Performance anxiety is a fascinating thing. It's your body's biological response to stress. Someone here put it best by saying it's your "fight or flight" reflex. You are stressed, your body floods with a bunch of chemical compounds, and suddenly you're not yourself any more. Motor skills, perception, mental function, they're all a bit different. It's like being in an altered state.
I haven't performed live since I was in high school. I recently took up the guitar well into adulthood, so I may try to play that live some day soon. The thought brings up all those high school anxieties. I used to play sax in the big high school band, and that was no problem. I'd sit there with the whole group and play my part, almost anonymously, no big deal. But I also played in a small jazz group, and also once as a duo. I remember those performances as bizarre out-of-body experiences. I remember going on stage, I remember the people watching me, and I remember coming off stage. I don't remember hearing a single note I played. I was usually well-rehearsed, and by all accounts I played well, but hell if I remember hearing any of it. I would be so much in that atlered state that I would barely be "present" for the performance. It was thrilling, but I can't say I enjoyed it. And that's probably why I stopped doing it.
Over the years I've had similar problems with public speaking and making professional presentations. I've had one spectacular meltdown where I couldn't even complete my part of a presentation from the overwhelming anxiety. But years ago I had an experience which put things in perspective for me and gave me a new approach to performance anxiety - I got my pilot's license.
It may seem unrelated, but stay with me here. Learning to fly, as you can imagine, involves an element of stress. You want to get your "performance" right. There's lots of people watching you, including an instructor, aircraft controllers, and everyone else around the airport. Not to mention, mistakes result in much more than being embarrassed, and you usually won't get a second chance to get things right. I found that this experience really taught me how to handle that adrenaline rush, and control my fight-or-flight reflexes. When you fly an airplane, you have nowhere to run or hide, and no way to end the performance, except by taking control, doing the right things, and getting on the ground safely, no matter what fear or anxiety you may encounter.
My instructor gave me some of the best advice I'd ever gotten in this regard. As I was learning to land, I'd come in on the approach, hands clenched, face drawn, trying to control the airplane's every movement, the very picture of tension, anxiety, and almost terror. He said to me, do you enjoy flying planes? To which I responded "I love it!" And he'd say, "Then why don't you smile? You don't look like you're having a good time." I'd laugh at that, and immediately feel the tension leave my body. It sounds simple and stupid, but a laugh or a smile floods your body with compounds in the same, but opposite, way, that fear and anxiety do.
I started doing that every time I came in for an approach. I'd get set up, reflect for a moment on the utter awesomeness of what I was about to do, and I'd smile. My grip would relax, my breathing would get slower and deeper, and my mind would clear. I'd become present in the moment and actually ENJOY what I was doing. All with a simple smile.
Corny? Yes, 100%. But I started doing it at the beginning of job interviews. And speeches. And professional presentations. And it works like a charm. Instead of the fight-or-flight reflex, I try to initiate the "stay-and-enjoy" reflex. I find I'm able to look at my audience, read them, respond to them, and when it's all over, I can remember how it went, and improve my performance for next time.
I don't know if this is going to work for playing the guitar live... when I actually do it, I'll let you know.
Sorry for the long post, I hope it's useful to some of you.
(Edit: I just realized I revived a two-year old thread. I hope there isn't a caning penalty for that. It came up as a search result for something else I was looking for!)