Narrowing the Knowing-Doing Gap

“We often (or even usually) know what we should be doing in both personal and professional life. We also know why we should be doing it and (often) how to do it. Figuring all that out is not too difficult. What is very hard is actually doing what you know to be good for you in the long-run, in spite of short-run temptations.”

- David H. Maister. Strategy and the Fat Smoker; Doing What's Obvious But Not Easy

The Knowing – Doing Gap

In a recent post entitled “There is a Difference Between Knowing and Doing,” Ivan Hoff describes what he refers to as the “Empathy Gap.”  He defines the Empathy Gap as “the difference between how you believe you will act under certain circumstances and how you actually act when the time comes.”  After giving several examples, he concludes:

Most market participants have incredibly short-term memory. Greed and fear have the power to erase even the most well thought out plan and make the smartest people behave silly.

Ignorance is not the main hurdle. A lot of people have excellent understanding of how market works and what their biases are, but yet very few are able to put that knowledge into practice. It is the difference between knowing how to lose weight and doing it, but 10 times harder. This is why so many successful people are not afraid to share everything they know – the “secret” to their success. Most people will never put the efforts and the time to consistently apply that knowledge in their everyday trading/investing process. It is human nature.

In their 2000 book, The Knowing-Doing Gap, Robert Sutton and Jeffrey Pfeffer set out to define and quantitatively analyze why the gap between what we know we should do and what we actually do exists.  They settled on one truth:

[O]ne of the most important insights from our research is that knowledge that is actually implemented is much more likely to be acquired from learning by doing than from learning by reading, listening, or even thinking. . . . . One of our main recommendations is to engage more frequently in thoughtful action. Spend less time just contemplating and talking about organizational problems. Taking action will generate experience from which you can learn.

Sutton and Pfeffer delve deeply into the matter in the book but also point out one important perspective to keep in mind:  their research revealed that, although some people are inherently better at shortening the gap between knowledge and action, ultimately anyone can do more of what they know they should do regardless of personality, ability or self imposed limitations.

In a recent post, Stephen Dodson notes that:

I think the bigger reason for the disconnect between knowing and doing is human nature. This disparity exists in all areas of human activity. Weight-loss books need only three lines: “Eat better food. Less of it. Exercise more.” That there are thousands of books in the genre, and certain to be thousands more written, is because this knowledge-action gap exists. This is exacerbated by our tendency to justify our actions.

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People tend to see what they want to see. And they often seem more motivated to be proven right than to understand reality. Bridging the gap between knowledge and action means doing things that are uncomfortable, like changing one’s mind and admitting mistakes. No one is right about everything the first time around. It means analyzing past mistakes, thinking about personal shortcomings. In a 1999 New Yorker article, Malcolm Gladwell interviews Charles Bosk, a sociologist who developed a system to evaluate the differences between unsuccessful surgeons and successful ones. It boiled down to one thing: “He [Bosk] concluded that, far more than technical skills or intelligence, what was necessary for success was… a practical-minded obsession with the possibility and the consequences of failure.”

In summary, for a trader, less emphasis should be placed on figuring out what to do, but rather devising ways to ensure that, compared to others, we actually do more of what we should do.

Examples of the Knowing-Doing Gap

Take a moment and think for a second.  Where can we find examples of the Knowing-Doing Gap?  Here are three:

1.  8 out of 10 dieters fail at losing weight for an extended period of time.  The “knowing” is the diet – the steps people take to lose weight.  The “doing” is the execution of the diet itself for a prolonged period of time.  As one clinician puts it, “Diets don’t fail, people do.”

2.  More than 50% of Americans don’t take prescription medication as instructed.  Knowing is that prescriptions will make you better.  Doing is the actual taking of the prescriptions.  As Seinfeld said, it’s not the taking of the reservation but the holding of the reservation.

3.  When patients were told that they had to make changes to their personal lives – diet, exercise, smoking – only 1 in 7 actually make the change.  The knowing is that lifestyle changes will literally save your life.  The doing is making those changes on a repeated basis.

The point of the examples above is that often times people know what they should do but they don’t do it (for a variety of reasons that will discussed below).  When people don’t diet or take their required medication, they accept the real and substantial possibility of getting sick or dying.  If people will so easily disobey something that may save their life, how easy would it be for a trader to diverge from a rule that has, in his or her mind, a slim possibility of being true in the first place?  Stated otherwise, would it be easier to disobey a doctor’s orders that would save your life or widen a stop on a losing position?  I am going to have to chose the latter. 

The Implications of the Knowing-Doing Gap

“The problem is the inability to close the gap between what we genuinely, even passionately, want and what we are actually able to do.” 

-  Kegan, Robert; Lahey, Lisa. Immunity to Change: How to Overcome It and Unlock the Potential in Yourself and Your Organization.

If we are to accept that most traders know what they SHOULD do but don’t do it because of certain limitations, then the next step is to identify each trader’s Knowing – Doing gap and identify ways to overcome this.  To do this, we must first understand the function that prevents us from doing what we should do. 

In the Immunity to Change book, they put it this way:

When we experience the world as “too complex” we are not just experiencing the complexity of the world. We are experiencing a mismatch between the world’s complexity and our own at this moment. There are only two logical ways to mend this mismatch—reduce the world’s complexity or increase our own.

To put it in a trader’s perspective, the market will never be less complex (arguably, it is getting more complex day by day).  The only solution is increase our own mental complexity. 

Any time you experience a resistance to implement a change, it is likely because of a deep-seated and hidden emotion – or a hidden commitment - that is holding you back and protecting you from what you perceive as harm.  Kegan and Lahey describe this as “one foot on the gas and one foot on the brake.”  You may want to execute your trade plan perfectly but you actually have a hidden commitment that is holding you back that, in your mind, is “protecting” you from the outcome you don’t want to experience.

Some of these hidden emotions/commitments that hold you back (unknowingly to the conscious mind) from doing what you should be doing are:

1.  Excuses

2.  Fear

3.  Greed

4.  Need to be Right

5.  Apathy or Laziness

6.  Procrastination

7.  Lack of Discipline

8.  Lack of Vision

9.  Victimization

10.  Self Sabotage

11.  Unrealistic Expectations

12.  Self Doubt

13.  Need to Control the Situation

14.  Approval Seeking/Worrying About What Others Think

The reason that you aren’t doing what you should be doing as a trader is because:

1.  You develop our own inner map of reality and the markets.

2.  You interpret the world (and markets) through this inner map based on your current level of mental complexity.

3.   In accordance with this inner map we have our own inner commitments to our own personal priorities (such as one of the 14 above).

4.  These inner hidden commitments have a high priority and will over-ride any counter intentions that conflict with them

5.  The high priority is assigned because the hidden commitment is inextricably linked to an inner hidden perception of our own physical, psychological, social or emotional safety.

6.  This hidden commitment is (nearly always) outside of our conscious awareness

Steps to Shrink the Knowing-Doing Gap

Kegan and Lahey point to 4 steps to create lasting change:

Step 1

-  Identify a commitment that is important and insufficiently accomplished.

For instance, a losing trader might say, “I am committed to taking every single trade that my system gives me without hesitation.”

Step 2

-  What are you doing or not doing that is keeping you from the commitment.

“Sometimes, I will not take a trade that my system is giving me because I hesitate to execute an entry or exit signal.”

Step 3

-  Identify competing commitments by imagining what it would be like to do the exact opposite of the behaviors listed in Step 2.

“I am committed to controlling the outcome of that specific trade.  I am fearful that I will exit a trade to early, take a loss or miss out on a big move in my direction.”

Step 4

-  Identify the big assumption that is underlying our competing commitment.

“I assume that if I can’t control the outcome of a specific trade, then people will know that I am not very smart and that trading was a big waste of time.  I assume that if I courageously take every signal an exit a trade to early or miss out on a big move, then I won’t make enough money to support my family or be proven a failure in other people’s eyes.”

Step 5

-  Step 5 talks about moving forward, by becoming aware of the big assumption and testing it out in the real world:

-  Observe the big assumption in action.

-  Stay alert to challenge the big assumption.

-  Design a test of our big assumption.

-  Run the test and discuss the data openly

Take the first trade entry and exit signal of the day (in a smaller size than normal) and wait for your feelings in Step 4 to come to the surface.

When you have those feelings, challenge them:  “I don’t need to know what will happen next to be a good trader or to be considered a smart person.  My preparation has helped me get to this point and was not a waste of time.”

For a more detailed approach to these steps, check here.

Conclusion

If the smartest, richest most successful trader walked up to you tomorrow and gave you a winning trading system, would you execute it perfectly?  Probably not.  Every trader has a knowing-doing gap.  Stop focusing so much on the technical changes and more on the adaptive changes. 

Keep ya mind right.