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Why are we so bad at separating luck and skill? Why are we so uncomfortable knowing that results can be beyond our control? Why do we create such a strong connection between results and the quality of the decisions preceding them? How can we avoid falling into the trap of the Monday morning quarterback, whether it is in analyzing someone else’s decision or in making and reviewing the decisions in our own lives?
Poker vs. Chess
Chess, for all its strategic complexity, isn’t a great model
for decision-making in life, where most of our decisions involve hidden
information and a much greater influence of luck. This creates a challenge that
doesn’t exist in chess: identifying the relative contributions of the decisions
we make versus luck in how things turn out.
Poker, in contrast, is a game of incomplete information. It
is a game of decision-making under conditions of uncertainty over time.
The quality of our lives is the sum of decision quality plus
luck.
Von Neumann and Morgenstern understood that the world doesn’t
easily reveal the objective truth. That’s why they based game theory on poker.
Making better decisions starts with understanding this: uncertainty can work a
lot of mischiefs.
Our lives are too short to collect enough data from our own
experience to make it easy to dig down into decision quality from the small set
of results we experience. If we buy a house, fix it up a little, and sell it
three years later for 50% more than we paid, does that mean we are smart at
buying and selling property, or at fixing up houses? It could, but it could
also mean there was a big upward trend in the market, and buying almost any
piece of property would have made just as much money. Or maybe buying that same
house and not fixing it up at all might have resulted in the same (or even
better) profit. A lot of previously successful house flippers had to face that
real possibility between 2007 and 2009
There is always an opportunity cost in choosing one path over
others.
In most of our decisions, we are not betting against another
person. Rather, we are betting against all the future versions of ourselves
that we are not choosing.
Most bets are bets
against ourselves
How can we be sure that we are choosing the alternative that
is best for us? What if another alternative would bring us more happiness,
satisfaction, or money? The answer, of course, is we can’t be sure. Things
outside our control (luck) can influence the result. The futures we imagine are
merely possible. They haven’t happened yet. We can only make our best guess, given
what we know and don’t know, at what the future will look like. When we decide,
we are betting whatever we value (happiness, success, satisfaction, money,
time, reputation, etc.) on one of a set of possible and uncertain futures. That
is where the risk is.
Our bets are only as
good as our beliefs
Our beliefs drive the bets we make.
The more accurate our beliefs, the better the foundation of
the bets we make. There is also skill in identifying when our thinking patterns
might lead us astray, no matter what our beliefs are, and in developing
strategies to work with (and sometimes around) those thinking patterns. There
are effective strategies to be more open-minded, more objective, more accurate
in our beliefs, more rational in our decisions and actions, and more
compassionate toward ourselves in the process.
Hearing is believing
Instead of altering our beliefs to fit new information, we
do the opposite, altering our interpretation of that information to fit our
beliefs.
The stubbornness of
beliefs
The concept of “fake news,” an intentionally false story
planted for financial or political gain, is hundreds of years old. Fake news
works because people who already hold beliefs consistent with the story
generally won’t question the evidence. Disinformation is even more powerful
because the confirmable facts in the story make it feel like the information
has been vetted, adding to the power of the narrative being pushed.
How we form beliefs, and our inflexibility about changing
our beliefs has serious consequences because we bet on those beliefs. Every
bet we make in our lives depends on our beliefs
Redefining confidence
Incorporating uncertainty into the way we think about our
beliefs comes with many benefits. Incorporating uncertainty in the way we think
about what we believe creates open-mindedness, moving us closer to a more
objective stance toward information that disagrees with us. We are less likely
to succumb to motivated reasoning since it feels better to make small
adjustments in degrees of certainty instead of having to grossly downgrade from
“right” to “wrong.”
Luck vs. skill:
fielding outcomes
The way our lives turn out is the result of two things: the
influence of skill and the influence of luck. For the purposes of this
discussion, any outcome that is the result of our decision-making is in the
skill category. If making the same decision again would predictably result in
the same outcome, or if changing the decision would predictably result in a
different outcome, then the outcome following that decision was due to skill.
The quality of our decision-making was the main influence on how things
turned out. If, however, an outcome occurs because of things that we can’t
control (like the actions of others, the weather, or our genes), the result
would be due to luck. If our decisions didn’t have much impact on the way
things turned out, then luck would be the main influence.*
An outcome like losing weight could be the direct result of
a change in diet or increased exercise (skill), or a sudden change in our
metabolism or a famine (luck). We could get in a car crash because we didn’t
stop at a red light (skill) or because another driver ran a red light (luck). A
student could do poorly on a test because they didn’t study (skill) or because
the teacher is mean (luck). I can lose a hand of poker because I made poor
decisions, applying the skill elements of the game poorly, or because the other
player got lucky.
“If it weren’t for
luck, I’d win every one”
100% of our bad outcomes aren’t because we got unlucky and
100% of our good outcomes aren’t because we are so awesome. Yet that is how we
process the future as it unfolds.
The predictable pattern of blaming the bad stuff on the
world and taking credit for the good stuff is by no means limited to poker or
car accidents. It’s everywhere.
Other people’s
outcomes reflect on us
We all want to feel good about ourselves at the moment, even
if it’s at the expense of our long-term goals. Ideally, our happiness would
depend on how things turn out for us regardless of how things turn out for
anyone else.
We can learn better and be more open-minded if we work
toward a positive narrative driven by engagement in truth-seeking and striving
toward accuracy and objectivity: giving others credit when it’s due, admitting
when our decisions could have been better, and acknowledging that almost
nothing is black and white.
Reshaping habit
American soccer great Mia Hamm said, “Many people say I’m
the best women’s soccer player in the world. I don’t think so. And because of
that, someday I just might be.”
We need a mindset shift. We need a plan to develop a more
productive habit of mind. That starts in the deliberative mind and requires
foresight and practice, but if it takes hold, it can become an established
habit, running automatically and changing the way we reflexively think.
We can get to this mindset shift by behaving as if we have
something at risk when we sort outcomes into the luck and skill buckets because we do have a lot at risk on that fielding decision. Thinking in bets is
a smart way to start building habits that achieve our long-term goals.
Wanna Bet? Redux
Remember, losing feels about twice as bad as winning feels
good; being wrong feels about twice as bad as being right feels good. We are in
a better place when we don’t have to live at the edges. Euphoria or misery,
with no choices in between, is not a very self-compassionate way to live.
The hard way
The benefits of recognizing just a few extra learning
opportunities compound over time. The cumulative effect of being a little
better at decision-making, like compounding interest, can have huge effects in
the long run on everything that we do. When we catch that extra occasional
learning opportunity, it puts us in a better position for future opportunities
of the same type. Any improvement in our decision quality puts us in a better
position in the future.
Not all groups are
created equal
We don’t win bets by being in love with our own ideas. We
win bets by relentlessly striving to calibrate our beliefs and predictions
about the future to more accurately represent the world. In the long run, the
more objective person will win against the more biased person.
Don’t shoot the
messenger
The well-known advice “don’t shoot the messenger” is an actually good shorthand for the reasons why we want to protect and encourage dissenting ideas. Plutarch’s Life of Lucullus provided an early, literal example: the king of Armenia got advance notice that Lucullus’s troops were approaching. He killed the messenger for delivering that message and, henceforth, messengers stopped reporting such intelligence. Obviously, if you don’t like the message, you shouldn’t take it out on the messenger. The accuracy of the statement should be evaluated independently of its source.
Adventures in Mental
Time Travel
Improving decision quality is about increasing our chances
of good outcomes, not guaranteeing them. Seeing our aged-self in the mirror,
along with a spreadsheet showing us how future-us has to struggle to get by, is
a persuasive reminder to put aside some discretionary spending money for
retirement. It’s that tap on the shoulder from our future self. “Hey, don’t
forget about me. I’m going to exist and I’d like you to please take that into
account.”
Moving regret in
front of our decisions
Regret can do nothing to change what has already happened. When
we see the retirement-savings shortfall in this country, there is no doubt that
many of the future, retired versions of us are going to regret the financial
allocation decisions that younger-us made, after it is too late to fix it. The
age-progression imaging works to address this issue of regret occurring when
it’s already too late. By giving us a look at the retirement-aged version of
ourselves, it gives us a chance to experience some regret that we didn’t plan
adequately for retirement before we’ve made inadequate plans. We would be
better off thinking about our happiness as a long-term stock holding. If we got
a big promotion last week and have a flat tire right now, we are cursing our
lives, complaining about how unlucky we are. “Bad outcomes can have an impact
on your emotions that compromise your decision-making going forward so that you
make emotionally charged, irrational decisions that are likely to result in
more bad outcomes that will then negatively impact your decision-making going
forward and so on.”
Betting on a Future
Scenario planning is a form of mental time travel we can do
on our own. It works even better when we do it as part of a scenario-planning
group, particularly one that is open-minded to dissent and diverse points of
view. Diverse viewpoints allow for the identification of a wider variety of
scenarios deeper into the tree, and for better estimates of their probability.
In fact, if two people in the group are really far off on an estimate of the
likelihood of an outcome that is a great time to have them switch sides and
argue the other’s position. Generally, the answer is somewhere in the middle
and both people will end up moderating their positions.
Finally, by mapping out the potential futures and
probabilities, we are less likely to fall prey to resulting or hindsight bias,
in which we gloss over the futures that did not occur and behave as if the one
that did occur must have been inevitable, because we have memorialized all the
possible futures that could have happened.
Dendrology and
hindsight bias
One of the goals of mental time travel is keeping events in perspective. To understand an overriding risk to that perspective, think about time as a tree. The tree has a trunk, branches at the top, and the place where the trunk meets the branches. The trunk is the past. A tree has only one, growing trunk, just as we have only one, accumulating past. The branches are the potential futures. Thicker branches are the equivalent of more probable futures, thinner branches are less probable ones. The place where the top of the trunk meets the branches is the present. There are many futures, many branches of the tree, but only one past, one trunk.
About the Author
Anne LaBarr Duke is an American professional poker player and author. She holds a World Series of Poker gold bracelet from 2004 and used to be the leading money winner among women in WSOP history. You can read more about her at https://en.wikipedia.org/wiki/Annie_Duke.
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Thank you very much for your time!
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Aaditya Chhajed
M: +91-9404055222.
Disclaimer:
Investors should seek the advice of their financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. Future estimates mentioned herein are personal opinions and views of the author. This post is not a recommendation to buy or hold or sell securities. Investments are subject to market risks. Please read all investment-related documents carefully.
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