Real Preparation for a Crash Is Not a Stronger Grip

Introduction: Prepared, and Still Not Settled

Crashes frighten you, so you want to prepare. The measures usually offered are familiar. Hold a higher proportion in cash. Train the grip that keeps you from panic-selling. Maintain a mind that does not flinch when the crash arrives. Each sounds plausible.

Yet people who have taken every one of these measures still cannot sleep on the morning of a crash. However thick the cash holding, however trained the grip, the chest goes as the figures fall on the screen. Prepared, and still not settled.

This article makes the following claim. Real preparation for a crash is neither a cash allocation nor a stronger grip. Where the decision rights sit is what quietly divides the same crash into helplessness on one side and a next move on the other. What follows takes apart why grip cannot reach it.

Why “Train Your Grip” Does Not Reach the Root

Look first at what measures like cash allocation and grip do, and what they do not.

However steady the investor, nobody moves a share price by an act of will. However composed the person, nobody pushes back a crash. Training your grip means training your capacity to withstand a grip, on the premise that you are being gripped. You are not questioning the premise; you are accepting it and enduring inside it.

The difference between a skilled investor and an unskilled one is only a difference in the mind’s reaction — whether they are shaken. The fact itself, that the decision rights sit with the market, applies exactly equally to the skilled and the unskilled. Raise your skill and you may be shaken less. But the structure beneath the shaking — the fact that you cannot decide — does not move a millimetre with skill. This is not a matter of degree but of structure. The same structure, seen from the side of labour, is analysed in what it actually takes to stop depending on an employer.

Loss Aversion Operates in Everybody

An established finding in psychology offers the handhold. At the centre of prospect theory, published by the psychologists Daniel Kahneman and Amos Tversky in 1979 (Kahneman & Tversky, 1979), sits a property of mind called loss aversion. People do not weigh gains and losses of the same size equally; the pain of a loss registers far more heavily than the pleasure of an equivalent gain — by a factor generally put at two or more.

What matters is that it operates in everybody. It does not occur only in the particularly anxious. However steady the person, nobody is entirely free of it. Which shows how difficult a thing the prescription become someone who does not flinch in a crash is asking for. It amounts to instructing you to defy the basic design of the human mind. Here is a further reason why measures that train the grip do not reach the root. The pain of a crash itself cannot be trained away.

The Same Pain Travels to Opposite Places: Whether a Move Exists

What, then, is the point of holding decision rights? Here is the summit of the argument. The pain operates on both sides. Where that pain arrives, however, divides into opposites.

On the side that is wagering on the market, when prices fall, what you can do is hold, let go, or wait. You cannot act on the prices themselves. So the pain of the loss you felt loses its destination and sinks into the helplessness of there is nothing I can do. What psychological research has shown repeatedly is that people are most deeply depleted not by the magnitude of a distress but by feeling that there is nothing they can do about it. The anxiety of a crash weighs so heavily because it is inseparably bound to that helplessness.

In an activity whose decision rights sit with you, by contrast, when things go badly and you feel the pain, a move exists. Change what you make, change how you deliver it, change who it is for, revisit the price. The same pain of loss, instead of sinking into helplessness, turns into the possibility of action: right, next we do this. What decision rights change is not the magnitude of the pain but its meaning.

A second theory supports this. Self-determination theory (Deci & Ryan, 1985), systematised by the psychologists Edward Deci and Richard Ryan, names autonomy among the psychological needs by which people live vividly — the felt sense of choosing your own action by your own will and owning it as yours. Someone who has entrusted their living to the market cannot offer their own act at the decisive moment of a crash. Autonomy goes structurally unmet. That holding decision rights brings stability to the mind is, in the light of this theory, simply what follows.

An Answer to “Running a Business Is Riskier”

An obvious objection arises. Surely running your own business is far riskier than investing in the market.

Concede it first. On probability of failure alone, a small individual business may well be more likely to go badly than a diversified portfolio. But a fact is being overlooked. The safety of diversification is not guaranteed either. Statistics showing that it has been rewarded historically promise nothing about the future. Long stagnations, and crashes beyond what was assumed, genuinely can occur.

The question to ask is therefore not probability but whether a move exists when things fail. Take a large loss on a diversified portfolio and you have no move; you can only wait for the market to recover. When your own business goes badly, you can change the method and try again. Even if it ultimately does not work, you remain throughout the process an agent who acts. You do not become a being who only waits. The height of the risk and the presence of helplessness are separate things.

Conclusion: Decision Rights Are the Umbrella You Hold in the Rain

Real preparation for a crash was neither grip nor cash allocation. Loss aversion operates in everybody, and the pain of a crash itself cannot be removed. What can be changed is not the magnitude of the pain but its destination — whether it sinks into helplessness or turns into the possibility of action — and what divides the two is where the decision rights sit.

Reclaiming decision rights does not abolish the pain of loss. Rained on by the same rain, the one with an umbrella and the one without do not experience the same rain. Decision rights are something like the umbrella you hold in the rain of adversity. You cannot stop the rain. You can go on walking in it. Which is why what deserves preparing is not the grip but the return of the decision rights to your own side.

▸ To take in the whole argument first, begin with Why Passive Income Does Not Lead to Freedom.

The route toward being the one who holds the source of value and the decision rights is set out in digital content as a means of production and in the analysis of economic structure.

References

Academic papers and theory

• Kahneman, D., & Tversky, A. “Prospect Theory: An Analysis of Decision under Risk” (1979) Econometrica, 47(2)
• Deci, E. L., & Ryan, R. M. Intrinsic Motivation and Self-Determination in Human Behavior (1985) Plenum Press
• Ryan, R. M., & Deci, E. L. “Self-Determination Theory and the Facilitation of Intrinsic Motivation, Social Development, and Well-Being” (2000) American Psychologist, 55(1)