How to think in bets

Poker players are known for their decision-making ability. A bet is a decision about an uncertain future. What if we extrapolate the strategy used in Poker to improve decision making in our lives.

Poker, card game, played in various forms throughout the world, in which a player must call (i.e., match) the bet, raise (i.e., increase) the bet, or concede (i.e., fold).

Quality of Decision vs Quality of Outcome

There are two things in life that determine how our lives span out. One is the quality of our decisions and the other is luck. But how do we make judgement on our decisions — Is it based on the outcome or based on the process itself?

I will quote an example from Cricket. During a cricket match, we all make a judgement call on how a particular decision should have been taken by a captain, player, or a coach. From decision on the toss to who should come next. When a captain takes a decision and if it resulted in a favorable outcome (a win), we equate it to be a good one.

Ask yourself — Is it right to equate the quality of a decision with the quality of its outcome? In Poker terms, this process of equating the quality of a decision only to its outcome is called as ‘Resulting ‘. This is observed in the world of investments too. If few of our investments don’t go well based on our strategy, we tend to change it.

Pitfalls of Resulting

Annie Duke in her book “Thinking in Bets” quotes an example of a consulting meeting with a group of CEOs. Each CEO was asked to come up with a brief description of their worst and best decisions of their previous year. Almost all of them highlighted their best result as their best decisions. But what’s the pitfall here?

Assume you made a decision of firing a senior executive in your company, and the overall outcome resulted in a disaster. But the overall rational behind decision making process might have been right. If we equate this bad result to bad decision making, this imperfect relationship, will adversely affect our subsequent decisions in future.

Have you ever labelled your decision as ‘Good’, despite a bad outcome?

Embracing “I Don’t Know”

Neuroscientist Stuart Firestein in his book “Ignorance” points out that in science, “I don’t know “is not a failure but a necessary step toward enlightenment. “I don’t know “does not mean that we lack competence or confidence. Accepting uncertainty is the first step in moving closer to an objective truth.

This also involves looking at the world in probabilities instead of binary. In investment domain, it is called as ‘Edge’. It’s a thinking model based on what is the probability that we will end up in a favorable outcome. And if it ends that way, what’s the risk & reward involved ?.

Human brains are not designed to think probabilistically. But we need to try our best not to misrepresent the world at the extremes of right and wrong, with no shades of grey in between.

The Feedback Loop

Another key thing in improving our decision is in learning from our past. Psychology states that learning occurs when there is feedback applied to our decisions. But not everyone with experience becomes an expert. That’s why some people never get the wisdom as they age.

Experience is not what happens to a man; it is what a man does with what happens to him “.

How can we improve our decisions based on our outcome? Answer lies in understanding whether the outcome has something to teach us and what the lesson might be. Learning from outcome becomes another bet. There lies an issue too. Any single outcome can happen for multiple reasons. It can be because of luck too. Fielding an outcome on luck or skill is a huge topic on its own. If our decisions didn’t have much have impact on the way things turned out, then Luck is the main influence.

Curse of Self-Serving Bias

The self-serving bias refers to an individual’s tendency to attribute positive events to their character, but attribute negative results or events to external factors unrelated to themselves and their faults

Psychologist and Behavioral Economist Dan Ariely in his book writes “We take credit for good stuff and blame the bad stuff on luck, so it won’t be our fault “. It prevents us from learning from our experience. But also, a contrarian view is that humans by default need this positive update to boost our self-image.

Key Takeaway

Take an example of a recent mistake or an accident you did. Your initial reaction will always be that we just got unlucky for ending in such a bad outcome. But if you take a more self-aware view of the same accident and you had to bet on that ? Now your mind will start thinking on different alternatives that could have resulted in the accident instead of directly blaming it on luck or on other external factors.

Agree that we may not have time to implement probabilistic thinking, feedback loop, journaling our decision process for every small decision that we make. But once we make this into a habit at least for major decisions in our life, it will improve the accuracy of our decisions through probabilistic thinking. And we will blame less on luck and others for our failure.

References

“Thinking in Bets” by Annie Duke