In the late seventies, Hebrew University psychologists Daniel Kahneman and Amos Tversky discovered that humans have an outsize dislike for misfortune. When the two researchers asked test subjects to risk $20 on a coin flip, they found that those subjects needed a reward close to double that figure to make the gamble palatable. The existence of this irrational bias—known as "loss aversion"—has since been confirmed in study after study. If you stake out the rental-car counter at the airport, you'll find folks paying $40 a day for insurance they don't need, even when they know their own auto coverage (not to mention their credit-card company) will protect them. If you examine stock-market transactions, you'll learn that people—even professional money managers—sit on shares on the decline for twice as long as shares on the rise.
It seems we can't help but worry about taking a hit, no matter how small. Odder still, the more we fixate on our losses—real or perceived—the more we're willing to risk to make amends. Back in the mid-nineties, when Nick Leeson was the general manager of the Singapore office of a British investment bank called Barings, one of his underlings made an error that cost the company $30,000. Leeson decided not to report it. He tried to hide the loss in a secret account instead. He figured he could make up the difference with a little trading of his own. He bet that the Nikkei would go down; it went up. He bet that Japanese government bonds would go up; they went down. Playing double or nothing time and again, Leeson compounded his predicament—raising the deficit from $30K to $30 million to $200 million. He ultimately rolled up $1.3 billion in losses, driving Barings out of business.
So how do you avoid blowing up the bank when your job's on the line, your budget is shrinking, and your boss insists that you find a new source of revenue—pronto? On one hand, fear can improve your focus and sharpen your senses in preparation for a fight-or-flight challenge. On the other, it can make you stupid, shrinking your working memory and distorting your sense of risk. Well, it helps to understand fear's mysterious ways. Here's what the smart guys do.
BE PREPARED TO CUT BAIT: It's easy to get attached to projects that you've poured time and energy into, but if they're obviously going nowhere, it's smarter to drop the ax yourself than wait for someone else to do it. The anticipation of a negative outcome tends to be more unpleasant than the outcome itself. Likewise, if you're worried about your year-end bonus, go ahead and ask if it's going to be slashed. "You might not like the answer," says Stanford University psychologist Brian Knutson. "But at least you can get on with your life."
TAKE CONTROL: During World War II, Air Force psychologists found that fighter pilots weathered the stress of combat much better than bomber crews. Why? Probably because having command of the airplane made their fear more tolerable. When you're trapped in a perilous situation, try to focus on the things you can do. You can't spare yourself the threat of layoffs, but you can sign up for job training and you can create a fallback plan.
BEWARE OF PROLONGED STRESS: In the face of danger, your body pumps out cortisol, a hormone that helps you metabolize emergency energy supplies. Over time, though, it begins to impede the body's self-maintenance, leading to high blood pressure, decreased cognitive functioning, and a suppressed immune system. According to John Coates, a neuroscientist at Cambridge University, when the stock market is particularly volatile, traders' bloodstreams are spiked with the stuff. "Cortisol affects the memories you recall. And it tends to make you recall mostly negative precedents," he says. "You generally see danger everywhere, and that tends to make you very risk-averse."
HIT THE GYM: To test how physical fitness influences stress resilience, Lilly Mujica-Parodi, director of the Laboratory for the Study of Emotion and Cognition at Stony Brook University, in New York, arranged to have first-time skydivers work on visual puzzles on a laptop en route to the drop zone. The fitter they were, the better they performed.
GET IT ON: According to one 2006 study, "penetrative intercourse" reduces the amount of stress people feel before public speaking. In fact, the more sex the subjects had, the less stress they felt. If nothing else, spreading the love will help you adopt a cheerier outlook. And that will bring you one step closer to a powerful coping mechanism called reappraisal: the ability to look at a horrible situation and recognize the good that could come of it—or at least appreciate how much worse things could be.
Even Nick Leeson can attest to the wonders of that kind of thinking. After bankrupting Barings, he fled Singapore, only to be arrested in Germany, extradited, tried, and sentenced to six and a half years in jail. While behind bars, he wrote a book about his experiences. That book, Rogue Trader, became a best-seller, and then a movie. The part of Nick Leeson was played by Ewan McGregor. Bet the guys in the office never saw that coming.