: the rational side on the one hand and the emotional side on the other. Most people believe that these two aspects of human nature are separate, unrelated, and often in opposition to each other. The acceptance of this dichotomy between emotion and reason-the belief that they are necessarily unrelated and even conflicting-is at the root of most human conflict, both internal and interpersonal.

If, like Mr. Spock, we are by nature a house divided, if we have two separate and competing aspects, then upon which side do we rely? Perhaps even more important, how can it be possible to lead an integrated, fulfilled life without suffering constant inner turmoil and frustration?

I think it is not possible if you accept the premise that emotions and reason are mutually incompatible. As long as you believe the soul is destined to permanently duel with itself, it will. I call this self-imposed affliction of an embattled self

the Spock Syndrome. It is the enemy that makes this business a war, and so much of life a painful struggle. But as with most wars, the way to end the violence permanently is not necessarily to fight, but to uproot and replace the false ideas that give rise to the conflict. In this case, that means challenging the premise that emotions and reason are separate and unrelated aspects of human nature, which means focusing on the nature and purpose of emotions in human life, with particular emphasis on the role of anger and fear.

Most conflict arises from misdirected anger and fear. Like the Vulcans, we have a savage and barbaric ancestry in which fear and anger played an essential, life-serving role. But in the context of modem civilization, fear and anger have very little productive use. Moreover, they can be life-threatening, self-destmctive. So why do we still experience them, and how can we make sure they work for us. instead of against us? The first step in answering these questions is to understand the source of anger and fear, and to do that, we must tum to our biological heritage.

FROM PREDATOR TO TRADER:

THE EVOLUTION OF HUMAN EMOTIONS

Picture Org the cave man, his club at his side, dozing lazily under a tree and digesti ng a lunch of wild bananas when suddenly, SNAP!, a twig breaks not 30 feet away under the weight of a large beast. Instantly, Org is on his feet, muscles tensed, his club balanced in his hand ready to strike, and his eyes peering in the direction of the noise. He sniffs the air ... a boar, a dangerous beast, but also excellent meat, and it is upwind.

Stalking the animal, with his blood pounding and all his senses heightened, he inches toward the sound and smell. There is a mstle in the bmsh 10 feet away. then, an ominous stillness. Org raises his club, he has an impulse to mn, but he remains, motionless, poised to strike.

With a terrorizing howl, the boar explodes from the bush with tusks hung low. ready to tip up through the flesh of his enemy. With an equally chilling scream. Org jumps sideways and swings his club a moment too late, landing only a partially damaging blow to the boars back. There is a searing pain in his thigh, and he looks to see his flesh opened and bleeding. The boar tums, hesitate s. and charges again. Org, enraged by his injury, swings his club with superhuman strength, and. timing the blow perfectly, shatters the skull of the boar, killing it instantly. After tending to his wound, he drags the boar to his cave, where it will be a source of meat for himself and his mate for a week.

Now consider John Trader sitting in his private trading room before his CRT screen, waiting for the bond futures exchange to open on the CBOT (Chicago Board of Trade). Yesterday, on news that the Japanese Central Bank was raising interest rates, he opened a new trade by selling 200 bond futures contracts at the end of the trading day. His reasoning is straightforward and logical. The bond market has been bullish for months and is showing technical signs of atop.

The Japanese are among the largest holders of U.S. bonds, and it is reaching the point where the interest charge on borrowed money to buy bonds is higher than the yield. The dollar is already declining in value relative to the yen. The Fed cant raise rates to protect the value of the dollar because of an already slumping economy. In fact, there are rumors that the Fed may lower rates. Foreign investors, the holders of 20% of long-term U.S. govemment securities, are going to dump bonds ...he knows it. This is an opportunity that comes once in several years!

But he also knows that he might be wrong. So he has set a mental stop 5 ticks above yesterdays highs, which amounts to 10 ticks above the price where he sold them. He is willing to risk $62,500 in the trade... no more.

The bond pit opens. His heart beats a little faster. The opening price is even with yesterdays closing price! He had expected it to gap down! Something is wrong. After 10 minutes, prices are 2 ticks above yesterdays opening. He picks up the intercom phone and calls his assistant.

"Bill, call the bond pit, see whats going on."

"Got it, John." Click.

He puts down the phone and lights a cigarette, his eyes on the bar chart. "Ive got to be tight," he tells himself, "I know its going to tum around, it has to." His assistant comes on the intercom.

"Lots of activity, but nothing unusual to report; nobody is selling any unusual size."

In the next hour, the price keeps ticking up, approaching his mental stop. He is down 7 ti cks, 8,... 9. . . and then suddenly, as swiftly as an animal on the attack, the price jumps up 5 more ticks, right through his mental stop.

"NOOOOOOO!" Johns scream is heard down the hallway. Then there is an ominous silence. After a minute, the silence is broken by the sound of Bill picking up the intercom. "John, should I buy em back?" "No, theyre going to sell off... hold on." Johns voice is calm .. . way too calm. He has to actively keep his voice down to stop his head from exploding. His heart is pounding; he can almost feel the adrenaline shooting into his bloodstream. He lights another cigarette. Another uptick ... he is now down 15 ticks on 200 contracts -$93,750.

For the next few hours, the price is basically unchanged: first up a tick, then down a tick. Johns hopes rise with each down tick and fall with each up tick.

Then, suddenly, out of nowhere, the price starts to move up again, gradually but surely. With his ashtray full and sweat rolling from his forehead, John watches with a perverse fascination, his mind automatically tallying the losses: $100,000, $106,250, $112,500, $118,750. The intercom clicks again; it is his assistant.

"John?"

"GOD DAMMIT, NO!!! IT HAS TO GO DOWN!" He slams the phone down, pounds his fist on his desk, and yells at the screen, "Come on you filthy b-! Come on you filthy, lousy, rotten b!" Suddenly, it is all too much.

"Bill!! Buy the whole goddam lot back... NOW!"

And he storms out of the room and heads for Michael Is on Trinity Place to drown his an ger with Dewars.

The next moming, bonds gap down and sell off dramatically for five straight hours. The word on the floor is that the Japanese are dumping bonds in size. Bill, the assistant, is watching the screen, slumped and despondent. John isnt there; he is sleeping off his hangover.

Org, the predator. John, the trader. Both Homo sapiens, brothers deriving their nature from the same process of evolution occurring over millions of years. The similarities between Org and John outweigh the differences; the differences are a matter of degree. Both are equipped with a highly developed intelligence. Both have imagination (as evidenced by cave drawings). Both experience emotions. The greatest difference is that John has much more intellectual capacity and far more knowledge.

And yet, who behaved more in accordance with his nature and surroundings? Obviously, Org did. His anger and fear served him, helped him protect himself and acquire food. John, on the other hand, while experiencing a predominantly similar emotional response, acted self-destmctively.

According to psychiatrist Dr. Willard Gaylin, anger and fear are provided by Darwinian evolution to