Authors not otherwise known as investment experts sometimes write books that can be very valuable to investors. One such is “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts” by Annie Duke (Portfolio, 2018).
The author, an accomplished poker, argues that when making decisions, you should shift your thinking from the need for certainty to the goal of accurately assessing what you know — and what you don’t. Doing so will make you less vulnerable to reactive emotions and destructive habits in your decision making.
Duke won millions of dollars playing in various poker tournaments in Las Vegas against the very best competition. She is now a full-time professional speaker and decision strategist. She did graduate work at Penn in the area of cognitive psychology.
Decisions, Duke writes, are bets on the future, and they aren’t “right” or “wrong” based on whether they turn out well in any particular iteration. An unwanted result doesn’t make your decision wrong if you considered the alternatives and probabilities in advance and allocated resources accordingly.
She cites Seattle Seahawks coach Pete Carroll ‘s decision to call a pass play as time ran down in the 2014 Super Bowl as an example of a decision that had merit, despite the outcome. On New England’s 1-yard line, the Seahawks quarterback threw an interception. That catastrophic outcome does not invalidate the wisdom of the call.
In a chapter suggestively headed “Dissent to Win,” Duke explains a methodology developed by sociologist Robert Merton. It forms an excellent guide for anyone seeking to be a profitable bettor or decision maker. It comprises four elements:
— “Get all the information available.” Without all the facts, accuracy suffers. Duke uses an example from John Madden , hall of fame football coach. Madden, when he was a young assistant coach, attended a clinic held by Vince Lombardi, who held the audience spellbound for eight hours as he described one play, a power sweep made famous by Lombardi. At the end, Madden realized he knew nothing about football.
— “Don’t shoot the messenger.” If you want to improve the accuracy of your beliefs, you’ll be better off if you include people and information sources you are likely to disagree with.
— “We all have a conflict of interest, and it’s contagious.” Our brains have built-in conflicts of interest, interpreting the world around us to conform to our beliefs, “to avoid having to admit ignorance or error.”
— Cultivate “organized skepticism.” A productive decision group would do well to organize around skepticism because true skepticism isn’t confrontational. If you don’t lean over backward to figure out where you could be wrong, you are going to make some pretty bad bets.
Another important discussion is a technique to avoid making important decisions based on short-term emotions. Duke cites the “rule of 10-10-10,” developed by Suzy Welch, a business journalist and author. Very simply put, when faced with conflicting choices, analyze the outcomes of each alternative 10 minutes, 10 months and 10 years from now.
Duke uses this tool to show why making an investment decision while “ticker watching” is likely not to be particularly productive for a long-term investor. She uses charts of the negative performance of Berkshire Hathaway during one random day in January 2017 vs. performance from 1964 to the present to make her point. Her conclusion is that “decisions driven by impulse can be become a self-fulfilling prophecy, degrading the quality of the bets we make, increasing the chances of bad outcomes, and making things worse.”
“Thinking in Bets” has lessons directly applicable for investors and retirement savers. You don’t have to be a poker player to understand or benefit from the book. You will become a better decision-maker and a better investor.
(Elliot Raphaelson welcomes your questions and comments at firstname.lastname@example.org.)