This article illustrates the parallels I see between the ways we attribute value across the capital structure of a firm, and how we attribute value and meaning across our interactions with others.
My intention here is introduce some psychoanalytic concepts to those folks working in finance for whom anything related to ‘mental health’ may feel quite alien.
The bit about me
I spent fifteen years working in banking and fintech across Europe and North America. I specialized in cross asset data and analytics that informed the decision-making processes for the many players in the investment banking world.
I walked the trading floors in Milan, Lugano, Toronto, Manhattan and Stamford. I met with the buyside, sellside, brokers. I spoke to prop traders, quants, risk managers, operations, market data, asset managers, equity analysts, portfolio managers, fund managers, regulatory compliance – you name it. Fintech was a fascinating sector to be in – probably one of the few vantage points that allows one to gain a comprehensive view of the universe of finance.
In 2015 I decided to retrain as a psychotherapist – ‘quite a change!’ many exclaim. Well, as intimated earlier there may be some parallels...
Psychotherapy was a five year training which in my case included a placement with the South London and Maudsley NHS Foundation Trust. Based in a GP surgery in Lewisham, South-East London, I treated clients suffering from anxiety and depression, often rooted in deeply traumatic historical and present day contexts.
I became familiar with the various players in this landscape as well - from psychiatrists, psychologists, counselling psychologists, clinical psychologists, CBT therapists, counsellors - you name it.
One could say that at the core of the way we value assets in finance or value relationships in life is an internal ‘feedback loop’ consisting of anticipation and intentionality.
Just as we use historical time series to identify leading indicators to get a sense of where markets will move, we build a sense of anticipation in our daily interactions based on past experiences. These expectations in turn inform our intentionality.
In time this circular reference of anticipation and intentionality gets solidified into what some call in psychoanalytic terms a schema, or an internal working model (IWM), of how we experience and relate to our immediate world.
I guess an equivalent ‘schema’ in the financial world is the ubiquitous Black and Scholes model, created in the 1960s, still used today to price options. To build an anticipatory view of stock volatility, this financial model borrows concepts from physics (Brownian Motions) related to the random movement of gas articles.
However, as we saw with the Credit Crisis of 2008, not all models are perennially good – some, over time, become ‘maladaptive’, meaning they become asymmetrical, out-of-synch, with market movements. Coincidentally, that is also what brings most clients to therapy – when a crisis hits and puts into question the suitability of what had been, hitherto, a lifelong adaptive model.
The Present Moment
So what is a person’s prevailing model of relating to the world? How can one identify it before the crisis hits?
In finance there is an explicit library of models to choose from, like the Black and Scholes mentioned earlier, via which we derive some coefficient of risk to guide our intentionality.
But with humans these models are invisible, out of awareness. They are an intrinsic part of every present moment and yet they remain mostly implicit. It is only if we manage to pause the present moment that we can catch a glimpse of our IWM, of which ‘defences’ are the visible outputs, like risk coefficients.
Risk Coefficients/Cognitive Biases
‘Splitting’ or ‘Black and White Thinking’, is one example of a very binary defence, also known as a cognitive bias – things are either all good or all bad.
This is the original model humans used to make sense of the most primitive of risks - what some call the irresolvable paradox - where the infant’s supposed source of safety (parent) is concurrently a source of threat.
An infant who is faced, with relative frequency, by a threatening or unloving parent, cannot sustain the type of vigilance required by the risk posed. That would entail the child having to accept that its source of nutrition, both physical and emotional, upon which it is fully dependent, is actually ill-equipped to provide any form of stability, a bit like repackaged subprime mortgages.
The terror of that prospect is such that the only solution available to the infant is to believe that it’s not the parent who’s bad, but that it’s actually something in the infant that’s causing the distress. In effect the infant introjects the badness of the parent, which eventually morphs into an adult IWM which anticipates risks of failure, abandonment, rejection, and ostracisation at every corner.
But keep in mind that the irresolvable paradox is an edge case, a tail-end event. This means that the 'defence' of splitting varies in intensity and frequency, and will pop its ugly head for most of us especially in times of duress.
For example, if we get dangerously cut off by another vehicle, for a brief moment we no longer see the driver ahead of us as a husband, wife, person – they are simply an a#%!hole driver, and we temporarily may feel ‘done to’.
Now part of this reaction is rooted in tangible risk (you got cut off, and that could result in an accident), but if that feeling of having been ‘done to’ lasts well beyond the event and gets in the way of other relationships, whether at home or at work, that may indicate that our IWM is asymmetrical, or maladaptive.
In such cases individuals no longer assess themselves and others based on solid fundamentals – they are no longer private shareholders in their lives – they IPO their sense of self to market forces, and develop an excessive reliance on others for a valuation of self, of which emotional volatility can become a leading indicator. In the CDO figure above, the first 'tranches' that feel the impact of a bad model are usually intimate relationships. Such individuals misread or overweight the market’s more negative perceptions, fostering a disproportionate anticipation of rejection and abandonment – this fosters an intrapsychic assessment of reality rather than an intersubjective one.
Cash and derivatives markets
What do we mean by these two fancy terms - intrapsychic and intersubjective?
Well the ‘intrapsychic’ denotes our subjective inner world, that which emanates from our IWM and amplifies our tendency to misread external indicators as threatening. In simple words, it’s our 'own issues’ that get in the way of asset valuation - we step into the derivatives market, further removed from the asset fundamentals.
The inter subjective is the ‘outside’ operative world, where subjectivities navigate, relate, collide - a bit like gas particles. It's the cash market, the exchanges, where goods are purchased and sold.
When we are splitting long after we got cut off by the a#% !hole driver, we are relating to the world mostly intrapsychically – our IWM is in the forefront of risk assessment while the complex realities of the operative world recede in the background.
Humans constantly oscillate between the intrapsychic and the intersubjective. When our IWM is developmentally balanced, this oscillation takes place within a window of tolerance, which looks very much like a Cap and Floor model. When we are stress-tested, we may breach the Floor by being depressed, or the Cap by being rageful, but it’s a temporary state and self-regulation eventually prevails. That’s the principle of resilience.
But for those whose schema was excessively stress tested, small challenges can cause them to breach the boundaries without bouncing back.
Therapy is an Integral
It is those individuals who I see in therapy – the portfolios that held toxic CDO tranches. And the principle of therapeutic change is not repackaging through some new SPV – it’s about getting back to the fundamentals and reassessing those external benchmarks we used to build a sense of self.
It is by integrating the different parts of the capital structure, good and bad, that will allow us to once again oscillate smoothly between the intrapsychic and intersubjective, and return to a state of market equilibrium.