Thinking in bets: How to make smarter decisions

Investments

I read a lot of books. Nearly every book has some nugget of wisdom I can take from it, but it’s rare indeed when I read a book and feel like I’ve hit the mother lode. In 2018, I’ve been fortunate enough to read two books that I’ll be mining for years to come.

The first was Sapiens, the 2015 “brief history of mankind” from Yuval Noah Harari. I finished the second book yesterday: Thinking in Bets by Annie Duke. Duke is a professional poker player; Thinking in Bets is her attempt to take lessons from the world of poker and apply them to making smarter decisions in all aspects of life.

“Thinking in bets starts with recognizing that there are exactly two things that determine how our lives turn out,” Duke writes in the book’s introduction. Those two things? The quality of our decisions and luck. “Learning to recognize the difference between the two is what thinking in bets is all about.”

We have complete control over the quality of our decisions but we have little (or no) control over luck.

The Quality of Our Decisions

The first (and greatest) variable in how our lives turn out is the quality of our decisions.

People have a natural tendency to conflate the quality of a decision with the quality of its outcome. They’re not the same thing. You can make a smart, rational choice but still get poor results. That doesn’t mean you should have made a different choice; it simply means that other factors (such as luck) influenced the results.

Driving home drunk, for instance, is a poor decision. Just because you make arrive home without killing yourself or anyone else does not mean you made a good choice. It merely means you got a good result.

Duke gives an example from professional football. At the end of Super Bowl XLIX, the Seattle Seahawks were down by four points with 26 seconds left in the game. They had the ball with second down at the New England Patriots’ one-yard line. While everbody expected them to run the ball, they threw a pass. That pass was intercepted and the Seawhawks lost the game.

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Armchair quarterbacks around the world complained that this was the worst play-call in NFL history. (I’ve linked to just four stories there. They’re all brutal. You can find many more online.)

Duke argues, though, that the call was fine. In fact, she believes it was a smart call. It was a quality decision. There was only a 2% chance that the ball would be intercepted. There was a high percentage chance of winning the game with a touchdown. Most importantly, if the pass was incomplete, the Seahawks would have two more plays to try again. But if the team opted to run instead? Because they only had one time-out remaining, they’d only get one more chance to score if they failed.

The call wasn’t bad. The result was bad. There’s a big difference between these two things, but humans generally fail to differentiate between actions and results. Duke says that poker players have a term for this logical fallacy: “resulting”. Resulting is assuming your decision-making is good or bad based on a small set of outcomes.

If you play your cards correctly but still lose a hand, you’re “resulting” when you focus on the outcome instead of the quality of your decisions. You cannot control outcomes; you can only control your actions.

Note: As long-time readers know, I grew up Mormon. One of the songs we were taught as children has this terrific lyric: “Do what is right, let the consequence follow.” This has become something of a mantra for me as an adult. If I do the right thing — whatever that might be in a given context — then I cannot feel guilty if I get a poor result. It’s my job to do my best. Beyond that, I cannot control what happens.

Luck and Incomplete Information

Why don’t smart decisions always lead to good results? Because we don’t have complete control over our lives — and we don’t have all of the information. Fundamentally, Duke says, results are influenced by luck. Randomness. Chance. Happenstance. She writes:

“We are uncomfortable with the idea that luck plays a significant role in our lives. We recognize the existence of luck, but we resist the idea that, despite our best efforts, things might not work out the way we want. It feels better to imagine the world as an orderly place, where randomness does not wreak havoc and things are perfectly predictable.”

Duke contrasts poker (and life) with chess. Chess is a game of complete information, a game of pure skill. There’s no luck involved. At all times, all of the pieces are available for both players to see. There are no dice rolls, nothing to randomize the game. As a result, the better player almost always wins. (When the better player doesn’t win, it’s because of easily identifiable mistakes.) Because chess is a game of complete information, luck isn’t a factor — the outcome is only a matter of the quality of your decisions.

In poker, however, there’s a lot you don’t know. What cards do your opponents hold? What cards remain in the deck? How likely are your opponents to bluff? And so on. Experienced poker players learn to think in terms of odds. “With this hand, I have a 74% chance of winning.” “I should fold. These cards only give me a 18% chance of coming out ahead.”

It’s because our decisions are made with incomplete information that life sometimes seems so difficult. You can do the right thing and still get poor results. You can opt not to drink on New Year’s Eve, for instance, but still get blindsided by somebody who did to drink and drive. You made a quality decision, but happenstance hit you upside the head anyhow.

Duke cites a scene from The Princess Bride as an example of how incomplete information affects the outcomes of our decisions. Criminal mastermind Vizzini and the Dread Pirate Roberts engage in a battle of wits:

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Vizzini pours two goblets of wine, then Roberts (actually our hero, Westley, in disguise) poisons one of them with deadly “ioacane powder”. The challenge is for Vizzini to choose the non-poisoned goblet. Vizzini cackles with glee when Roberts/Westley downs the poison — but then falls dead after drinking his own goblet. It turns out both goblets had been poisoned, but Roberts had spent the previous few years building an immunity to iocane powder.

Vizzini made a quality decision based on the information he had, but he didn’t have all of the information: both goblets were poisoned, and his opponent in this “battle of wits” was immune to the poison in the first place!

Thinking in Bets

Duke argues that in order to make smarter decisions, we have to embrace both the idea that there’s a lot of luck in life and the reality that we’re swimming in uncertainty. There’s a stigma in our culture about appearing ignorant, about being unsure. Duke says that becoming comfortable with uncertainty and not knowing is a vital step to becoming a better decision-maker.

“Admitting that we don’t know has an undeservedly bad reputation,” she writes.

“What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of ‘I’m not sure’.”

Duke suggests that by moving to a framework of “I’m not sure”, we’re far less likely to fall into the trap of black and white thinking, of false certainty. She cites Stuart Firestein’s TED talk about the pursuit of ignorance:

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We should be pursuing “high-quality ignorance”.

Based on all of this, how then can we make smarter decisions? Duke says that we should stop thinking in terms of right and wrong. Few things are ever 0% or 100% likely to occur. Few people are ever 0% or 100% right about what they know or believe. Instead, we should think in bets.

“Decisions are bets on the future,” Duke writes, “and they aren’t ‘right’ or ‘wrong’ based on whether they turn out well on any particular iteration. An unwanted decision doesn’t make our decision wrong if we thought about the alternatives and probabilities in advance and allocated our resources accordingly.”

Duke says that because pro poker players learn to think in terms of odds during their games, they transfer this way of thinking to everyday life. “Job and relocation decisions are bets,” she writes. “Sales negotiations and contracts are bets. Buying a house is a bet. Ordering the chicken instead of the steak is a bet. Everything is a bet.

Just as each poker bet carries a different chance of success (based on the quality of the hand, the hands of the other players, etc.), so too the bets we make in life carry different chances of success. And our personal beliefs have (or should have) varying degrees of certainty. Duke wants readers to begin thinking about their beliefs and decisions in terms of probabilities rather than in terms of black and white.

Turns out I already do this to a small degree — but usually for minor stuff. In fact, I’ve done it several times in the past week.

  • A few days ago, I was listening to a Big Band station on Pandora. The song “Green Eyes” came on. “I wonder what year this is from?” I thought. I listened to the vocals, to the band, to the recording quality. “I think there’s an 80% chance this song is from 1939 — give or take two years,” I thought. I looked it up. The song was released in 1941. (I listen to a lot of older music, and I play this game often.)
  • Because it’s been hot in Portland lately, folks in my neighborhood have all been taking early morning walks. We all tend to follow the same two-mile loop because it’s easy. I’ve started playing a game when I pass somebody. “Okay, the dog and I passed David Hedges at the llama farm. Where will we encounter him on the top side of the loop? I’ll be it’s between Roy’s house and the bottom of the hill.” It’s fun for me to see how accurate my guesses are.

Duke believes that we should each do this sort of thing whenever we make a decision. Before we commit to a course of action, we should think about possible outcomes and how likely each of those outcomes is to occur.

Let’s say you’ve only got $200 in the bank and it’s a week from payday. Should you join your friends for that weekend motorcycle trip? Or should you save that cash in case something goes wrong? Or, thinking farther in the future, what outcomes are you seeking in life? What decision will improve the odds of achieving those outcomes?

Or, imagine that you’re trying to decide whether or not to buy a home. As you consider the possibilities, think about the probability that each possible future will occur. Don’t simply cling to the outcome you’re hoping for. Be objective. If the odds of success seem reasonable, then pursue your desired course of action. But if they don’t, then pull the plug.

Duke writes:

“In most of our decisions, we are not betting against another person. Rather, we are betting against all the future versions of ourselves that we are not choosing. We are constantly deciding among alternative futures: one where we go to the movies, one where we go bowling, one where we stay home. Or futures where we take a job in Des Moines, stay at our current job, or take some time away from work. Whenever we make a choice, we are betting on a potential future.”

Every choice carries an opportunity cost. When you choose to save for the future, for instance, you’re giving up pleasure in the present. Or, if you choose to spend in the present, you’re giving up future financial freedom.

Final Thoughts

Thinking in BetsFor a long time, I’ve argued that the best books about money are often not about money at all. Thinking in Bets is another example of this. While Duke uses plenty of personal finance examples, the book itself is about self-improvement. It’s not a money manual. Yet the info here could have a profound impact on your financial future.

There’s a lot more in this book that I haven’t covered in my review. (I’ve really only touched on the first third of the material!) For me, the biggest takeaway comes early: It’s vital to separate decision quality from results. The rest of the book explores how to improve the quality of your decisions.

Among the strategies Duke advocates are these:

  • Learn to examine your own beliefs. Be your own devil’s advocate. If you’re certain about something, explore the opposing viewpoint. (If you’re liberal, seek conservative opinions. If you’re conservative, look for liberal voices.) Be skeptical — of yourself and others.
  • Build a network of trusted advisors, people who can give you feedback on your beliefs and decisions. But don’t make these support groups homogeneous. Draw on people from a variety of backgrounds and belief systems. If you only associate with people who think the same way you do, you never give yourself a chance to grow, and you’ll never spot possible errors in your thinking. (This is like the current problems Facebook is facing with its deliberately-created echo chambers, which only serve to reinforce the way people think instead of challenging them.)
  • When you make decisions, think of the future. Use barriers and pre-commitment to do the right thing automatically. Practice backcasting, a visualization method in which you define a desired outcome then figure out how you might get there.

The book is dense — dense! — with ideas and information. When I finished it, I wanted to go back and read it again. Plus, I wanted to plow through the nearly 200 other works that Duke lists in her bibliography. I feel like I could spend an entire year diving deeper into this book and its related reading.

But, as much as I wish it were, Thinking in Bets isn’t perfect. A strong argument could be made that this material would work better as a TED talk or a 5000-word essay in The Atlantic (or on Get Rich Slowly!). The book is so packed with info that it sometimes loses its way. There’s also a lot of repetition — too much repetition. Plus, it seems to lack a clear sense of organization.

These quibbles aside, Thinking in Bets has earned a permanent place on my bookshelf. If I ever get around to putting together a Get Rich Slowly library (a project I’ve been planning for years!), this book will be in it. I got a lot out of it. And I bet you will too.