I wrote sometime back on how I appreciate risk, volatility and that part of my system is to understand it more. This includes being more of an active listener to articles on this area, how to create a better system for it (See 6 and 7).
The New York Times has this interesting article titled The Biology of Risk.
The most critical take away for me was how our body reacts to a level of uncertainty that you cannot see the clear path. This generates a greater level of cortisol:
Our challenge response, and especially its main hormone cortisol (produced by the adrenal glands) is particularly active when we are exposed to novelty and uncertainty. If a person is subjected to something mildly unpleasant, like bursts of white noise, but these are delivered at regular intervals, they may leave cortisol levels unaffected. But if the timing of the noise changes and it is delivered randomly, meaning it cannot be predicted, then cortisol levels rise significantly.
Uncertainty over the timing of something unpleasant often causes a greater challenge response than the unpleasant thing itself. Sometimes it is more stressful not knowing when or if you are going to be fired than actually being fired. Why? Because the challenge response, like any good defence mechanism, anticipates; it is a metabolic preparation for the unknown.
As a psoriasis sufferer, stress is something that the western doctors says is a key trigger, depending whether you believe it. And I tried to come to grips with it. There are the folks that says: “Hey Kyith, your job must be the key reason why its causing this aggravation isn’t it?”
In reality, my observation of the flare ups indicate a different thing. No matter how crazy the work gets in running projects and operations, the condition doesn’t worsen. This can be attributed because in running these stuff, you have an internalized or your own risk management plan. You more or less anticipate most of what can happen. Yes the unknown happens, but if your company have a good system in place, its just work, longer time.
What really flares up was when I am on leave, thinking about certain software projects on my own, hacking away on the keyboard. Then you see some crazy flare ups.
This could explain it in that, when you put yourself in really unfamiliar territory, be it not knowing if your code will run, why it doesn’t run when it is suppose to work that way, running a 10 km route an acquaintance leads you without knowing WHERE YOU ARE SUPPOSE TO RUN, puts more stress.
The FED use of Transparency
When opportunities abound, a potent cocktail of dopamine — a neurotransmitter operating along the pleasure pathways of the brain — and testosterone encourages us to expand our risk taking, a physical transformation I refer to as “the hour between dog and wolf.” One such opportunity is a brief spike in market volatility, for this presents a chance to make money. But if volatility rises for a long period, the prolonged uncertainty leads us to subconsciously conclude that we no longer understand what is happening and then cortisol scales back our risk taking. In this way our risk taking calibrates to the amount of uncertainty and threat in the environment.
Under conditions of extreme volatility, such as a crisis, traders, investors and indeed whole companies can freeze up in risk aversion, and this helps push a bear market into a crash. Unfortunately, this risk aversion occurs at just the wrong time, for these crises are precisely when markets offer the most attractive opportunities, and when the economy most needs people to take risks. The real challenge for Wall Street, I now believe, is not so much fear and greed as it is these silent and large shifts in risk appetite.
I never got around why the FED said that they will be more transparent, and that it is a big thing. This article might shed some light on that. It also serves partly to explain the extremely low volatility we are seeing in this recovery.
In the latest FED statements, we would have observed that they say they will stop the buy back and likely to raise rates only in 2015 and 2016. The narrative creates an environment where business decisions can be planned more conducive, less uncertainty.
It cuts both ways. When they felt that there is a need for volatility, they could withhold information, make the message more murky and this ramps up the volatility.
I find that its rather ingenious. The FED is great.