Every time Michael thought about entering the stock market he said to himself "But what if I lose?" Those thoughts often paralyzed him from action or delayed his entry so long that many opportunities simply passed before he would pick up the phone. When Michael did open a position, all he could think about were negative consequences. "My trading system is wrong at least half the time—what if this is one of those times?'' He couldn't sleep because his mind was racing with those “what if” thoughts. Michael suffered from a chronic "dis-ease" of the mind called worry.

The psychological component of stress is what Michael was doing: worrying. It involves a concern for one’s performance and its consequences. It is the expectation of failure and the negative self-evaluation that accompanies failure. Worry is probably the precursor to the fight-flight reaction. Constant worry or intense worry certainly produces physical stress and, as such a herald, worry might be expected to only have a mild effect on performance. Research, however, shows the converse is true.  Though physical stress at its extreme might result in death, worry generally has a much greater effect on human performance than its biological counter. Much of the experimental research on worry has dealt with a common problem of students—their concern about performance on an examination. Students who worry about test performance are likely to do poorly compared with students who are not concerned. The worry has nothing to do with preparation for the examination—it is simply the fear of poor performance. As a result, concerned students spend at least 25% of their conscious thought worrying about their grades on the examination rather than devoting their full effort to talking the examination. Michael, the investor who cannot sleep well because of his concern over possible negative consequences, will perform as poorly as the worrying students. His ability to forecast price movement or select good investment opportunities does not matter. His constant worry about his performance ensures that he will not achieve optimum results.

Worry and Information Capacity

Our senses are constantly bombarded with millions of bits of information. One can only select a small portion of this information for conscious processing. Thus, people have a limited capacity for dealing with information that comes through the senses. You can test this capacity in yourself by reading the following list of numbers, closing your eyes and then recalling as many of them as you can:

78   23   81   59   44   90    37   17    4     91   16     55   98    11   84          

Unless you have an elaborate strategy for organizing the numbers into groupings that you can memorize, the basis for most mnemonic techniques, you probably were not able to recall many of them. Fifteen two-digit numbers far exceeds the capacity of most people.

Now imagine what other people will think of you if you don't recall all 15 numbers. Perhaps they'll think you are stupid or getting old or incapacitated. In addition, imagine that you will be fined $1,000 for each number that you miss. You could lose up to $15,000 if you miss them all. And what if the numbers you think you know turn out to be wrong? You really could miss all of them! 

Now, keeping all of these thoughts in your mind, try again to recall the numbers. Chances are you missed more of them, if not all of them, on the second attempt. Why?  Because worry takes up precious processing capacity. When you worry and take up capacity, little remains to perform more important tasks such as investment decision-making. Worry takes away from your ability to pay attention to what is really going on in the market.
You cannot notice subtle changes in the market or respond to them because you are too preoccupied with your fantasy of "what if."  Thus, if you worry about what will happen if you make a mistake, you probably will make that mistake. By concentrating on potential mistakes, you make them happen.

Worry and Perception

All the information obtained through the senses about the world "out there" comes from a set of complex mental operations called perception. These mental processes interpret and attach meaning to the information the senses detect. For example, one might see a set of black markings on a white piece of paper and “perceive” it as a bar chart with a "head-and-shoulders bottom" or some sort of "resistance" or, to a non-technician, just meaningless lines. Perception is a filtering process, which selects information for conscious, processing. It selects information from the billion of bits impinging on our sensory apparatus, so we can cope with the world. The selection process is not random, however, but an active process that selects information according to one's expectations. What one sees out there depends on what one expects to see. The investor who expects to see a bull market in stocks will tend to perceive information that supports his expectations. He will "see" bullish technical patterns in his charts and ignore any evidence that might contradict the possibility of a bull market. Worry is a form of perception based on negative expectation. People who worry anticipate negative consequences. Most stressful events are stressful because of the way they are perceived. The event is just an event. It is a person's interpretation of the event that makes it stressful. Winners, for example, have learned how to make it "O.K. to lose." Losers, in contrast, become extremely anxious over losses and, as a result, have difficulty "letting go" of them.

A large loss, or even the potential for a large loss, may devastate the worrier. The person who dwells on the more positive aspects of the situation will view the same event as a lesson or even an opportunity. Suppose for example, the price of soybeans drops 20 cents per bushel. Let's look in detail at the reactions of five commodity investors to this same event.
• An old man with a smile on his face had been stopped out of soybeans early in the day. He had a $3,000 loss at the time he was stopped out, but the closing price of the day would have amounted to a much larger loss. He felt good about himself for sticking to his trading plan, so he responded to the news by smiling and telling himself, "Great! You stuck to your system."

• An active trader was convinced soybeans were due for a major rally. He had predicted the drop during the day and had used the opportunity to acquire a substantial long position in soybeans. He had a small loss on the day, but he felt a sense of satisfaction because his plan was working well. The only thing he said to himself was, "I'm right."

• A financial columnist was long in soybeans. He had absorbed the loss, because he did not enter a stop with his order. His predominant thought was that he did not stand a chance. If he entered a stop, he was sure it would be picked off by the traders on the floor. If he sold out at a large loss, it would probably be at the low price of the day. If he held onto his position, the market probably would continue to go against him. "Why me?" he thought.

• A company president phoned his broker in a panic even though he was short in soybeans. He now had a $3,000 profit and he was concerned the market might go against him. His broker had convinced him to enter into the position and now he was afraid that he might lose his profit. "I'll lose again! " he thought as he called his broker to learn if he was still bearish.

• A soybean farmer had sold his crop two months earlier at a much higher price because he was convinced that certain big companies were manipulating the markets down. The 20-cent price drop was, for him, further proof of manipulation. "Damn them," he said to himself as he frowned. He remained in a bad mood the rest of the day.