Fear, Bravery and Courage

October 19, 1987, scarred the market for good. You can tell from the fact that it is colloquially known as Black Monday, or by how it turned the volatility “smile” to the volatility “smirk”. Before then, starting from the at-the-money strike, the implied volatility of options would increase further in-the-money, or further out-of-the-money, at roughly the same rate both sides. This made a V-shape that looked like a smile, hence the name volatility smile. After Black Monday, and perhaps poetically, volatility now smirks. According to Investopedia:

Black Monday made investors worry a lot more about sudden significant market drawdowns—they became more fearful. I’ve never been around for a bear market, let alone a black swan. My exploits in financial markets are quite amateurish and span a short period. They involve diligently punting my disposable income in currency markets, and occasionally blowing small accounts. But one day, if all goes well, I may have a significantly large account, or be in charge of a fund, and then I will really give a damn about bears and swans. I imagine myself much older, in some office with my Bloomberg on one of the monitors and twitter on the other. I see myself putting on a dip on an afternoon, leaning back the chair and just worrying. Worrying about the economy, the Fed, the companies whose stocks I own; worrying that other’s aren’t worried enough—that’s the job isn’t it?—risk management? Then much later in the afternoon, I decide that the outlook actually isn’t so bad, so I get my head out of the dark clouds and make some trades.

The thing about fear is that often what we imagine is going to happen is usually so much worse than what actually happens. Our imagination is great at horror shows and bad at feel-good movies. We rarely have a big enough imagination about the positive things that could happen to us. I think this very human tendency is what is reflected in the volatility smirk—at any given moment, we are much more fearful than we are hopeful. That’s also why the put-call ratio is almost always higher than 1. Then, after all the fear-mongering, when the shit actually hits the fans, we become more hopeful than fearful. That’s why the put-call ratio drops below parity in market turmoil. The post I wrote earlier today shows some nice chart of these effects. It is useful to know that you are probably blowing things out of proportion when you are fearful because then you can check yourself.

One of the greatest experiences of being human is overcoming things you were afraid of. It is so freeing. Every time you overcome a fear, the quality of your life gets a lot better damn near instantly. When I was around 4 or 5, I was afraid of the dark. In particular, I was afraid of dark parts of my grandfather’s house where I lived. I was convinced there was a monster under the stairs, so instead of going up and down the stairs serenely, I would run up the stairs or swing down the handrail. The racket and potential for injuries drove my grandpa mad, but I couldn’t help it. I was scared. Every night at around 8pm, I had to go to the staircase, turn on the light, go up the stairs, turn off the light, then go to my room to sleep. It was an ordeal, every. Single. Time. I was convinced that any amount of time that the staircase lights were on was long enough for the staircase monster to come out and do something to me. On most days, I would ask an adult to accompany me or at least turn the lights on and then off once I was safely in my room. But some days, the present adults were non-indulgent. It was hell.

I don’t remember the exact day that I stopped being so afraid of the dark, but I remember how differently it felt going to bed since then. It stopped being a thing I cared so much about. I suppose I developed new fears to replace staircase monster but at least in one small but significant way, the quality of my life improved.

What does it take to overcome fear? Sometimes its bravery, and sometimes its courage. No, they are not the same. Some people say that you are brave when you are afraid of a physical threat, and courageous when the threat isn’t physical. It’s a good definition, but I have a different one. You’ve probably heard the wise quote: “Courage is not the absence of fear, it is acting in spite of it.” I think that’s bravery. I think when you are brave, you feel afraid of something, physical or otherwise, but you don’t let it stop you. The whole time you are being brave, fear is present, calling you to safety and painting ugly pictures of what will happen. Courage is different. When you are being courageous, there is nothing else. Not a pip. Absolute silence within. The only voice in your mind is yours, and the result is not a fire lit in your heart, followed by a ‘call-to-action’ type feeling. The result is an assurance that what you are being courageous about is right. Confidence, not bravado. You overcome the fear mentally first, and then you have courage.

Courage smells like the air you breath, and tastes like water. You are more courageous than you think, you just don’t know it because it doesn’t come with bells and whistles. It takes courage to get out of bed in the morning, for example. When you find yourself struggling to get out of bed, you are likely subconsciously afraid of something.

Not very often, but there are times in your life when it will be demanded of you that you be courageous—truly courageous—more courageous than you know you can be. For example, it takes courage to fight evil. One of our worst traits as human beings is that we often stand by and watch as bad things are done to other humans; the sadists among us having a laugh. I call it “silence of the lambs”. In the face of evil, you cannot afford to be held back by fear. You have to be a lion(ess). If for no other reason, then simply because evil destroys even itself. Fighting evil requires either bravery or courage as well as self-sacrifice. That’s what the story of Jesus is about.

Ever since I hit puberty until my early twenties, I was deathly afraid to talk to women. The more I liked them, the more afraid I was. Nowadays I’m not. At first I was being brave—I feared rejection—but now I have courage. The turning point came about like this. First of all, I realized that whether I was afraid of not, if I talked to the girl I liked, and it went well, I would thank my lucky stars. Secondly, I noticed that the kind of girls I liked happened to be very beautiful yet isolated, which is a big problem for attractive people as everyone assumes they have a ton of friends and/or they will reject their advances. Third, I realized that the consequences weren’t as dire as I imagined. Even if I was publicly and shamefully humiliated, the focus would be on the balls it had taken, and how my attractive rejector had a bad attitude. Men would give me silent daps, and women would give me lingering side eyes or sympathetic stares—both of which played to my advantage. I made the decision then to always talk to the girl I liked, and by overcoming my fear of talking to women, I was able to develop good relationships with all the women in my life ever since.

The important thing to do when you are afraid, is rationally decide what to do, and then you will know if you are being brave or courageous.

I’m not saying that courage should be more esteemed than bravery. For instance, in trading, you need both. On a day to day basis, you need courage and the accompanying confidence, but in a losing streak, when you have lost so much that you are generally fearful and irrationally so, bravery can do wonders. Nothing cures a losing streak than a win. Start by aiming for rationality: get back to flat; think things through slowly; figure out what is going on. Remain in this state until you’ve decided what to do. Then act.