Annie Duke won over $4 million as a professional poker player and is an expert on decision-making.
Together with William Green, they talked about:
– Cognitive biases
Here are my notes:
1. Be at ease with a bad outcome
Focus on the decision-making process instead.
Think in probability and play to the best of your hand.
Don’t dwell on a bad outcome if the process and decision-making were sound.
You have no control over outcomes when luck is involved.
“…understanding that you have to get down to what do I have control over, and what don’t I have control over. And I have to accept the tremendous influence of luck, I have to accept the fact that I’m having to make these very high-stakes decisions without being able to see my opponents cards.
And then there’s also the issue of just applying base rates to that problem, right? Understanding how often do you get certain hands, how often does someone generally enter a pot. If I understand that you’re going to enter the pot 25% of the time, then that tells me something about likely what you have, are you above the base rate, are you below the base rate, those kinds of questions.
And you just have to be okay with that, because you don’t have control over that, you’re going to observe that 2% of the time, and that you have to not let that mess with you.”
2. Advice from Eric Seidel: Do not dwell on ‘unlucky’ events
Eric Seidel is a 9-time world series of poker bracelet winner who made $40 million.
By all means, discuss what could have been done better.
If you played to the best of your cards, that’s all that matters.
“So I walked away from that table and I was just really upset, and I went to him and I was just complaining to him…And he just stopped me and said, “Is there a question here?” And I was taken aback, because you would expect most people to be like, “I am so sorry; that’s so unlucky. I feel so bad for you. It really mattered to you.”
He goes, “I don’t want to hear about it if there’s not a question. I don’t care that you got unlucky. I get unlucky too. And I have to deal with losing with two jacks against two nines all the time also. I certainly don’t want to take on your emotional trash about it myself. And what’s the point of talking about it? You made a great call and lost, who cares? Would you have changed anything about what you did? Do you think you got the read wrong? It sounds to me like you did everything right. So why are we even talking about this?” I was like, “ugh,” right? And at first, I was really mad, and then I realized, no, he’s totally right. I mean this is the thing, if it really was just bad luck, who cares? This is about embracing that uncertainty, right?
3. All decisions are probabilistic
And we make these probabilistic decisions all the time
Consciously or subconsciously.
Whether its choosing your partner or the route you are taking to work.
You’re making a forecast.
The moment we make it explicit, we start to create feedback loops we can learn from.
“Even if you don’t think you’re doing it explicitly, literally every single decision you make is probabilistic, because it’s a forecast. It’s a forecast made under conditions where you don’t have all the facts. You generally know very little in comparison to all there is to be known.
…we have to reject the idea that if you’re not doing it explicitly, that you aren’t thinking probabilistically because every decision is a probabilistic decision just by its nature because the world is probabilistic, that is how we decide.
Now the act of trying to make these things explicit will make you better at it, because what it will start to do is allow you to create good feedback loops.”
4. Don’t play if you don’t have an edge
And we are very good at fooling ourselves into believing that we have an edge.
Set up structures, write down your thesis.
What new information will break your thesis?
When should you quit?
“I think we’re very good at fooling ourselves into believing that we have a rational reason, that we have an edge. And I think that that’s particularly so when we’re in a situation where the thesis would affirm other things that we already believe about the world. I think it’s particularly so when we’re already in the investment.
So one of the things that we need to do is set up structures around us that will allow us, first of all, to be better at those, are we really being rational and starting… but more importantly, because the starting decision is always uncertain, is to say, as we discover new information after we’ve started, are we stopping, right? Are we figuring out when we should stop? Because it turns out that we’re very, very dense when it comes to actually paying attention to the signals after we’ve started something that we ought to stop it. And that’s where we get particularly irrational.”
5. Know your limits and set rules around it
For Annie, she played best in 6 to 8 hour sessions.
Set out the rules beforehand rather than waiting until you are in it.
Because you will not make good decisions then.
“…there are particular states where you’re going to feel suboptimal that have to do with your own physical state. You’re tired, you’re stressed, whatever, but then there are also cognitive states where you’re going to behave sub-optimally. And the particular cognitive state where you’re really going to behave suboptimally is when you’re in the losses.
And the reason that you’re going to be a terrible decision-maker is, except for the part it’s going to cause you to be emotional, is that you’re going to want to get your money back. And this is a really big problem for investors. You start down a path, it starts to lose and you don’t want to sell, because you can’t get your money back. That’s the moment that you go from a loss on paper to a sure loss. It’s when it becomes a realized loss. And that is a moment that we do not like. And so we will come up with all sorts of reasons to think we’re being rational in continuing on, when we’re being completely irrational because we’re just trying to protect ourselves from having that moment of having to take the sure loss. This is what Daniel Kahneman calls sure loss aversion. And it’s related to obviously to some cost. And we better set up some things in advance that stop us from doing that.”
6. Loss aversion
Our loss aversion prevents us from selling investments at a loss.
But this extend beyond investing to.
Decisions should be made based on the future, not the past.
“I think people are familiar with loss aversion. We don’t like to start things that carry with them a chance of loss, even if we’re winning to the decision. So we’ll prefer some low volatility, but not particularly valuable, investment over one that’s higher volatility but more valuable, because the higher volatility investment obviously carries with it a higher chance that you’ll lose, and probably a larger possible loss. So that’s a problem with starting.
…when you already have a loss on the books, or even a cognitive loss on the books, it was trading at one level and now it’s trading lower, we don’t like to sell. In other words, this becomes loss aversion stops you from starting.
Of course this is irrational, because what matters is, is the next dollar that you spend worthwhile, not did you already spend a dollar. We shouldn’t care.”
7. Hate your job?
Cognitive biases often prevents us from making the switch.
If your current job has a 0% chance of making you happy and a new career has a 50% chance, what’s holding you back?
“So I just said to her, “Well it’s a year from now. You stay in the job you’re in, what’s the probability you’re happy?” And she said, “Zero percent.” She had enough experience to say that with confidence.
So I said, “Okay, if you switch to the new job, it’s a year from now, what’s the probably ability you’re happy?” So, “I don’t know, that’s kind of hard, but probably 50-50.” And I just said, “Okay, so would you rather have a 0% chance of happiness or a 50% chance of happiness?” And then she got it and she switched, but she was so concerned about the 50% chance of being unhappy, that she had been having a terrible time trying to decide whether to switch. So that’s a whole bunch of things. That’s loss aversion, omission, co-omission bias, status quo bias, and also something called ambiguity aversion, that has to do with fear of the unknown, which you could also see in that decision-making.”
8. Endowment effect
We value things we own, much more than things we don’t own.
Even though the opposite might be true.
It could be stocks, bonds or our IDEAS.
We wrap our identity in things and won’t quit despite the warning signs.
“And then we also have the issue, which I think is really important for investors, you have something called an endowment. We value things we own, much more than we value things that we don’t own. And it’s not just ownership over investments, we actually own the stock, or we own the bond, or whatever, we own the option, but it’s also our ideas. And every time we invest, we have ownership over our thesis. And here’s the interesting thing, is that when the thing that we’re doing is out of consensus, this is when it gets really bad. So when we think about these issues of sunk cost, and sure loss aversion, and the way our identity gets wrapped up in things, and the way we have ownership over things, and the way that affects our inability to stop, you have to put a big huge blinking warning sign when the thing we’re doing is out of consensus.”
9. The kill criteria
Think in advance the signs you might see in the future that would signal that it is time to quit.
To continue holding this investment, what do you need to see in the next few quarters or years?
Sticking to things too long denies us future opportunities.
“… the things is kill criteria. Think in advance about what are the signals that I might see in the future that would tell me that it’s time to walk away and you will get better at it.
“What do I need to see within the next quarter or the next two quarters from the way that this investment might perform?”
Essentially think, “How long can I tolerate this, or how much time do I need in order for me to actually get the information that I would need in order to be able to make a decision?” Figure out what that time period is and then figure, at the end of that time period, “What would I have to see? What are the benchmarks that this thing would have to hit in order for me to feel like I ought to continue? And if it doesn’t hit these things, then I should walk away.”
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