Sebastian, welcome to 12 Geniuses.
Thank you, Don. I'm so psyched to be on your show. I started listening to prior episodes and I already love it. I'm an instant fan.
And by the way, your ratings are amazing. I think you got like a perfect rating. So, this is really high pressure for me today.
Well, we'll talk about pressure. We'll talk about stress. I think those are good things. I think you're going to convince us that those are positive things to have in our life. Tell us a little bit about your background.
So, I work in money management 25 years. It's a high pressure job. I oversee over 500 billion in assets under management. And a few years ago, I became super interested in positive psychology and sports psychology. And it has led to the publication of my book, The Psychology of Leadership. So here we are.
Why did you write that book?
I was stressed at the time and I was stressing about stressing. So, I was adding another layer to it. And I ended up talking to a sports psychologist where I live here in Maryland. And we sit down and he decides to tell me the story of his best match ever. So, it turns out this sports psychologist, his name is Dr. Daniel Zimmit, holds 40 national titles in the sport of handball. Now, handball is kind of like squash, but you whack the ball with your hands. And so, Zimmit happens to have 40 national titles in that sport, but he's also a sports psychologist. So, he's an interesting person who's mastered the mindset as an athlete and then in his practice coaching other athletes, NFL, pro baseball players, Olympic athletes. So, we sit down and he starts telling me the story about this match, but the match took place 10 years prior and it's so strange because he remembers everything about the match, every point. He's describing, oh, point eight, the ball hit that wall. And there's so much passion. He's describing how at some point he's on his knees and does an extreme shot to get the ball, makes the point, and then Don, it's an absolute letdown because he goes, 'Oh, I lost the next two points.' And I go, 'Wait, wait, wait, you lost that match?' And he goes, 'Yes.' And to him, he starts explaining the mindset. It was completely irrelevant whether he won or lost the match. He was playing a much stronger opponent and that day on the court he realized he had made huge progress in his game and he was now able to play at a higher level. So he was using this to explain the mindset in sports psychology. Roger Federer famously told students recently, 'No matter what game you play in life, you're going to lose.' Because if you think about it, Roger Federer actually only won 54% of the points he ever played, even though he won 80% of the matches. And it's just such a beautiful description of the sports psychology mindset where he goes, 'The best in the world are not the best in the world because they don't lose. They're the best in the world because they know they're going to lose again and again, and they've learned how to deal with it. And it's not about winning. Sports psychology is about losing.' I found that fascinating and what you learn from the losses. And if you transfer that to my day job in money management, look, no one has a crystal ball and we will get investment decisions wrong. But if we have that small edge that we apply consistently over time, then we can deliver wonderful outcomes, wonderful returns for our investors. So there's a direct analogy with money management. There's a direct analogy with just business in general. And the fact that you're going to make decisions that are going to be wrong. And that was the spark for me to start reading. I'm a nerd. I'm a research nerd in finance and economics. So I started reading scientific literature in sports psychology and in positive psychology, ultimately in personality psychology which is super interesting as well, and that's why I wrote the book. Long story short, it was just this spark that occurred when I realized that there's so much research around resilience, around losing, around accepting losses, around the mindset that is not known or applied in the business world. So that became sort of my mission. What happens when somebody makes a bad choice or when there's a loss? How do you handle that as a leader? How do you want your other leaders within the organization to handle that?
So, here's a number one takeaway for me on the relationship between the two. The world of sports, the world of investing in business. You have to learn in our world to separate luck from skill. And there's great work that's been published by Annie Duke on this. I'm a huge fan of hers. She's a great author. She was a pro poker player and became an expert at decision-making under uncertainty, which is what we do when we're investing. So, separating luck from skill. If you think about it, athletes control their process. They control their preparation, but on the day of, they can't control the weather. They can't control what their opponents are going to do. There are all sorts of dimensions how they're going to feel that day. There are so many dimensions they can't control. And they too when they lose might have played their best. So they too have to separate luck from skill. There's a huge random component to sports. There's a huge random component to investing. So a simple example I like to use, Don, to illustrate the concept is suppose that we go out to dinner the two of us. Podcast was such a positive experience we decide let's go continue the conversation over dinner and we have so much good wine that it's not a good idea to drive. But suppose that actually I decide to drive home nonetheless after a bottle of wine. That, you know, is a bad decision. But if I make it home safely, it's a good outcome.
Still a bad decision, right? And so in investing, people will put all their money into a crypto coin, a memecoin, and they might triple their money in two months and feel like it was a really good decision, but it really was luck. And it's not repeatable over time, and it's incredibly risky, and one day they'll probably lose all their money.
And then the opposite is true as well, right? I might decide to get an Uber, but the Uber crashes. Bad outcome. But I can't obsess over my bad and think I made a bad decision because it wasn't a bad decision.
So that happens all the time in business and in particular in investing. You followed your process. You made the right decision, but Russia invaded Ukraine and you had no way of knowing what would happen to oil prices, right? So, separating luck from skill applies to both worlds. To me, it might be the number one takeaway of how to think about the mindset beyond what we just talked about, which is learning from your losses. I think separating luck from skill is one way to learn from your losses. Look back. Did I prepare well? Did I make the right decision even though the randomness in the outcome didn't come my way?
So, let's say somebody on your team has a really good outcome, but their process was flawed. How would you address that?
You have to discuss the process itself and separate the outcome from the process. Those discussions aren't easy to have. People, it's human nature if you're lucky to think that you made really good decisions and it's human nature if you're not lucky to think that you did everything right. So, constantly you have to be direct and honest and build trusting relationships when you're all involved. Sometimes it's an investment committee, sometimes it's two people discussing investment outcomes or other business outcomes. When you're all able to discuss the process itself, you kind of have to build intrinsic motivation to perfect your process. This is another thing from sports psychology. It differentiates between ego motivation and process motivation. And if you're motivated by improving your swing at golf more than by the actual score on the board, then you're in a good place long term. You're in a good mental place and as a player probably have more longevity in success. So you have to have these discussions no matter what the outcome is. As a mentor of mine told me one day early in my career, 'You'll learn, Sebastian, there are only two types of investors: those who are talented and those who are unlucky.' And that was an introduction to this idea of human nature. If we get it wrong, we weren't lucky. If we get it right, we were talented.
What are the most important psychological principles that distinguish great leaders from good ones?
Okay, I love that question, Don, because you're saying great versus good. Let me describe what most people would think are the qualities of a great leader, but really it's more basic and being a good leader. So imagine a great leader in popular culture. Well, she's a very convincing and a very strong communicator, inspiring others. Great speeches certainly is part of it. She's decisive, makes quick decisions. She never quits. You know, we talk a lot about resilience. Don't quit in the face of adversity. And she's calm under pressure. She doesn't experience stress, right? There's always a calm demeanor in her behavior. Well, it turns out I can argue in The Psychology of Leadership that that's all fine and good, but it's actually the exact opposite that will take you to the absolute next level. And here's the counterintuitive part. This is backed by research. I talk about my own experience. If you want to get to the next step as a leader, it's more likely than not that it's not about how well you communicate and your inspiring speeches. It's the opposite. Are you a good listener? I had this during the pandemic. I had a little sticker on my computer that says, 'Listen more, talk less.' In my own journey, it's been more about developing my listening skills. Like a leadership superpower that's completely underrated. And then about this idea of being decisive and making quick decisions, the hardest part in business is actually to exercise strategic patience when you have time to make a decision. Some of the best leaders I've worked with would often ask, 'How much time do we have to make that decision? How much time do we have to hire that person to look at that strategic acquisition?' And if they had more time, they would actually keep the optionality. Strategic patience greatly underrated, counterintuitive. This idea of never quitting. The toughest thing to do in high performing leadership is knowing what to quit and when to quit. Going back to Annie Duke as well, she's written about that as well. So, see how it's actually the reverse. And this idea of not experiencing stress. This is directly from sports psychology and from the research. Optimal performance in sports for sure and I believe in life does not occur at a stress level of zero. A little bit of stress and activation will improve your performance up to a point after which we know stress can be really bad. It can kill you basically over a long run. But this idea that there's a curve and that activation increasing stress can increase your performance is actually key because you know what, if you want to go from good to great leadership, you're going to experience stress just like athletes. They experience stress. Dr. Zimmit told me top athletes are all high in neuroticism.
But learning to harness it, reframe it, and turn it into higher performance is part of it. So there you go. People say communicate well, be decisive, never quit, be resilient. I'm saying if you want to go great, if you want to take it to the next level, do the opposite: listen more, learn strategic patience, know when to quit because it's hard, and embrace stress.
Let's start with stress because I agree and I've heard you talk about an archer versus a powerlifter, right? There's a lot of stress and one activity is very mental, one's physical and the type of stress. One is fine motor skills, the other is gross motor skills. But I've also heard you talk about the 100 meters, right, where you're trying to activate. But I find that event to be really interesting because at the very beginning of the race, you have to have an incredible amount of control over the stress to start well. So maybe you could talk about those examples and how to manage that type of stress. And then I also want to talk about surgery and I want to talk about fighter pilots as well because I think those are interesting types of roles where they have very high levels of stress.
Well done. First of all, thank you. You've clearly done your homework here.
I did a little bit of research. Yeah.
And look, it's called the Yerkes-Dodson curve if people want to look it up. It's got about 80 years of research behind it. The Yerkes-Dodson curve shows that performance for athletes increases with activation and stress up to an optimal performance point after which performance decreases. You choke. Now what's really interesting which you're raising is the curves look different for different tasks. They also look different for different people. You and I have different Yerkes-Dodson curves. So when you start with this mental model and you look at different tasks, you quickly realize, as you suggest, that some tasks require higher activation levels, simple tasks, the 100 meter dash, the power lifter. Other tasks you'll obtain optimal performance at a lower stress level, not zero but at a lower stress level: archery, taking a math test, surgery. So when you manage a team in an organization, you can think of the organization's Yerkes-Dodson curve and calibrating your goals and measures of success to look for that optimal point, not make the goals too easy, not make the goals too hard. So it applies to calibrating pressure if you will inside an organization and realizing that the optimal is not zero because anyway zero pressure, zero stress personally or organizationally is impossible. So you have task-specific Yerkes-Dodson curves and understanding those is fascinating. Notice, Don, how I'm playing a little loose with the language because I'm substituting stress with activation. Sports psychologists will take issue with this.
It's very important for them or in the literature, it's also called arousal. So they'll reframe stress as something that kind of feels the same, biologically is the same, but has a different impact and is essentially reframed. So that is also part of it. That is a caveat. Now what you also mentioned is the curves are people specific. Some people have very high performance at very low stress level. Their entire curve looks in a different place in the graph. And so then the question is how do they get there? Right? In the book, I like to use the example of Neil Armstrong because famously he had a really interesting Yerkes-Dodson curve. He performed really well at really low stress level. Apparently the mission went completely wrong. This is a famous story. They lost connection. They didn't have communication. The computer didn't work. The module went off course. They ran out of fuel. Armstrong took manual control, landed the thing in the place it wasn't supposed to land, and then the rest is history. He famously came out and said, 'One small step for a man, one giant leap for humanity.' If you think about this moment, I get goosebumps, right? What most people don't realize is that as an astronaut, he was hooked to a heart rate monitor. And Don, do you know what the heart rate was for most of the mission?
I do. 75 beats per minute. It's unbelievable.
75 beats. You really did your homework. 75 beats per minute.
Mine is going a lot faster than that right now.
Yeah. Yeah. We're probably both higher than that. For a lot of people, 75 is resting. And so Neil Armstrong had a lot of repetition. So he had a lot of experience in high pressure situations where he developed stress resilience skills. And then in the moment, there's also a lot of research about how to in the moment address stressful situations. I used to think breathing exercises were kind of trite advice, but when you start using them and trying them in very high pressure situations, you realize the effect they have and they actually work. So there are all these different ways you can improve your Yerkes-Dodson curve.
Can I make a comment on the breathing because I had a fighter pilot on the show, Major General Kenneth Ekman. It's a great episode if you go back and listen to it. He is now a general serving in Germany but with a command in Africa and he has about 3,000 flight hours, 600 in combat. And he says that when he has a stressful mission, he'll go back and listen to his breathing on the mission. And he'll look to see, oh, is the breathing irregular? Was it elevated? Was it faster than normal? So, he's very in tune to breathing. And he reminded me, well, not that I knew, but he said, 'A mission is not stressful unless you're getting shot at.' So, his idea of what's stressful is completely different than mine or yours or than the general public. And the other one who has been on the show is Dr. Michael Mattis, who is a world-class surgeon, and he's become a friend of mine. He's in Minneapolis here and we've become friendly and he said that he has this ability to detach that not all of us do. So he separates like you were talking earlier. He separates the outcome from the process. Focuses just on the process, is able to detach that this is somebody's father or mother or brother or son and he just focuses on what his training has taught him to do over and over. And he's a very emotional guy. He's a hugger and he's a great father, but in that moment he's able to detach in a way that I don't think a lot of us have learned to do.
You know what that makes me think of is this state of flow around which there's a lot of research in positive and sports psychology as well. He's probably able to get in flow where the challenge he's addressing is a really good fit for his skill level so that he's fully engaged because he needs to be fully engaged and it's not too easy so that he gets distracted, it's not too hard so that he gets discouraged, and he's just in the sweet spot zone of flow. That just sounds like you're describing flow here. Which is also part of operating optimally on those stress curves. Look, my view is I started this journey, the research, by stressing about stressing. I kept telling myself, I've been doing this for 25 years. Why do I experience this stress? And then getting into sports psychology and realizing that I don't need these two layers of stress. One is enough and then embracing it as part of performance fuel. But yeah, the state of flow is a big part of the research in positive psychology, a big part of what I write about in The Psychology of Leadership. I have a couple chapters on it and it's a huge, I think underestimated, tool mental model for business in general. How do you get your organization in flow? And what a lot of people don't realize is flow is also a social concept. It's also a team concept. And I think you've had at least three sports psychologists on your show before. And sports psychologists care a lot about team performance as well. And I just listened to a prior episode where we're talking about team building as well and getting the right pieces together. Well, flow can be a team experience. If you go back to the original research with Mihaly Csikszentmihalyi where he started writing about it, he says conversation can be a source of flow. So right now, Don, we're having a conversation. We're fully engaged. And in meetings, I see it in business when people start debating an idea, a tough problem to solve. I'm looking around the room and I think the team is in flow right now. The intellect is fully engaged. It's challenging and we're in a team state of flow, which is a really good place to be. So how do you build the conditions in your business world or in your sports organization to generate team level flow?
How can business leaders apply positive psychology to create more resilient teams especially in high pressure corporate environments?
