Supported by Greenhaven Road Capital, finding value off the beaten path.
Annie Duke joined Barry Ritholtz to talk about her book Thinking in Bets. The book is a good introduction to someone who wants to understand decision making. Here’s a YouTube playlist of clips of things Duke writes about:
In the book, Duke introduces the term resulting.
“We have this very uncertain relationship between decision quality and outcome quality.”
“Learning from your outcomes is a really poor strategy. It’s great if you’re playing chess; but it’s terrible if you’re playing poker, it’s terrible if you’re investing, it’s terrible if you’re driving.”
This was something we looked at in the Traffic podcast. The system we call driving offers terrible feedback for the human. But camera and radar make it better. Why? Feedback. After it therefore because of it isn’t always right reasoning.
Duke writes about Pete Carroll and explains why the intercepted pass play was a good play call. Carroll explained his philosophy this way:
“The winning/losing thing. The judgment at the end of it. You can’t focus on that. If you focus on that you’re missing all the things that happen in the meantime. What really gets you there are the good plays, one after another. One step at a time. One thought at a time. If you believe and trust in that, the outcome will turn out the way you want it to.”
Carroll must be a 76ers fan. Duke uses Daniel Kahneman‘s two systems to explain. “We’re pretty good at understanding our goals…the problem is all the small execution decisions along the way.”
We tend to choose goals in System 2 (thoughtful, wise) but pursue them in System 1 (reactive, myopic). Wes Gray suggested making those small, middle, execution steps part of the big goal planning.
Luck “The problem with luck,” Duke explained, “is that if you were unlucky there’s nothing you can learn to improve your execution of decisions in the future.”
Why is it so difficult?
“Generally we don’t have enough data to do it and generally we field outcomes one at a time…We live in this noisy system where sometimes we drive through red lights and we get through just fine and sometimes we go through green lights and get in an accident. It’s not perfectly linked together like a game of chess”
Okay. Instead of just saying luck is hard to untangle from skill is there practical advice? Yes! Michael Mauboussin suggests we figure out how replicable something is. Rolling a seven with a pair of dice is pure luck. Sports and games are less luck and more skill. Chess is almost purely skill.
For things that are less skillful, assume the base rate. What’s the base rate? Cade Massey explains:
Success requires a mix of humility and ego. It’s an attitude of, I believe I can do this though it’s not guaranteed. Duke said:
“I think there’s a difference in being humble in the face of the game you’re playing and humble in the face of the opponents you’re facing.”
“The more you play the more you realize you have no idea what you’re doing at this table.”
“I think once you’ve survived a long time, whether it’s poker or anything else, you’ve probably developed some more humility around the rightness and wrongness of your decisions in the first place.”
Tariq Farid of Edible Arrangements put it this way. “Humility is never a sign of weakness. Rather, it is a sign of willingness — to learn, collaborate, benefit from the experience. Arrogance, on the other hand, is often a sign of insecurity and can be an immediate turn-off when dealing with anyone in a business venture.”
At the 2010 NBC National Heads-Up Poker Championship Duke defeated her mentor – and one of the best poker players ever – Erik Seidel. How?
“I ended up facing Eric Seidel at the final table and I knew he was going to outthink me. So I injected a lot of luck into that match. I understood that if I had to execute a lot of decisions where he has the edge I’m going to be in big trouble.”
Daryl Morey said something similar about the pre-20017 Houston Rockets. When asked about playing the Golden State Warriors Morey suggested a one-game playoff. Why? More variance in small sample sizes. Fun statistic professors point out that it’s the lowest population counties that have the highest cancer rates. Is it because of access to services? No, it’s about statistical variance. Do you know where cancer rates are the highest? Other low population counties.
Perpetual beta. Duke asks, do you want to be someone who goes around justifying your beliefs or do you want to be someone who verifies the world?
“The person who wins at a bet is not the one who affirms their prior, it’s the person who has the most accurate model of the world.”
“When you view your beliefs as under construction, you don’t end up with these full-on reversals that I’m an idiot.”
Phillip Tetlock writes about perpetual beta in Superforecasting and points out that it goes along with a growth mindset. How does Duke do this? “I have to make sure I’m openminded to the information and that I’m information hungry.”
Unsexy careers Playing poker, making wine, writing movies – these are all very sexy careers. Which also means they’re damn hard to dominate. When Ritholtz asked Duke for advice to a young person considering poker she said:
“Now that it’s been on television, it’s a little more glam, know what you’re getting into. It’s a grind. You have to put in your hours because the amount of money you make is tied to the amount of hours you put in.”
Careers pay financially and emotionally. If you’re not getting paid in the former, advised Scott Galloway, then make sure you’re getting paid in the latter. Sometimes we assume the two are tied; that only sexy jobs pay well. But as investors like Brent Beshore know, that’s just not the case.
Thanks for reading.