interviewed by Jack Schwager: Not a few blew up early in their careers. It took huge valleys to force the self-appraisals and reorganizations that would eventually generate the significant peaks. This was a major conclusion of Thomas Kuhn when he wrote the classic, The Structure of Scientific Revolutions: The progress of science is typified by periods of gradual, incremental change within a paradigm, followed by accumulating anomalies (observations and questions the paradigm fails to address), and eventually followed by the upheaval of revolution and paradigm change. At those junctures incremental change yields to qualitative shifts: The science takes an entirely new direction.
A small example of paradigm shift in psychology occurred when the reigning framework of psychoanalysis gave way to more active, directive, briefer forms of intervention. Psychoanalysis was – and remains – an elegant theoretical framework with explanatory power. Freud's core idea was that present-day problems are reenactments of past, unresolved conflicts. The goal of therapy was to reenact those conflicts within the helping relationship, allowing the analyst to provide insight into the repetition compulsion. Once patients became aware of their repetitions, they could change those patterns within the therapeutic relationship and, from there, within their other relationships. As you might expect, analysis was a long-term affair, requiring time and effort to achieve insight, wrestle with conflicts within the therapy, and then work through those conflicts in present and past relationships. In the heyday of analysis, it was not unusual for therapy to require multiple sessions per week over a period of years.
Key Takeaway
Change occurs only once the accumulation of problems necessitates the reach for new solutions.
As it happens, people do repeat conflicts and issues throughout their lives – in their marriages and in their trading. What therapists found in their practice, however, were Kuhnian anomalies. Some clients described vexing, long-standing problem patterns and yet managed to change them within a matter of days and weeks – not months and years. Pioneering therapists such as Alexander and French and Milton Erickson began to explore these accelerated change processes and question core tenets of psychoanalysis. What they found was powerful emotional experiences could catalyze relatively rapid change. My life turned around, not because of any grand insight accumulated over years of analysis, but from the single powerful influence of meeting the woman who would become my wife and the children who would form my new family. Anomalies had built to a crisis point in my life, and it was out of the deep emotional recognition of personal, social, and career limitations that I became ready for wholly new commitments.
Once you grasp the Kuhnian dynamic, you can appreciate why sine-wave life charts with few valleys are not necessarily good ones. Mastering the moderate challenges of childhood and adolescence is what gives us the resources to meet the challenges of life's greater valleys. University of North Carolina researcher Angela Duckworth calls this resilience “grit.” It's the ability to get off the canvas after being knocked down and still have a shot at winning the fight. Learning to master the small setbacks gives us the tools and confidence to weather the much larger ones. Without experiences of grit to draw on, there is no bridge-building to the future: Change becomes a threat, not a challenge.
And the peaks? Those provide the energy and inspiration that carries us through life's valleys. Often, peaks come from fresh experience: traveling a new career path, giving birth to a child, taking a very special trip. Those new experiences help us see ourselves and our world in novel ways: They open up new possibilities and bring fresh perspectives. One of my recent peak experiences was a trip with Margie to the Alaskan wilderness. It was beautiful beyond words. More than that, however, the trip cemented our desire to see more of the world and to make that a shared experience. In a very important way, a small boat ride to the base of a glacier helped us reorder life's priorities. That is the power of peak experiences.
So what does it mean when, like Chris and Gina, there are few peaks and few valleys? Between the ups and downs of life, all that remains is routine. The incident in my office was a perfect example. Chris was trying to capture in words what was missing from the marriage and Gina quickly shifted the topic to a child-centered routine. At other times, it was Chris doing the shifting. On one occasion, when Gina voiced a strong desire to keep the family together, Chris moved uncomfortably in his seat, pulled out his phone, and checked his market position. Gina stopped talking, Chris obtained his quotes, and the topic quickly changed to their mutual concern for the children. Nice, safe terrain – and more of the avoidance of change that was strangling the marriage.
The reality for Gina and Chris was that their children no longer needed to occupy dominant mindshare. Their kids were mature, growing up, and increasingly self-sufficient. Leaving home for college was soon to come. Many of the couple's routines, once glue for the relationship, no longer had a purpose. Without anything to take the place of those routines – without a bridge to the future – the couple foundered. The family had changed and they had not. They had a commitment to each other, but that wasn't enough. They needed a flexible commitment.
Flexibility and Trading
Ironically, no one should be able to do flexible commitment better than traders. We've all been in situations we're long and suddenly a tape bomb hits the headlines and inspires a bout of selling. What do you do? If the headline is credible and institutions are acting on the news, you very well might hedge your position, lighten it, or get out altogether. You're willing to entertain the possibility that this is a game-changer. The upward trend that you counted on is no longer a certainty. Great traders are not married to the long or the short side. They follow the market's cue – and that requires particular open-mindedness.
If we were to examine the thought process and preparation of those successful traders, we'd see that flexibility is built into their trading plans from the outset. Let's say a trader has built a model of the various fundamental drivers that impact currency prices – from trend/momentum to interest rate differentials to economic surprises – and receives a strong buy signal from his USD model. Our trader initiates long USD positions versus a basket of other currencies and knows that the Federal Reserve is scheduled to finish its meeting and make an announcement in the afternoon. Plan A for the trader is to follow the Fed announcement closely and, if monetary policy is unchanged and language is hawkish as expected, add to the positions on dips in dollar strength. Plan B, however, is to exit the positions and even reverse them should the Fed express unexpected support for monetary ease. At that point, historical odds from the model would take a backseat to the idiosyncratic risk of the present, as a dovish tilt in monetary policy would likely bring in a fresh class of dollar sellers.
So let's say, after moving higher early in the session, the dollar sells off sharply when the Fed notes weakening economic indications and expresses renewed support for a policy of restrained rates. Quickly our trader hits bids and exits the long positions. The dollar sells off sharply and then bounces feebly as stocks stay weak and bonds rally. The intermarket action tells our trader that markets are repricing growth prospects based on the Fed statement. Quickly exiting the positions has given the trader time – and mental clarity – to look for markets slow in repricing, so that what started as a losing day can yet become a winner.
The key to our trader's morning success is not just planning the trade, but flexibly planning the trade. It is the active construction and rehearsal of a Plan B that enables the trader to adapt to the unexpected message from the Fed. If the trader had held an unshakable conviction that the dollar had to move higher because of momentum or interest rate movement in his macro model, such flexibility would have been impossible.
But that is flexibility in a single trade. What if we as traders lack flexibility in our basic approach to trading? What if we are like pharmaceutical firms that fail to develop pipelines of new drugs as existing ones approach the end of their patents? What if our entire careers lack a Plan B? Caught in trading routines, we – like Gina and Chris – can fail to create our bridges to the future. Like the chef-owner who sold to Emil, we keep cooking the meals we love, until we wake up to the fact that
