Sunday, July 06, 2014

Turning Success Into a Habit

In the course of writing my next book, I've been reading The Power of Habit by Charles Duhigg.  It's an excellent read, citing a wealth of real-life examples and cognitive neuroscience research to explain how making life changes often boils down to making habit changes.

This flowchart provided by Duhigg explains the structure of habits and illustrates what must be done to change them.  Habits begin with cues that lead people to anticipate rewards.  Once cues are activated, the routines that bring the rewards become relatively automatic.  It is the automatic nature of habits, grounded in the brain's basal ganglia, that makes them difficult to change.  Only by restructuring the routines that connect cues and rewards can we channel automatic efforts in constructive ways.  Interestingly, this can be done by finding small, consistent ways to disrupt an existing habit, rather than by trying to overhaul bad habits in general.

For the most part, the problem is not that traders lack positive trading behaviors, but rather that they have not been able to turn those behaviors into routines.  To the extent that we rely on willpower to do the right things, we are vulnerable to inevitable lapses in willpower. The beauty of habits is that they take on a life of their own, freeing the conscious mind to tackle fresh challenges.  That life of their own, however, is precisely what traders lament when they find themselves reacting to cues in unintended--but habitual--ways.

Once upon a time, psychologists tended to operate with the conceit that talk therapies were somehow deeper and more profound than other change modalities.  Brain research suggests that precisely the opposite might be the case:  talking to people about their habits is a singularly ineffective way to change those habits.  If the action patterns are coded non-consciously in the basal ganglia, engaging the reasoning, conscious mind to initiate change is less likely to be successful than initiating fresh action patterns that reprogram the relevant brain region.

When traders become competent, they replace trading mistakes with best trading practices.  When they become expert, they turn those best practices into positive habit patterns.  Finding the right cues and rewards is half the battle in changing our trading routines.

Further Reading:  Turning Stress Into Performance