M
Thinking
in Bets
MAKING SMARTER DECISIONS
WHEN YOU DON’T HAVE ALL THE FACTS
ANNIE DUKE
Thinking
in Bets
Supplemental Graphics
Copyright © 2018 by Annie Duke
PORTFOLIO/ PENGUIN
MAKING SMARTER DECISIONS
9780735216358_ThinkingIn_TX.indd
iii
12/1/17 1:24 AM
LIFE Is POKER, NOT CHEss
15
MÜLLER- LyER ILLUsION
Which of these three lines is longest? Our brain sends us the
signal that the second line is the longest, but you can see from
adding the measurement lines that they are the same length.
We can measure the lines to confirm they are the same
length, but we can’t make ourselves unsee the illusion.
What we can do is look for practical work-arounds, like carrying around a ruler and knowing when to use it to check against
how your brain processes what you see. It turns out that poker is a
great place to find practical strategies to get the execution of our
decisions to align better with our goals. Understanding how poker
players think can help us deal with the decision challenges that
4 AM
game, we are making a bet that we will be happier in the future
for having seen the final play. We bet on moving to Des Moines
and we find our dream job, meet the love of our life, and take up
yoga. Or, like John Hennigan, we move there, hate it within two
days, and have to buy our way home for $15,000. We bet on firing
a division president or calling a pass play, and the future unfolds
as it does. We can represent this like so:
80
THINKING IN BETs
BETTING ON A FUTURE
or whether they
result
of particular
deciBELIEFwere theBETpredictable
( sET OF
OUTCOMEs
)
sions we made is a bet of great consequence. If we determine our
decisions
the
outcome,
can
the data
followAs thedrove
future
unfolds
into we
a set
of feed
outcomes,
wewe
areget
faced
with
ing
those
decisions
back
into
belief
formation
and
updating,
another
decision: Why did something happen the way it did? cre84 T H I N K I N G I N B E T s
atingHow
a learning
loop:
we figure
out what—if anything—we should learn from
an outcome becomes another bet. As outcomes come our way,
(luck). I can
lose a hand
of poker
because
made poor
decisions,
figuring
out whether
those
outcomes
wereIcaused
mainly
by luck
applying the skill elements of the game poorly, or because the
other player got lucky.
BELIEF
BET
OUTCOME
BET 2
Chalk up an outcome to skill, and we take credit for the result. Chalk up an outcome to luck, and it wasn’t in our control.
For any outcome, we are faced with this initial sorting decision.
9780735216358_ThinkingIn_TX.indd 79
That decision is a bet on whether the outcome belongs in the 12/1/17 1:24 AM
“luck”
or the
“skill” bucket.
Thisfrom
is where
the future
Greek
Webucket
have the
opportunity
to learn
the Nick
way the
went wrong.
unfolds
to improve our beliefs and decisions going forward. The
can update
thefrom
learning
loop to represent
this like so:we
moreWe
evidence
we get
experience,
the less uncertainty
LEARNING LOOP 1
have about our beliefs and choices. Actively using outcomes to
examine our beliefs and bets closes the feedback loop, reducing
uncertainty. This is the heavy lifting of how we learn.
UCK
Ideally, ourBELIEF
beliefs andBET
our betsOUTCOME
improve withL time as we
learn from experience. Ideally, the more information we have,
the better we get at making decisions about which possible future
sKILL
to bet on. Ideally, as we learn from experience we get better at
assessing the likelihood of a particular outcome given any deciabout
like we about
are anthe
outfielder
catching
a fly ball
sion,Think
making
our this
predictions
future more
accurate.
As
with
runners
on
base.
Fielders
have
to
make
inthemoment
you may have guessed, when it comes to how we process experigame “ideally”
decisionsdoesn’t
about where
throw the ball: hit the cutoff man,
ence,
alwaystoapply.
throw
behind might
a baseproceed
runner,in
throw
out
an advancing
basemore
runLearning
a more
ideal
way if life were
ner.
Where
the
outfielder
throws
after
fielding
the
ball
is
a
bet.
like chess than poker. The connection between outcome quality
We makequality
similar
bets be
about
where
to “throw”
an outcome:
and decision
would
clearer
because
there would
be less
into the “skill
bucket”
(in our
control)
or theoutcome
“luck bucket”
(outuncertainty.
The
challenge
is that
any single
can happen
side of our control). This initial fielding of outcomes, if done
well, allows us to focus on experiences that have something to
LEARNING LOOP 2
192
THINKING IN BETs
192 T H I N K I N G I N B E T s
for the long run. Look at this chart of Berkshire’s performance
since Look
1964:at this chart of Berkshire’s performance since 1964:
for the long run. Look at this chart of Berkshire’s performance
since 1964:
Now zoom in on a random day in late January 2017. The
upticks and downticks look large and potentially frightening.
zoom insitting
on a random
daypoint
in late
January
2017.
The
You Now
can imagine
at the low
around
11:30,
feeling
Now
zoom
in downticks
on a random
daylarge
in lateand
January
2017. The
upticks
upticks
and
look
potentially
frightening.
like your
losses look
are spiraling.
and
downticks
large and potentially frightening. You can
You
can
imagine
sitting
the around
low point
around
11:30,
imagine sitting at the
low at
point
11:30,
feeling
likefeeling
your
like your
losses are spiraling.
losses
are spiraling.
10AM
12PM
2PM
4PM
10AM
12PM
2PM
4PM
9780735216358_ThinkingIn_TX.indd
192
12/1/17 1:24 AM
9780735216358_ThinkingIn_TX.indd
192
12/1/17 1:24 AM
24 AM
ADv E N T U R E s I N M E N TA L T I M E T R Av E L
193
If you zoomed in on the performance of Berkshire Hathaway
If you zoomed in on the performance of Berkshire Hathaway stock dur‑
stock
the
banking
crisis,2008
September
2008
to you
March
2009,
ing theduring
banking
crisis,
September
to March
2009,
would
feel
terrible
mostfeel
days:
you would
terrible most days:
BERKSHIRE HATHAWAY (SEPT. 2008−MARCH 2009)
160,000
140,000
ADv E N T U R E s I N M E N TA L T I M E T R Av E L
120,000
209
100,000
A D v E N T U R E s I N M E N T A L T I M E T R A v E L 209
to,
given what they knew about each of those things (and, of
80,000
course,
60,000 numerous others)? Just as they relied on reconnaissance,
to,
given what
they
each
of those
things
of
we
shouldn’t
plan
ourknew
futureabout
without
doing
advance
work(and,
on the
40,000
course,
others)?
Just asfrom
theyany
relied
on decision
reconnaissance,
range
ofnumerous
futures that
could result
given
and the
20,000
we
shouldn’t
plan
our
future
without
doing
advance
work
on the
probabilities of those futures occurring.
0
range
ofus
futures
thatbetter
could decisions,
result
fromwe
any
given
and
the
9/2/08
11/2/08
12/2/08
1/2/09
2/2/09
3/2/09
For
to10/2/08
make
need
to decision
perform
reconprobabilities
futures
occurring.
naissance
on of
thethose
future.
If a decision
is a bet on a particular fuFor
us
toknow
make
better
decisions,
need
to apicture,
perform
reconYet we
know
from
the
first
chart,
thewewe
big
picture,
thatweallthat
those
ture
based
our from
beliefs,
before
place
bet
should
Yet
weon
thethen
first
chart,
the
big
all
minute‑to‑minute
and
even
day‑to‑day
changes
had
little
effect
on
the
naissance
on
the
future.
If
a
decision
is
a
bet
on
a
particular
fuconsider
in detail what those
possible
futureschanges
might look
like.
those minute-to-minute
and even
day-to-day
had little
investment’s general upward trajectory.
ture
based
on
our
beliefs,
then
before
we
place
a
bet
we
should
Any
decision
can
result
in
a
set
of
possible
outcomes.
effect on the investment’s general upward trajectory.
consider
detail is
what
futures of
might
look lives.
like.
Our in
problem
thatthose
we’re possible
ticker watchers
our own
Any
decision
can result
a set of possible
outcomes.
Happiness
(however
weinindividually
define
it) is not best measured by looking at the ticker, zooming in and magnifying
BELIEF
( sETmovements.
OF OUTCOMEsWe
)
moment-by-moment
or BET
day-by-day
would be
better off thinking about our happiness as a long-term stock
Thinking
aboutdo
what
futures
inthrough
that
BET
(our
sETcontained
OF
OUTCOMEs
) set (which
holding.
We BELIEF
would
well
to vieware
happiness
a widewe
do lens,
by putting
memories
together
in a novel
waytrend
to imagine
angle
striving
for a long,
sustaining
upward
in our
Thinking
about
what
futures
are
contained
in
that
set
(which
how
things
might
turn
out)
helps
us
figure
out
which
decisions
happiness stock, so it resembles the first Berkshire Hathaway chart.
wemake.
do
by putting
memories
together
in aofnovel
way to possible.
imagine
to
Mental
time travel
makes
that kind
perspective
how
things
turn and
out) futurehelps usselves
figuretoout
which
decisions
We can
usemight
our pastpull
us out
of the
FUTURE A
to make.
BETTING ON A FUTURE
BETTING ON A FUTURE
FUTURE B
FUTURE CA
FUTURE DB
ETC.
BET
BELIEF
FUTURE C
FUTURE D
Figure out the possibilities, then take
ETC.a stab at the probabilBELIEF
9780735216358_ThinkingIn_TX.indd
193
BET
ities. To start, we imagine the range of potential futures. This is
the possibilities,
a stab
at compiles
the probabilalso Figure
known out
as scenario
planning.then
Natetake
Silver,
who
and
ities.
To
start,
we
imagine
the
range
of
potential
futures.
This
is
interprets data from the perspective of getting the best strategic
alsoofknown
as scenario
planning.
Nate
Silver, who
compiles
and
use
it, frequently
takes
a scenarioplanning
approach.
Instead
12/1/17 1:24 AM