Subscribe to Annie's Substack

How To Make The Right Decisions Even When You Don’t Have All The Facts

Annie has mixed her poker insights with cognitive psychology in her new book, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts. The book is an amazing guide to making better decisions. It’s filled with stories from Annie’s life and offers new ways to change our thinking to get better outcomes in business and in life.
Steve Pomeranz Show

 

Annie Duke is the author of Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.

Annie was one of the top poker players in the U.S. She has earned a World Series of Poker bracelet and is the only woman to win the NBC National Heads-Up Poker Championship.

But there’s more! Prior to becoming a professional poker player, Annie was awarded the prestigious National Science Foundation Fellowship and studied Cognitive Psychology at the University of Pennsylvania. Annie also went head-to-head with Joan Rivers to win second place in Season 8 of Celebrity Apprentice.

Annie has mixed her poker insights with cognitive psychology in her new book, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts. The book is an amazing guide to making better decisions. It’s filled with stories from Annie’s life and offers new ways to change our thinking to get better outcomes in business and in life.

The Worst Call In Super Bowl History

At the outset of her book, Annie Duke tells the story of Pete Carroll, coach of the Seattle Seahawks. Pete made one of the most controversial calls in football history in Super Bowl XLIX.

With 26 seconds left at the end of the fourth quarter, the Seahawks were on the New England Patriot’s 1-yard line. It was second-down, the Seahawks were down by four points, and had one timeout.

Then, instead of making a running play, Coach Carroll told his quarterback to pass the ball. The ball was intercepted in the end zone, and the Seahawks famously lost a Super Bowl game that they were on the brink of winning.

Bad Call Or Bad Luck?

Did Pete Carroll screw-up bigtime? Annie notes that the probability of a short-pass interception is below two percent, based on 15 years of NFL data. Moreover, if the pass is incomplete, the clock stops on its own. The ball can then be handed off to the running back for a touchdown attempt, without wasting a timeout.

Turns out, Pete’s call wasn’t a bad one based on the facts he had. The interception was highly unlikely and, unfortunately, cost the Seahawks dearly. Yet, people blamed Pete Carroll as if an interception was inevitable!

Making The Right Calls At Poker

In Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts, Annie Duke notes that as a professional poker player, she had to constantly make in-the-moment decisions based on incomplete facts. Annie did so by embracing the uncertainty, by estimating the probability of various outcomes, and by guessing how her opponents would play the cards they had.

It was the same for the Pete Carroll play. He went for the lowest risk play, but it simply did not work out.

“Resulting”

As Steve notes, our biases lead us to think that if we have a successful outcome, we’ve made a good decision; but if we have an unsuccessful outcome, it’s bad luck. People also tend not to take the blame for their own mistakes and, therefore, do not really move forward in learning how to be more successful.

Annie adds that if you’re judging the quality of a decision from afar, we judge the decision based on results. If it’s a bad outcome, we assume it was a bad decision and vice versa. We ignore how much luck plays a role in the equation.

On the flip side, when judging ourselves, we engage in a self-serving bias. If it’s a really good outcome, it’s because we’re awesome. When it’s a bad outcome, we want it to not be our fault. Consequently, we end up blaming luck and everything else.

In Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts, Annie Duke says these mindsets, “resulting” and “self-serving bias”, make us feel good about ourselves, but keep us from learning from past outcomes.

Learning How To “Be Awesome”

To underscore this point, say you drive drunk and still get home safely. This may lead you to believe you’re a really good drunk driver! But that’s a folly.

Instead, Annie Duke recommends changing the definition of “being awesome”.

Awesomeness should be about working really hard at everything and hoping Lady Luck pulls in your favor. Awesomeness should also include the humility to take mistakes in stride.

When things go wrong, don’t blame others. Instead, analyze your approach and learn from your mistakes. This approach helps improve decision-making going forward.

So, the next time you’ve had a bit too much to drink, you’ll take more responsibility and have someone else drive you home.

The Fallacy Of Averages

Annie likens life to an experiment with rats. First, rats were given food if they pressed a lever ten times. Then, researchers introduced some uncertainty and gave food for an average of ten lever presses. This uncertainty and averaging confused the rats.

So it is with averages in the stock market, adds Steve. Historical returns average about six percent. Yet, strong down-swings could result in huge losses.

Annie notes that successful learning depends on two things: feedback, and the correlation between feedback and decisions.

For example, if you started smoking in 1920, the feedback you got in 1960 was too late to act on. To be actionable, it’s important to get feedback in a timely manner.

Going back to the rat experiment, there has to also be a correlation between the feedback (getting food) and the number of times the lever needs to be pressed to get food. Giving the rat food on an average of ten presses introduces uncertainty and makes it harder to learn from the feedback.

Feedback Loop In Investments

Steve sees this feedback loop routinely playing out in the world of investments. Portfolio managers who do well in their first few years in the market tend to repeat their investment strategies. But if the macroeconomic landscape shifts, their strategies often stop working.

Much like the rats, outcome uncertainty confuses us and impacts our decisions.

The Fix

Annie Duke believes that being smart isn’t particularly helpful. In Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts, she wrote a section titled “Being Smart Makes It Worse”. The fix is to not believe you’re the smartest but to recognize uncertainty and respect it.

Warren Buffett echoes her views. He has said that it doesn’t take a high IQ to be successful in the world of investing. It takes understanding your own behavior and biases and learning from them.

She also recommends seeking unbiased advice from others. As she puts it, recognize the power of getting other people to help you. You’ll always be better off bouncing your thoughts off others, putting your logic to the test with them, and getting their feedback.

To learn more about how to make better, quicker real-life decisions with limited facts, consider reading Annie Duke’s Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.