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Personal Lessons from the Financial Crisis

The trick is to learn from—but not overreact to—the market downturn

Throughout their lives, my parents never trusted the stock market; as a result they completely missed the Great Bull Market. They didn’t care. Their financial mindset had been so indelibly seared by the hot iron of the Great Depression that the living memories of the hardships and deprivations of those grinding years of poverty, even after my father’s business success, could never be erased. Similarly, for those of us stunned by the financial meltdown of 2008, the psychological trauma, beyond the financial loss, could ossify into counterproductive behavioral traits.

In experimental psychology, it’s called “one-trial learning.” For a rat in a maze, make the electric shock painful enough, say along one route, and the animal, after only one such experience, will be extremely reluctant to go there again. Even if the shock is turned off, the rat will not venture to find out. Even if the route might lead to the largest reward, the rat will not seek to explore it. Whereas in normal learning situations a rat may require multiple trials to remember and work the task accurately, if there is deep trauma involved, one trial does it. So, too, after so shocking a financial loss, one-trial learning could affect many of us—and this is often not for the good.

Because if that happens, if our attitudes solidify and become impervious to change—for example, if we become reluctant to be adventurous—then we will have lost far more than mere money. The good news is that human beings are not rats (at least most of the time), and pains of all kinds can be overcome.

There are different ways to learn lessons from the financial crisis. Certainly there are investing lessons. My interest here is introspective, the personal psychology of how we are changed or should be changed or should not be changed by the sudden impact of economic adversity. Critically, we need to be aware of the dual and diametrically opposite dangers of, on the one hand, being so cavalier as to not learn appropriate and vital lessons and, on the other hand, being so traumatized as to learn inappropriate and debilitating lessons.

Apprehending this duality, here are some words that, to me, come to mind: vulnerability; prudence; passion; determination; productivity; patience; balance.

Vulnerability. Personally, I’ve often felt vulnerable—even in good times—with the fragility of life ever present. But riding the long economic boom ever upward, watching one’s net worth spiral higher had, I now see, a soporific effect on rationality. The financial meltdown brought me back to my reality. My inner metaphor is to “sit lightly on chairs,” as if the floor might shake at any moment. At all times, appreciating one’s vulnerability means connecting to reality.

Prudence. Considered judgment, the careful and controlled weighing of all facts before decisions are made, is praised by all cultures and traditions. But prudence is only a virtue when there are substantial incentives or pressures that pull in other directions. Major commercial banks and investment banks were devastated when highly leveraged derivatives enticingly seemed to promise high return on equity. At all times, be prudent. 

Passion. Nothing great is achieved without passion. So when, in times of turmoil, passion dissipates like air from a blown tire, one’s entire spirit can feel trashed. Passion is fragile and adversity kills it. The only antidote is toughness. Try artificial passion; it’s better than no passion and often can catalyze the real thing. We all do things we do not like. Sometimes the trick is to fool oneself by imagining the unpleasant task to be highly significant and then imaging how to do it energetically. Strive to be passionate.

Determination. It is said that when pilots in the armed forces have an accident, they need to get back into the air as soon as possible so that the trauma does not have a chance to set in neural cement. (“Gun-shy” is another metaphor.) The financial crisis leeched out people’s intensity, undercutting their capacity to focus. Think of this: If you can focus, be intense, be determined in times of adversity, you can do so much more in times of plenty. Think of adversity as if it were a barbell to bench press; the heavier it is, if you lift it, the stronger you get—and the easier it will be to lift lighter weights. Pick your targets, then be determined.

Productivity. Productivity embeds proper objectives and efficient means for achieving them. It takes given inputs and generates optimum outputs (“optimum” is usually better than “maximum,” because multiple factors are almost always involved). During the scariest moments of the financial crisis (2008 Q4)—when no one knew where the bottom was, or when it would come, or what would happen next—the whole system seemed threatened and everyone’s productivity suffered. In adversity, one must recruit inner fortitude to be productive.

Patience. For me, this is the hardest. I do not remember a single good thing that I’ve ever done that came about quickly (or, for that matter, easily). Having been burned with the implosion of certain investments (leveraged hedge funds supposedly exploiting minor discrepancies in efficient markets), one hesitates to invest again, hiding out in cash (even though real returns, net of inflation, are negative). One wants recovery instantly. It won’t happen that way. At all times, be patient. (As a commentary on patience, if one believes in a personal God, patience is the only answer to the conundrum that if human beings are so special for God, why did God design a world in which it took humans so long to evolve—almost 14 billion years? The alternative answer, of course, is that humans aren’t so special.)

Balance. I would proffer that proper balance is our most efficacious objective. I say “proper” balance, which does not mean “evenly” balanced, splitting contrasting positions down the center. Balance, to me, means optimizing all factors for the purpose of achieving given objectives. For example, the balance between determination and patience is a key parameter in managing one’s life. With respect to behavioral modifications generated from the financial crisis, the balance is between, on the one hand, proper prudence (not being taken in by euphoria), and on the other hand, a willingness to assume appropriate risks (not being petrified by the past). At all times, find proper balance.

We do not know whether the financial crisis will continue to recede and the economy will go into long-term, albeit hesitantly slow, recovery. One cannot know what surprises the world will offer up. Those who prosper in the long run will be those who use crisis to strengthen character. It’s good to learn lessons from the financial crisis—but not lessons that aren’t there.

Robert Lawrence Kuhn’s new book is How China’s Leaders Think: The Inside Story of China’s Reform and What This Means for the Future (John Wiley & Sons). Dr. Kuhn, an international investment banker and corporate strategist, is a long-time advisor to the Chinese government and senior advisor to Citigroup. His television series—Closer To Truth: Cosmos, Consciousness, God—is broadcast on PBS and noncommercial stations.

About robert lawrence kuhn

Dr. Robert Lawrence Kuhn is an international corporate strategist, investment banker and expert on China. Since 1989, he has worked with China’s senior leaders and advised the Chinese government on matters of economic policy, industrial policy, mergers and acquisitions, science and technology, media and culture, Sino-U.S. relations, and a variety of international business matters. Dr. Kuhn advises leading multinational companies, CEOs and C-Suite executives, regarding formulating and implementing China strategies in a variety of sectors, including science and technology, energy and resources, industrial, media and entertainment, healthcare / medical / pharmaceuticals, consumer products, and financial services. He works with major Chinese companies on structuring their capital markets financing and M&A activities.