216: Making Smarter Financial Decisions with Annie Duke
Today, I’m speaking with Annie Duke. Annie is an author, speaker, and decision strategist. She is also known as the Duchess of Poker, and won a World Series of Poker gold bracelet in 2004 and was the leading money winner among women in WSOP history when she retired from the game in 2012.
She’s written a number of books on poker strategy and decision making, as well as an autobiography. In her newest book, Thinking in Bets: Making Smarter Decisions When You Don’t Have All The Facts, she uses examples from sports, politics, business, and poker to help people understand how to make better decisions and embrace uncertainty–and make sense of the disconnect between outcomes and decisions.
Today, Annie joins the podcast to talk about her astounding career in professional poker, and how it translates to making decisions in real life. We’ll also talk about the reasons why good decisions don’t always lead to good outcomes (and vice-versa), and how this can apply to your portfolio at any stage of life.
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In this podcast interview, you’ll learn:
- Why Annie was able to leave poker behind without giving up what she loved about poker–and what makes Erik Seidel such a special player.
- What makes it so hard to make decisions in the present that will lead to better outcomes in the future.
- Why it’s so hard to use our past decisions to make better ones in the future.
- What happens when you get “in on the joke,” accept that you’re not omniscient, and get an edge against everyone else who’s investing too late.
- The power of the happiness test.
- Annie’s six-step decision making process.
- Why it’s so important to have an advisor who challenges you.
- How to spot bluffs in real life.
- "We're generally overselling our knowledge rather than underselling it. We're usually much more certain of our guesses than the accuracy of our beliefs warrant." - Annie Duke
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Casey Weade: Annie, welcome to the podcast.
Annie Duke: Well, thank you for having me. I love that introduction. And I have two things to say. One is, while I did five years of PhD work, I did live ABD, as they say, which is “All But Doctor”, I didn't defend my dissertation, but I'm working on rectifying that now and actually working toward cleaning that little part of my life up, in order to go play poker, that’s why I left, but I did like the whole program, but I am not a PhD. So, I just would like to clarify that.
Casey Weade: Well, as far as I’m concerned, you're the smartest person I know when it comes to decision making. I’m going to put a...
Annie Duke: No, I’ve done a lot of PhD level of work. I also, like I really appreciate you calling me one of the best poker players in history, like for my mind, what starts coming to mind is the list of players who were so much better than I was, but anyway, I appreciate the small exaggeration.
Casey Weade: Well, let's see, I recently had the opportunity to play in a PGA Tour event and a Pro-AM, and we were playing, I said, “Wow, this guy's only ranked 94. This one's ranked 165.” And they said, “Well, yeah, top 100 in the world at anything, top 200 in the world at anything is pretty darn good.” It puts you in a pretty exclusive group out there. And I remember watching you in 2004, when you won the poker championship. And that's when I watched a lot of poker between 2000 and probably 2008, for about eight years, I just loved it. If I was watching TV, I was looking for poker. And so, I got to see a lot of your hands get played.
Annie Duke: Yeah, that was really the heyday of poker. And I feel like I was really lucky because prior to right around when you're talking about like in 2002, 2003, it wasn't on television. And so, I feel like the people who were established and obviously, very accomplished at the time that it came on television, particularly if they felt like there was a good story to be told, just had a very big advantage because you were coming into an untilled field, like it was frontier. So, somebody like me, 3% of the people who play in the World Series of Poker are women.
So, I was a woman, I had four kids, I was double Ivy League educated, like I had all of this stuff that kind of went along with me during that time that you were really playing poker, I kind of had a head start in terms of the ability to sort of brand and get well known. And obviously, I'm not saying you don't have to back that up with wins. And in 2004, I won some really important tournaments, obviously, but I also always recognized, like being first was really good, being a woman in this case was good for branding, that I was a mom, and all of this stuff also helped make me a little bit unusual, which is always a good thing. Being unusual is never that bad.
Casey Weade: Well, I’m going to be careful in derailing the conversation too much into the whole world of poker, but I am curious, you're not playing competitively.
Annie Duke: I haven't in a long time.
Casey Weade: It’s my understanding. Do you miss that? If you do miss it, what do you most miss about it?
Annie Duke: So, it's interesting, so I haven't played competitively since 2012. There's a variety of reasons for that. The poker economy really contracted for one thing after 2008, but separate and apart from that, starting in 2002, I was actually kind of circling back to my academic work. And I had started to give talks, which were at the intersection of kind of the decision problem that poker presents, which is like high uncertainty, like a lot of volatility, a lot of hidden information, and obviously, high stakes. And thinking about how that merged with the academic work that I've been doing in cognitive psychology, and I started getting really deep back into that, and thinking about how they could inform each other. So, I started doing talks, and then I was doing some consulting, and so on, and so forth.
So, I started spending less time actually at the poker table, and started increasing the amount of time that I was giving talks and kind of thinking in this space. And I really had in my head that I really, really wanted to write this book, Thinking in Bets, which would be the expression of this kind of stuff that I've been talking about, how do you make decisions when you have uncertainty, it's a hard challenge. So, that combined with the fact that the new players that came into the game had– I mean, I would have had access to them as well, but I've been in the game for a long time. These new players were running poker solvers, like algorithms and Monte Carlos and simulations in order to really start to dig down into sort of what the best strategy is in poker in a way that honestly, at that point in my career, I don't know that I would have been willing to put that work in. So, the players honestly started to get a lot better than I was because they had access to tools that just weren't available to us.
And there are people that I admire so much, like Erik Seidel, who did stick around and put that work in, and he's so incredible, and he's still doing so, so well, but I actually think that I had to make a choice. Did I want to, in some sense, sort of relearn the game? Not that I wasn't always learning, but did I want to relearn the game in a way that was going to really undo things, and I was going to have to put in tons and tons of work? Or did I want to go into this other thing? And that was a question about which I was more passionate about it at that time in my life, and I was just much more passionate about the work that I was doing in decision making.
So, what's ended up happening is that I don't really miss poker because the things that I really loved about poker, which was sort of facing this challenge of how do you make high quality decisions under these circumstances? How do you break problems down into their component parts? How do you think about what's happened in the past and untangle luck from skill? These are the things that really fascinated me about poker. And I do all of that in my work now, I do all of that in the consulting work that I do. I get to do it in an academic way, where I get to test hypotheses and actually see if those hold true.
So, the problem-solving aspect of poker that I loved and this idea of like, how do you model the world? How do you make good forecasts under those circumstances? I get to do it in my everyday life anyway. So, I don't feel like I left poker in that sense. And I think that's part of the reason why poker makes such a good sort of model for thinking about human-decision making, in general, because most problems poker can inform pretty well. So, I feel like I never actually stopped playing, I just stopped playing against people who are going to kick my butt.
Casey Weade: Now, you still kick butt against Erik every once in a while.
Annie Duke: Against Erik Seidel. Well, I beat him in 2010 for the NBC National Heads-Up championship. By the way, he came back and won it the next year. I couldn't play that next year, because my mom was in the hospital at that time, but I'm sure he would have beaten me anyway, even if I could have played in that year. I mean, Erik Seidel is such a special player. He's so good in terms of really, really just understanding the game, being willing to adjust, approaching the game from a place of humility, always looking for what he can learn from other people. And that's just really, really unusual in a game like poker.
What you find in poker, and this actually translates to life, and I'm sure that you'll sort of hear how this translates, is that like, obviously, there's a zero-sum nature to the exchange of the chips, but I think that people also, when they're thinking about what is my self-view in the moment? It's like, if you lose a hand, you're faced with this choice of, should I say that this is because I made a mistake, and the other player is better than me? Or can I say that this is because of luck, and the other player is not better than me? Now, both of those things can both be true, but you need to actually approach that pretty objectively. And what ends up happening is that for a variety of reasons that have to do with the way, that sort of cognitive bias can grab hold of the uncertainty, like the sort of rope that luck gives us to sort of interpret the world in a way that makes us feel better. What you see in poker is that most people when something bad happens, they have a very strong tendency to offload it to luck. And if you're going to say that I lost a hand because I got unlucky, it's really hard to then say that your opponent actually played the hand well. Like those can't really live together. While that might be really good for you in the moment, it's not particularly good for you in the long run.
And we all know this, like the people, someone gets passed over a promotion, like is that ever the person's fault that the person who got the promotion really deserve it more because they really put in the work and they worked harder, and I should learn something from them, and so that I can improve as a human being or in my job. Our first instinct is, that was unfair. I deserved it, but I didn't get it. The thing that makes Erik so special is that, that isn't his first instinct, that his instinct is always around long term, what's best for me? Because long term obviously, it's best to actually find out the truth and figure out, did I get unlucky? Was it like I could only lose if the queen of clubs hit? And that was going to happen 2% of the time, and it happened. Is that the reason why I lost? Or did I lose because I made a mistake? Or even more importantly, even if I won the hand, it doesn't necessarily mean I played it really well. That's a hard place to live. And that kind of long-term view, he's really, really good at living there. And he's an example of like, how we should be approaching decision making away from the poker table.
Casey Weade: Well, that I think, to me, was my biggest takeaway from how to decide. Our decisions are not necessarily and usually nearly as good or bad as we actually think they are, it's really about decision analysis. And I have a quote from your book on that where you said, “We're generally overselling our knowledge rather than underselling it. We're usually much more certain of our guesses than the accuracy of our beliefs warrant.” And I think that was one of the best less– that just really hit home to me, because I think one of the best lessons my dad ever taught me was that we might be wrong. And let's go ahead and analyze it, and that goes back to humility. And so, I think…
Annie Duke: Yeah. So, I think it's kind of two things. I think one is humility, but the other is separate and apart from humility, I kind of hinted at, which is, how much are you thinking about what's best for long-term Casey versus Casey right now, like the present version of Casey? So, one of the issues that we have, and this cross is like so much of our decision making, is that what's good for us in the moment, is very often not good for us in the long run. So, like, as an example, chocolate bars are really yummy. And if I eat that now, that's going to make me right now pretty happy, but if I do that, that's not very good for long-term me. Like, if I'm thinking about like, 75-year-old Annie, that person is probably not very happy if I was like chomping down on a bunch of candy bars, because that made me feel good right now.
So, we can see that battle when we're talking about health, like quitting smoking. It would be good for you now, but it's hard at the moment, even though there's no question that the long run is better for you, eating healthy, working out, like all of these things. That's kind of a battle between the future self and the present self. That's true of decision making, as well, that what's good for the present version of you in terms of the way that you think about, was an outcome due to luck? Was it due to skill? What's the mix of that? Was it my fault? Did I make a bad decision? Am I really a good decision maker, and things just didn't go my way? This becomes very candy like that in the moment, what feels good is to say, of course, it wasn't my fault, and that's if you get a bad outcome. And if you get a good outcome, it feels really good to say that was all me. Right? Like, I'm so amazing, I got that promotion because I deserved it, I worked really hard, I worked harder than everybody else, this was totally a matter of skill, there was no luck involved, because I'm great.
And when it doesn't work out for you, it feels better to sort of take that escape route, that luck allows us in order to preserve that positive update to our self-image that we really, really crave, that allows us to continue to think that we're smart and we're great, and we don't make mistakes, and we're more confident, we're more certain than we are, and we deserve what we got and all of those things, but the problem is that it's very much like the eating healthy problem is that that's not good for future you. Future case is really going to suffer if your automatic impulses, like I'm awesome when things worked out, and it was luck, when things don't work out because clearly, it's a mix of both. And all four things can be true. You could make a great decision and have a bad outcome. You could make a great decision and have a good outcome.
So, great decisions, great outcomes would be like just rewards, you got what you deserved, and you earned it, it was earned. Great decision, bad outcome would be like bad luck, but you can also make a bad decision and get a bad outcome, that would be kind of like just desserts, but then you can also make a bad outcome, bad decision, and get a good outcome. So, that would be dumb luck. And we need to recognize that if we're not actually exploring to see where does it actually sit? We're going to take some pretty bad lessons from our past decisions, as we're trying to figure out what the feedback is, which is the outcome of the decision, what that's supposed to tell us in terms of our learning. And if we're not doing a good job of that, yeah, I might feel better about myself right now, because I get to interpret the world. Basically, no matter what happens, I'm great, but that's not good for me in the long run because I'm not going to spot my errors, and I need to be able to spot my errors in order to improve my decision making. And this is a big problem that we have.
So, we obviously need humility to do that, but the other thing we need is an eye on the prize, we need to understand who we are taking care of. Are we taking care of the person that we are today? Or are we taking care of the person that we're going to be in the future? And obviously, we want to take care of the person that we are in the future, because there's many, many more of those people than the one version of me that exists today.
Casey Weade: So, Annie, I have to ask how weird are you? And I say that, and how many people are actually looking at the decisions they make and analyzing? How many people are really going through the process of decision analysis? I don't know if there's any research or statistics around this. It seems to be that most aren't really analyzing their decisions, it's just chalking up to bad luck or moving on, we just kind of check the box and move on with life. Is this unusual?
Annie Duke: So, it depends on the setting and also depends on kind of what you mean by the analysis. So, there's obviously circumstances where people are trying, it's just that they're trying with pretty bad tools. So, like, maybe they're using a pros and cons list, that's actually quite a poor decision tool, doesn't really improve the quality of your decisions very much, or like something that you hear particularly in businesses which have very long feedback loops. So, like, you'll hear this from like angel investors, sometimes. It's like, well, I just go by my gut. I just go by my gut feel. So, that's obviously going to be sort of no analysis at all, it's sort of saying there's some sort of analysis in the guise of I'm just going with my instinct. And I think part of the reason like the excuse that they give for that is that well, I'm not going to find out for 10 years. So, I just have to look a founder in the eye. So, I think that you get people who are doing that.
You do have people have certain processes, like, for example, it's very popular to be like, I'm very results oriented, that's a very bad thing, actually, that creates a lot of really, really bad behavior, among the people that you're working with. It will actually also really degrade your decisions as well, if you’re results oriented, unless you're specifically saying long-term results oriented, which is not what people mean by that. People will sort of be trying to figure out, like, when we're having meetings, they'll sort of think about what the structure of the meeting is, they'll come up with something where like, it's majority rule, or we need to get to consensus or those kinds of things. So, I think, particularly in business, I think people are sort of trying to think through, like, how would we make a decision?
The problem is that people just come to pretty bad answers about it. And there's a new book coming out in the spring by Daniel Kahneman, Olivier Sibony, and Cass Sunstein, and I'm sure that a lot of people are familiar with Thinking, Fast and Slow by Daniel Kahneman, this is called Noise. So, Thinking, Fast and Slow is about cognitive bias, things like overconfidence and confirmation bias, and all this stuff has become very popularly known. This book is more focused on noise, which is just randomness in your decision making, but it really makes a case for the fact that most of the way that people are doing decisions right now, even if they think that they've sort of stopped through the process are probably not helping the matter very much.
So, in the business setting, I think that people are thinking through this. In the life setting, I think that people spend a lot of time trying to make decisions about things like menus, like what should I learn about the menu, but generally, people don't have a very good process for most of their decisions. They haven't really thought through. How should I go about it? And I think the reason why is because it's a little bit like walking. Like you've been walking before you really were conscious of yourself. You don't really think much about like, how would I proceed to walk? It's like, you put one foot in front of the other, and then you go. So, why would you need to study walking, or learn what a process for walking is? It's obviously something that you do naturally.
And I think that decision making actually kind of goes in that category. We've been making decisions. Since the moment you were born, you were making decisions. So, I think that most of us feel like we've gotten to kind of where we are, this is particularly bad for successful people. And so, obviously, I'm a really good decision maker, but that's resulting, it's like, okay, you've had some good results. It doesn't mean that you have a good process, it doesn't mean that you're a great decision maker. And to take Erik Seidel’s lesson, it certainly doesn't mean that you can't improve. So, I know that's kind of a complicated answer, but I just want to separate out, I think there is a large group of people who are trying.
Casey Weade: I think it's largely, like you said, it's just step by step, we put one foot in front of the other, and it's just kind of automated. Something you said about being results oriented, I want to go back to that, because that's a real issue, I think, in the financial planning business, or the delivering of financial advice. Results oriented is what the client usually is, and they could make a bad decision by taking too much risk, and then have great results because well, I took too much risk, hey, I made 40% last year, but that doesn't mean that it was a good decision. Then you have, it's a good decision, we're working with a lot of families that are stepping into retirement. So, good decision to de-risk the portfolio, but then the market takes off the next year. And now, they have regrets. It might be an overall allocation, reducing equities, or it might be an individual stock that they've held on to for the last 20 years that made up 80% of their net worth. And now, they've lost out on gains that they could have had if they would have kept things where they're at. How do we as advisors help clients avoid those regrets when we're looking at the long term? They're only looking at those results over the next year, two to three years.
Annie Duke: Yeah, okay, so let me get a little bit meta to start, and then we can sort of dig down into how you resolve this in terms of really understanding how problematic that is. So, let me get a little meta. So, there's something that I used to say to people at the poker table a lot, I'm going to admit, it’s a little bit too sort of shoo them away, but what I was saying was actually pretty deep. So, in poker, you have this resulting problem as well, and it manifests in this way. You fold a hand, and then the cards come down in the middle of the board, and you would have made something amazing. So, someone raises, I fold a seven and a deuce, that's actually the worst two card combination, in Hold ‘Em, I would hope that I would be folding that. And then, the board came, and there was a seven, a seven, and a two. And it turns out that I would have crushed the person with aces if I continue to play.
So, this happens to us a lot. So then, what would happen a lot is that someone would lean over to me, like someone would be sitting next to me at the table, and they'd always lean over with a whisper. And they'd say, Ah, I folded the seven deuce. And they're clearly, like looking for sympathy, like, can you believe that I would have won the hand? But this is the problem you're describing, right? And I would lean over to them, and I'd say, “You know how you can fix that?” They'd be like, what? Like, they'd be really excited because I can give them an actual solution. I said, “You can play every single hand till the river.” And if you do that, you will never experience one moment of regret, that woulda, shoulda, coulda. I mean, you'll be broke, but you're not going to be wondering. And that will give you certainty, because you'll be able to see every outcome until the end.
And then they will get mad at me because, of course, I mean, I was saying something completely true, but the reason why they got mad at me was because I was sort of like piercing the absurdity of what they were saying. Well, obviously, in order to be a winning poker player, you're going to fold lots and lots of hands that would have won, it has to be that case, right? And we know that, like we can drill down in the stock market. It’s like at any time, if you were omniscient, your portfolio would be concentrated in one stock, the one that was going to do best that day, or whatever. Let's assume a fee-free world, right? You would just move your money around, maybe if you're omniscient, you do it hour to hour, I don't know. And you would just go from one stock to the other to the other to the other, there'd be no reason to ever own more than one stuff because you'd be omniscient. But across the portfolio, obviously, there are going to be things in the portfolio where you’re like, damn, why did I have money in that? And things in the portfolio where you're like, Ah, I should have put all my money in this. Or things outside of your portfolio, which is like, why didn't I have Bitcoin? I should have more of that. It’d be amazing. Or man, I wish I didn't GameStop two weeks ago.
So, we know that that's always going to happen. So, this is where the meta lesson is. You have to get your clients in on the joke. You have to explain to them upfront: Let's think about what it is that we're trying to accomplish. Let's look at historically, what's going to happen. And I'm going to give you some examples of both cases. Here's what would have happened if you kept your portfolio the way it is in 2008. Here's how frequently a 2008 type of event comes along. You know you're going to be sad then, but at the same time, here if you have this portfolio, this is what would have happened in say, a boom year like 2016, or when Bitcoin is flying, or whatever, and you're going to see that there's always going to be things, that these two things are always going to be true. There are going to be things that you don't own, that you wish you had. And there will always be things that you do own, that you wish you hadn't. And that's because you're deciding under uncertainty, and you're trying to figure out probabilistically, what's the best balance for what my goals are? Those goals are going to change over your lifetime.
So, here's the secret for you, and this is where you have to really get them in on the secret. You're going to hear your friends complaining. You're going to hear other people talking this nonsense that if they'd only played that seven deuce, then they would have had a full house at the end, but you know better. And that's the secret to why you're going to do really well. Because when you hear those people say, “Oh, I was so smart, I put all my money into” you're going to be like, Wow, that's really dumb. Like, maybe it's going to work out, and then I'm going to hear about it from them, but I know that's not right. You're going to hear people talking about why did I have any money in bonds recently? They haven't been performing, but I'm going to know why. And I'm not that person who thinks I should play every hand till the river.
So, when you get somebody in on the joke, they start hearing the world differently, and they start hearing the voice for themselves differently. And then, actually, when they come to you, and they say, why this, why not that, you can say, “Let's look at how that would have done in 2008.” Let's actually look at how that would have done outside this brief moment in time, let's see if that necessarily would have been a good strategy, let's look at all the stocks where that would have been the stock that you would have the 80% of your net worth in, and it cratered, and you wouldn't have been able to time the crater properly. And even if you could, you're never going to sell it at the high, which means you're always going to regret that you lost a little on the way back. You're never going to buy things at the low, like these are all things that would require omniscience and a time machine. So, you're not omniscient, you don't have a time machine, that's actually going to be your huge edge against everybody else who's investing because you know that thing.
Casey Weade: That's great, yeah. And there's one thing that I really love that you mentioned there, which probably back to the happiness test, what are the tools, and how to decide, you mentioned probably the one area. So, I want to start at the easiest area, I think to understand and that is making a decision on what you're going to have for dinner. This is the one that I have used several times since reading your book.
Annie Duke: Oh, good.
Casey Weade: Because that's one of the things, I look at the menu and I want it all, and then I end up frozen, and I just can't make a decision on which one I'm going to get, I'm asking for input. And I think the happiness test did it for me, that really was a very simple way of understanding. Can you just explain what the happiness test is? Maybe in that realm of deciding what there is for dinner, but then maybe going a little bit further down the line and to these types of decisions, even like making an investment decision, making a major investment decision or derisking the portfolio, getting more aggressive.
Annie Duke: Yeah, absolutely. So, the happiness test is actually, when I was talking about decision making is a battle between present Casey and future Casey, the happiness test is actually a really good tool to have in your back pocket that really helps you go and have a conversation with future Casey. So, we're going to do a lot better in our decision making if we're having more conversations with that future version of yourself. And this is what the happiness test does, it makes you go talk to that person. So, let me explain in terms of the menu problem. So, you just mentioned like, you're someone who's looking at the menu, like, I didn't know what I should have. And I think part of the reason why we take so long with those decisions, and we're like quizzing the waitstaff, and we always want to be the last one to order, and we're asking everybody else what they're having, and we're looking on Yelp and looking at the pictures of the dishes and all the stuff.
Casey Weade: You just described me.
Annie Duke: Yes, there you go.
Casey Weade: But I'm fixing it, let me tell you.
Annie Duke: But let me ask you this, actually, because you do this, because I have an intuition about this, I'm curious as to what your response is. I think part of the reason why people take so long with that decision, or you take too long with that decision is it feels like it should have a right answer. Like it feels more in the two plus two equals four category, because it's about you and your preferences, and the menu is right there. And you know food, and you know the dishes. Like it feels like if you just have all that information, you should be able to solve it. I'm just curious, is that sort of how you feel?
Casey Weade: It seems like there has to be a 100% correct answer that this is what I like, this is what everyone else likes, and this is what's going to make me happiest.
Annie Duke: Right. So, we end up taking a lot of time on the decision, I think, because we feel like there's a solution, and that's particularly hard when we're talking about our own preferences. We feel like we know thyself. We should at least know ourselves. So, that comes from really– we have the same problem, like choosing what to watch on Netflix, where you're like in the endless scroll. You should just watch something, who cares? Alright, so how do we…
Casey Weade: And please, if I may tie this into freeroll, because I think it's just perfect.
Annie Duke: I will in a second. So, let me explain the happiness test, and then I'll explain that freeroll. Okay, so the happiness test is this. Basically, when we're thinking about how much time we should take on a decision, what we're really saying is, how much are we willing to sort of increase our error rate? Like, if we take less time on a decision, it's more likely that we're going to get a bad result, it's more likely I'm going to get a dish I don't like so much. So, if I save time, maybe I'm going to make a slightly less good decision. Okay, so then what we want to say is, okay, so let's imagine your chicken’s really dry. You don't actually like it very much. Now this is where the happiness test comes in. So, I'll ask you, Casey. So, you're in the restaurant, you've taken your 15 minutes, you get the dish, it's disgusting. The first thing that comes to your mind is I made a mistake. So, let's just start there. And that's ridiculous, because you don't have a time machine.
So, you did the work. Sometimes when you go through green lights, you get an accident. That's what just happened to you, it wasn't a mistake to go through the green light. The chef was off that night. So, you get your disgusting chicken, you don't really want to eat it. And now, I see you a year later. And I say, “Hey, do you remember a year ago, when you took 15 minutes to decide on that meal, and then you got kind of that disgusting chicken that you didn't really want to eat?” Alright, so I'm seeing you a year later here, how much did that one meal a year ago affect your happiness today?
Casey Weade: It affected my happiness today zero, 0%.
Annie Duke: That’s interesting.
Casey Weade: There's no way that it affected my happiness.
Annie Duke: You spent a lot of time on that decision. Yeah. So, what about if I see you a month later?
Casey Weade: Well, the compounding of all those decisions over time is huge.
Annie Duke: But you're not– remember, if you're making good decisions, you're mostly going to have good results.
Casey Weade: Yeah.
Annie Duke: Right? So, you're going to have an occasional bad meal in there, basically. So, it's like, how much can you tolerate that one bad result?
Casey Weade: Yeah, a month later, I don't think it affected me at all a month later.
Annie Duke: Right. What about a week later? You've had 21 meals since then.
Casey Weade: Highly unlikely.
Annie Duke: Right. So, what this tells us is that getting a bad result, when it comes to eating food is going to have very little impact, it's a low-impact decision. And we know that because I can ask you the same thing. Let's say the chicken was amazing, has it affected your happiness a year later? No. So, it's just a low-impact decision. So, what we want to do is spend our decision-making time on things that actually have some high impact, that are actually going to matter to us in the long run. And this is one that doesn't matter in the least. Whether the result is good, or whether the result is bad, who cares? And that's true, like, if you watch a half hour of bad TV, it's not going to affect you in the long run.
So, we want to keep our eye on when do we want to spend the time and when don't we, because we have to remember that we can't guarantee the result as much as you have the illusion that you can get certainty on that decision, you can't. And this is a decision that you shouldn't even be trying to get certainty on. And then, we can compound that by saying, this decision also repeats. As I said, by the time I see you in a week, you've had 21 other meals. So, if it happens not to work out very well, and you make maybe a more experimental choice or whatever, and it doesn't work out. So what? In six hours, you're going to have something else. And so, that also really reduces the impact of the bad decisions. So, that's why the happiness test is so important to understand. It starts getting you to think about is it worthwhile for me to spend time on this decision, because is this going to matter in the long run? I'm defending against feeling like I made a mistake in the short run when my bad food comes, but what I really should be talking to is Casey in a year, and saying, “Hey, Casey, can you tell me if this matters to you at all?” And if it doesn't matter to you at all, you shouldn't care? So, obviously, we want to sort of take that idea out into the rest of our lives.
So, now, what about something that does have impact, that doesn't necessarily mean you have to go slow? So, this is where a freeroll would come into play. Sometimes, so with the chicken or the fish or whatever, it doesn't matter which side of the equation you look like, neither of them has a really high impact. So, even if your chicken is fabulous, it's like an amazing dish, it's not going to affect your happiness in a year. It's not going to be like, yeah, it was really horrible, and I lost my job, but thank God for that chicken a year ago. It’s not going to help you much, but that's not true of everything. Sometimes, if things work out well, then they could have actually a really big impact on your life.
So, what we want to think about in that case is sometimes, we sort of face decisions where we sense that there's that really high impact, and that slows us down, but we're only thinking about the high-impact side of the equation. So, that would come with like, for example, if you're trying to decide whether to offer on a house that's out of your price range, right? Well, like really analyzing that decision, we're afraid of getting a no, and we know that this is a really high-impact decision, like where are we going to live? If you're trying to think about whether to apply for a job that you think might be slightly out of your reach, you know that's a pretty high-impact decision, your job has a lot of effect on your happiness in a year. And so, you get really caught up in those decisions, but what we want to think about not is about the upside of those decisions about, but what the downside of the decision is. And this is where we get into freerolls.
So, a freeroll is basically a decision that has really, really limited downside impact, but lots and lots of upside potential. So, that would be like, if you offer on a house that's outside of your price range, basically, if the worst that happens, which is they don't accept your offer, if that occurs, you're actually no worse off than you were before you made the offer. So, your state of being has not changed, but the upside is, you could have your dream house, right? If you apply for a job that you think is like a reach or a college that's a reach or a graduate school that's a reach or whatever, assuming that you can afford the cost of the application, if you get told no, you're no worse off than you were before because you weren't in that college, but if it's yes, then you get to go to the dream college.
So, you should be looking for these freeroles a lot and always asking yourself, if the worst that happens, am I really worse off than I was before? And it turns out that the answers to that question is very often no. And this can occur with investment decisions as well. This is one of the reasons why we think about some of these types of investments that don't have a whole lot of downside associated with them, because the downside is just really limited. So, like bonds would go into that category. So, it just limits the downside for whatever decision that you're making.
Casey Weade: Yeah, there's something you said that I want to get into, but I think it ties really well into the five-step decision making process. I would like to go through that process, or would you like to walk us through the five-step decision making process?
Annie Duke: Sure, yeah. It's six steps, but yes.
Casey Weade: Really?
Annie Duke: You know why? Because there's a last step that has a loop around and do it again. That’s really five steps.
Casey Weade: And the book needs an update.
Annie Duke: Oh, that, oh, no, that's a little different. I thought you were talking about this. Hold on. I shall show you, I shall show you. We're talking about two different parts of the book. Here, I'm going to show you this part.
Casey Weade: Say you should never argue with someone about the book they wrote.
Annie Duke: Well, that's probably a good tip. There you go. Do you see what that says?
Casey Weade: Yes. Yeah, I was really– this one did it for me, I guess.
Annie Duke: I'm going to do the one you're talking about.
Casey Weade: The visual is really helpful.
Annie Duke: Okay, so do you want to talk about the part that's about how do you decide whether you should go slow or fast?
Casey Weade: Yeah, it’s how fast can I go, so does the decision pass the happiness test? It is number one.
Annie Duke: Yeah, perfect. I can totally walk through that. Yeah, so absolutely. So, this is a good way to think about things. So, this is thinking about the world as options and impact. So, the question we always have is, how fast can we go? If you think about what a robust decision-making process looks like, you might think I've got to go pretty slow all the time. For a poker player, obviously, no, poker, you have to make pretty fast decisions. So, the question is, when can I go really fast? That's what you want to ask yourself. So, the first thing is the happiness test. So, what does the happiness test tell you? It tells you, I'm deciding about something that isn't going to matter in the long run. So, that would be like, should I try a TV show out? What should I wear? What should I eat? So, if it passes the happiness test, then you can probably go fast.
Now, if on top of that, it's a repeating option, which is what I was talking about with meals that you're going to get to make that same choice pretty quickly, then you can also go faster, because it's just like you're going to get another sort of shot on goal. So, you can be sort of quicker and more out there and less certain about what you might order off a restaurant menu because you can probably go to another restaurant at some point during the week. And so, that means that you can sort of explore more and go faster. Okay, so that's the first thing.
So, now the question is, what if it doesn't pass the happiness test? The next question that you ask is, is it a freeroll? So, that's what we’ve just discussed. So, just say, am I really worse off than I would have been before, if it doesn't actually work out? So, like a classic example of a freeroll, I gave a few, but a classic example of a freeroll would be, should you ask somebody out on a date? What's the worst is going to happen? They say no. And I think we've all given people that advice. Just ask, like the no, but they're more popular than I am, or they're so smart, and they're never going to want to go out with me. And you're thinking about all those things, but the answer is, it's a freeroll. If they say no, you're not worse off than you were before. So, that's the next thing is think about, is it a freeroll? If the answer to that is yes, you can go pretty fast. If the answer to that is no, you go on to the next question, which is, is it a sheep in wolf's clothing. So, this is a very particular type of decision. That's actually a really, really important concept. It's a very important concept in investing, actually.
Okay, so what is a sheep in wolf's clothing? It's when you have two options that are very high impact, it hasn't passed the happiness test, they're not freerolls, meaning that if the downside happens, it is going to be bad, it's going to change what your situation is. And if the upside happens, you're also going to be pretty happy about it. And you have these two options. And now, you're caught in an analysis loop, trying to decide between the two of them. And this feels like a very, very hard decision. I'll give you an example. In the times before Coronavirus, let's say that you have a big vacation that you had to take, and you're trying to decide between Paris and Rome. So, it doesn't pass the happiness test. If I see you in a year, and you had a crappy vacation, you're going to tell me that made you pretty sad, that it actually did have an effect. It's not a repeating option for most people, you can't just go back on your vacation to Europe in the next month and try again, with another city. It obviously has a high cost. If it doesn't work out, you are actually worse off than you were before. And again, if it does work out, that is going to actually affect your happiness as well. So, it's sort of failed all of those tests, it's not a freeroll, it doesn't pass the happiness test, it’s not a repeating option for most people.
Okay, so now what happens is, you're down to Paris and Rome. And what happens? I bet this happens to you because if you're taking a lot of time on a menu, you're probably taking a lot of time with those decisions. So, you start looking at TripAdvisor, and you start asking all your friends who've ever been to one of those two cities. And you're spending months in deep anxiety trying to decide between Paris and Rome. And you feel like this is something where you should be able to distinguish between the two. Similar to, I should be able to distinguish between the chicken and the fish on this menu, but now this is a really big impact, like a high-impact decision that doesn't repeat.
So, the secret to sort of unlocking these decisions is to figure out what is it that's making this decision really hard for me? Why can't I decide between the two of them? And the answer is because they're both the same, basically, that as far as you can see, because you cannot experience the vacation before you take it, Paris and Rome are identical. When you're thinking about where you want to go, it's like they obviously are both fabulous European cities with beautiful architecture, amazing food, lots of history, the weather is very similar. There's just not a lot of difference between those two places as far as going on a vacation. So, it's actually the fact that they're the same that's making it hard for you to decide between the two of them, but once you realize, oh, they're the same. That's what tells you that this is actually an easy decision that only appears hard. That's why I call it a sheep in wolf's clothing.
Casey Weade: And therein lies the only-option test, correct?
Annie Duke: Yes. So, what we want to do is say, what's making it hard is that both of these have met the threshold that I have for a place that I would want to go on my vacation. It's not like I'm deciding between Paris and spending my time in a fish cannery, like, I mean, which obviously, that would not be a hard decision. It's that these already passed the threshold, and so the way that you can figure out that you're in the situation as to exactly as you just said, apply the only-option test. If Paris were the only option that I had to go on this vacation to, would I be really happy about it? If the answer is yes, go on. If Rome were the only option that I had for this amazing vacation, would I be really happy about it? And if the answer is yes, that tells you that as far as you're able to see, and that's what's really important, because again, if you were omniscient, and you had a time machine, you'd be able to actually see yourself on the vacation, and you’d know which one was going to be happier, but you aren't. That's what we always have to remember is that we're limited in the information that we have.
So, from where you're standing, these both would be great options, at which point, you should really just flip a coin between the two of them. And this comes up all the time, it comes up in hiring. You have two amazing candidates that you're trying to decide between for a particular position. And now, you just have all this anxiety about, am I going to get this decision right? There is no getting the decision right. The right part of the decision is figuring out that they've met your threshold, that if I hired Morgan, I would be pretty happy if Morgan were the only person that I had an option to hire. If I hired Taylor, I would be pretty happy because if Taylor were the only option that I had to hire, I would be really happy. And then, based on the limited information that you have in the hiring process, you're hiring somebody off of a CV and recommendations and a few interviews. How are you actually going to be able to distinguish between the two? Again, it would be the midst of uncertainty, which I heard from a wonderful person yesterday on a podcast. And if I open my calendar, I'd be able to cite him properly, but I apologize for not using his name.
So, it's this idea that we should be able to solve it like a two plus two equals four equation, but we can't, we can't do that, not given the information that we have when we're trying to decide, I haven't been to Paris or Rome. Even if I have been to Paris or Rome before, that doesn't mean that I've been to Paris or Rome this particular time. I don't know these candidates beyond the limited information that I have. If I'm trying to decide between two houses, I don't live in them yet. And you can see this could apply, for example, to two different retirement plans, that we're trying to distinguish, like, we're so worried like, what if I get it wrong, and one of them goes up a little bit more than the other? It's like, okay, but we don't know. We have to think about, what's the threshold? And those thresholds and problems, for example, with what plan do I want from our retirement have to do with what are my values? How much risk am I willing to take on? What do I think the appropriate distribution is across different asset classes? It would be things like, how slow is my capital? Like, am I 70? Or am I 45? And you think about it, okay, so let me think about what those things are that I'm requiring of the portfolio that I'm trying to construct, that tells you the threshold that the portfolio needs to meet. And then beyond that, once you've got different choices that are going to satisfy those requirements that you have, probably shouldn't spend too much time worrying about which one among those should I choose, because it's going to be relatively random and out of your control, which one performs a little bit better than the other one, as long as they're meeting your requirements. So, this brings up all my thinking about the only-option test. What that's really getting to, is to distinguish between sorting and picking.
So, sorting is like the kick the job candidates are coming into your funnel, and you're pre-screening them. And you're thinking about the CV and you know what you're requiring of that person's experience, you're thinking about what qualities of the candidate you think would make them successful in the job that you're trying to hire them for, and you're actually thinking explicitly about those things. By the time you get to the point where you're thinking about possibly hiring them, what it means is that they've met that threshold, and then you're done. Anybody who meets the threshold, you can generally pretty much just flip a coin between the two of those.
And that's when you're in the picking part. It's like sorting versus picking is a really important concept. Spend your decision-making time on the sorting. Think about what are the things that I need in order for it to meet my threshold. That's thinking generally about portfolio construction, about what your goals are, your values, how much risk you're willing to take on, how much liquidity you need, like these are all questions that go into the sorting category, but then don't spend a lot of time on the picking, because those are the things where you can't predict the differences.
Casey Weade: A lot of this seems to come down to predicting the impact. We have to figure out what that impact really is. And I think individuals, I see quite often struggle with these two retirement plans, as you've explained there, maybe one is 20% and short-term bonds, other one is 20% in a fixed annuity, and they go, oh, they're completely frozen because they have trouble really accurately predicting the impact largely between those two decisions. How can we better predict what that impact really will be on the back end so that we can make a quicker decision? Because I think in many of these instances, especially when it comes to finances, yes, maybe we should slow down, but how much should we slow down? Because the longer that we take, we can be increasing the downside.
Annie Duke: Yeah, that's exactly right. Yeah, so this gets into kind of the last piece after you get to this idea of a sheep in wolf's clothing, and like applying the only-option test. The last piece of that puzzle, in terms of when you can really speed up is how quittable the decision is. So, in finance, we would call that liquidity. So, there's two ways in finance that you can quit a decision. One is that you can sell it, you can sell the positions. So, that would be liquidity. The other is that it's easily hedgeable, right? So, if you have your money tied up in something, and then it turns out you don't like it, if there's some way for you to get sort of a money and to neutralize the bad effects of that particular choice, that's also a little like, it's kind of a weird way to do it, but it essentially allows you to quit the decision. So, you'd want to think about how hedgeable.
Casey Weade: That’s my exit strategy.
Annie Duke: What's my exit strategy? And sometimes the exit strategy is, I can't get my money out of it, but I can get a position on that. We’ll do well when this one does poorly. So, that's a little bit sort of getting to neutral, which is a little bit of a way to quit something. So, the reason why that matters is that when we're thinking about as we enter into something, how fast can we go? One is we want to think about the long-term impact, but the second thing that we want to think about is, what are we going to do if it goes wrong? And how easy is it for me to shift to a different option, if that happens? Then, what would be true of the world that would cause me to want to shift? So, that third step is also really important.
So, one of the best ways to do this is to do what's called a pre-mortem. So, instead of a post-mortem, which is, your portfolio did poorly. Why? Afterwards, when you're considering entering into some kind of investment strategy, some sort of portfolio, say, let me imagine it's a year from now and I'm sad, my portfolio did poorly. Why do I think that happened? You could actually examine each part of the portfolio and say, why would this do poorly? Why did I lose to this? And this is going to tell you things like, for example, you know that the bond portion of your portfolio isn't going to do well under certain conditions, if interest rates remain really low, for example, generally, if equities are doing really well. There's a variety of things where that will do poorly. And then when you notice that, you can say, “Okay, so what do I think the probability are that those conditions are going to occur over the next year? What's the probability that I would be able to get out of those positions in order to get into a position that I think is going to be more favorable in the environment?”
So, the first step is what could be occurring in the world that should make you want to switch? And that's actually really important, because even if bonds are doing poorly, it doesn't mean you want to sell them. And you should actually think about that in advance as well, because you don't know that the conditions that exist today are going to continue to exist. So, you might actually want to set out in advance, what are the conditions under which I would actually change the construction of my portfolio? Having done that, and figured out what those conditions are, you then make a commitment to actually do that thing. So, that's telling you, let me think about how I'm going to get out of this position, how I'm going to shift. So, that's where things like quittability are going to come into play. So, when we're trying to choose between two options that are pretty equal, otherwise, we would prefer the thing that's more liquid.
Casey Weade: So, we have the opportunity to fold in the future and still stay in the game?
Annie Duke: Right. So, you can do this work of a pre-mortem and think about if my portfolio is down at the end of the year, certain parts of it are down, what is it that happened, and why? What happened in the world that caused it to be down? If certain things happen, if some class of that, I would then want to change my mind. It's hard to change your mind if you're not in a liquid position.
Casey Weade: So many ways that we could go deeper into these things, but I want to go to what you said about getting clear on your values before you go into that initial decision. And I think it's even before that, before you're going into looking at different types of retirement strategies, getting clear on your values, this comes down to seeking advice, how we seek advice, how we find the right person to get that advice from. You had in your book, you said, advice can be an excellent decision tool, as long as you are explicit about your goals and values, when you're seeking that advice. Otherwise, you run the risk that the person whose advice you're seeking will assume you share the same preferences and will answer accordingly. And I really wanted to get into that whole goal and values. Should my advisor be different than me? Should you have the same values? Or should she have a different opinion than me? Should I seek contrasting opinions? How do we get clear on this before we go in? What's the importance of it?
Annie Duke: Yeah, so it's a little bit of a mix of both. So, essentially, we want to do information discovery in these relationships. So, the first thing is prior to seeking out an advisor, you should think about what are my goals? What are my values? How much risk do I think that I'm willing to take on? Really good advisors are going to have you do that, as sort of like an intake form, they're going to actually ask you those questions, but you should think also beyond that and really try to explore, not just how much cash do I want to have available to me to get out quick? Which changes things? How quickly am I going to retire? How much risk am I willing to take on? This kind of thing, but also, what are the things about an advisor that I care about?
So, it may be like, I really care that they're kind, I want to have a relationship with them, or this is someone I'm just going to check in with every six months, and I don't want them to bother me too much. So, that's up to you, that has to do with the type of relationship that you want with the person who's handling your money. And some people want that relationship to be pretty close, and some people just want to have sort of scheduled check-ins to review their portfolio and not really have more than that. And that's up to you as an individual. So, you should also be thinking about that kind of thing. So, that's number one. So, prior to even getting into the conversation, that's what you should do, but then number two, is that as you sort of thought about the things that have to do with what you want from the construction of your portfolio, it's actually really good if your advisor doesn't see that from you first. It's better if you say, “Okay, I'd like you to understand, let me tell you about my circumstances.” Like, let's say, somebody's 65, and they're going to retire in five years, that's their plan. And here's how much money I have, here's what my financial obligations are. Don't even tell them how much cash you want to have, that you can get in a pretty liquid way. Don't tell them how much risk you believe that you want to take on in your portfolio. Don't tell them what you think the right construction for the portfolio is. Give them the information they would need in order to think about that, and then ask them to give you that information prior to having seen what your answers are.
So, you've written your answers down, they now write their answers down. And this is where you got that, you don't want to be on the same page, because now you reveal the two answers, there are going to be differences. And now you talk about the differences so that I can understand why you are recommending this to me, and you can understand why was my instinct that I wanted to have 40% of my capital, I could get at the snap of a finger in a month. We can now discuss that in a way where it's not about you trying to convince me that you're right, or me trying to convince you that I'm right, it’s I'm saying I need someone from the outside looking in at my situation and telling me what they believe to be true about sort of what the distribution of my capital should look like. I had some preconceived notions about it, they should also understand why I believe that. And if we live in the intersection between those two things, we're probably going to be able to get to the truth better.
Casey Weade: Yeah. And it comes down to being able to be open and honest. You can have the conversation on the front end, but then, if the advisor comes back with something you don't really like, well, that's due to preferences. They took an academic approach, whereas finances are emotional and a large part, it's not always best to take the academic approach, but you have to be able to be open to having that kind of conversation.
Annie Duke: That’s exactly right. And what you want to avoid is someone who's trying to sell you. And there's different ways to sell somebody. The two main ways are, they see what you think your portfolio is supposed to look like, and that's what they recommend to you. So, you really want to avoid that. That's going to feel pretty good in the moment because you get affirmed, and you feel like the person's your buddy, but that's not necessarily great for you in the long run, because you aren't the professional, and you may not actually know best. There are things that you know best.
Casey Weade: The benefit is to have an advisor that challenges you, like an advisor that's going to challenge you.
Annie Duke: Exactly. And then on the other end, an advisor can sell you by basically overselling their opinion about it and saying, I know that this is right because I've done this with a million people. And my clients are always really happy with my portfolio construction. And I'm an expert, and so on, so forth. Now, you do have expertise, but the thing is that what the client is saying to you is going to reveal certain things about what their preferences are. And so, you don't want either end of the extreme, the person who's really overconfident and like, this is what I do for a living, and I'm amazing. And you're really going to regret it, if you don't do exactly what I say. And you don't want the person who says your plan is amazing, you're so smart.
Casey Weade: Yeah.
Annie Duke: What you want is someone who's open minded to hearing what your rationale is for why you came in with the ideas that you had about what you wanted to do. And you're listening in an open-minded way to what they're saying. And the goal of the conversation should be that I can I repeat back the rationale that you have for why you're recommending the things that you are to me in a way that you would say to me, you said that better than me, and vice versa, that you should be able to repeat back to me as the client, the rationale for why I believe the thing that I did in a way that you would say thank you. So, none of it is trying to– I'm not trying to convince you I'm right, you're not trying to convince me that you're right. It's actually, I'm just trying to really deeply understand why you believe what you do, and you're trying to really deeply understand why I believe what I do. And that creates the most open-mindedness. And it's actually going to get you to the best intersection of what my preferences are, with what your professional opinion is.
Casey Weade: Yeah, I really like that. That's great. And this is along those lines, but maybe it's outside of your realm here, but it was a question that I had, because today, the latest research shows that there's been this huge trend in those individuals seeking financial advice that they're seeking someone that has similar parallels with their political and religious views. And political and religious views also drive financial decisions. Should we find someone that perfectly shares those values with us? Or should we have someone that has opposing views? What are the pros and cons in this? And I know we can't make a pros and cons list, but…
Annie Duke: You could talk about pros and cons, but a pros and cons list is bad. So, we'll talk about the upside and downside to it. So, here's the thing that I always say about the sort of people who hold opposing views to you. I mean, first of all, somebody’s religious beliefs, assuming they're not in a cult, that has nothing to do with their expertise. In the same way, I don't think I'm choosing my doctor based on their religious beliefs. Like, what I care about is their expertise in the area that I'm seeking the expertise from. The only red flag that would go up for me as if it was somebody who– there's certain things that happen in politics, where people can become pretty extreme in their beliefs, and they kind of stop arguing in good faith. This is not a one side of the aisle or another side of the aisle problem, this is a human problem. And when people kind of stop arguing in good faith, and they start just kind of trying to assert their views or their straw manning the other side, which means they're sort of like painting the sort of weakest caricature of what the other side might believe, that for me would be a red flag. Not so much, are your political views perfectly aligned with mine? I don't really care about that. What I care about is, are you someone who sort of like painting these caricatures of what the other side is, and just sort of arguing against that? Or are you really extreme? Are you not arguing good faith?
The reason why that would be a red flag for me is that I don't think that person thinks well, and I need someone who thinks really well, in order to be my advisor. Beyond that, it's actually really helpful. First of all, I don't think it should matter very much, but it's actually really helpful to have somebody who holds different views than you, because then when we're getting into those really good, great, deep conversations about where we have our dispersion of opinion, then it's just about understanding the other side. So, like, as you say, there are certain things about what I believe, whether I'm on the liberal side of the aisle or the conservative side of the aisle, that may change what my preferences are in terms of my investments. Now, it should matter little what side of the aisle you're on because you're trying to best help my preferences be expressed in a way that's going to allow me to achieve my financial goals. So, I don't think we should divide up in that way. What I think we should divide up by is, are you open-minded? Are you conscientious? Are you arguing in good faith? Are you always trying to seek to explore the other side to understand why other people think what they do? And then beyond that, I'm good.
Casey Weade: That's the value. So, it might even throw up a red flag for you if someone's taking a hardline religious view or a hardline political view, that means they're not maintaining an open mind, which might mean that they're totally excluding tools that can be very useful in your financial life.
Annie Duke: Right. And that type of thing exactly, as you just pointed out, can really translate into, essentially what it means is that they have sort of like a need for closure. So, this is a particular type of cognitive style. It's the opposite, obviously, of open-mindedness. They're going to tend to not see things from many different angles. So, Phil Tetlock talks about being a fox or a hedgehog. Sorry, something in my throat, but hopefully, I'll be able to keep going.
Casey Weade: It’s okay. Grab a drink, if you must.
Annie Duke: So, a fox is someone who looks at things from all different angles, that's actually a really good thing to be. So, there's a lot of talk about mental models in sort of like the literature now, and like Shane Parrish who has Farnam Street, like he's got a book on mental models, which is really just like, how are you looking at the world? So, like, an example of a mental model would be a two-front war. So, why is that a good mental model? Well, we can think about that physically, in a war that you've got someone fighting you from your Western and your Eastern border, that's actually really hard, but we can think about that in politics. A center candidate is often fighting a two-front war. They're getting it from the right and the left. So, they're also in a two-front war.
So, that's like a mental model that we can then apply out. So, there's all sorts of mental models like that. We can think about how we end up with models in finance. So, we could talk about growth or value investing, so on, and so forth. Those are all just models for how we think about investing. And the more that people look at it from lots of different angles, generally, the better the decision making that comes out of that process. Now, when someone gets extreme, when someone starts not arguing in good faith, when someone starts straw manning or coming up with a weak version of the other side and just sort of applying their worldview to everything as if that's definitely right, so that's more hedgehog-type thinking. So, hedgehogs roll up in a ball, and they don't like to see the world when danger comes to them.
So, foxes are looking around it, all different angles. Hedgehogs have one big idea that they impose on the world. And you can see that in finance, right? There are certain people, for example, who are value investors who that's their big idea and they see the whole world through that lens. So, this is what we're trying to avoid. And if you're dogmatic in your political views in a way that you're really dismissive of the other side, and you don't sort of think about where they're coming from, that's going to be a signal that you might be dogmatic in other ways, and that's not going to make for a particularly good advisor.
Casey Weade: Wow. That's great. That's fantastic. I know, we're running out of time here. I have two final questions, if you have the time. Good? Okay. So, before we got started, I was talking to one of our other advisors, Chris, on the team, and he had an interesting question for you, and that had to do with bluffing. He said, you've got someone here that is incredibly good at spotting a bluff. And what is it in the financial industry that people are looking for more than anything else, they're looking for someone that they can trust? Or maybe there's a parallel there, we felt. If you're sitting down with someone, and you're trying to figure out, is this someone I can trust? Are they speaking the truth? Or are they bluffing? Are there any tells that might be carryovers from your poker experience?
Annie Duke: So, I would say that the biggest towel is, there's a very simple thing in poker that strong means weak. So, what does that mean? So, when you have a newer player, I wouldn't do this with an expert because they might false signal you, but when you have a newer player, if they put their chips in the pot, with lots of bravado, that's usually a sign their hand is pretty weak. So, that actually translates pretty well. When people are kind of overselling their confidence, overselling how right they are, overselling their certainty, underselling nuance, underselling that there's lots of different solutions that we can explore and that we can't guarantee you that it's going to work out well, I don't know what the exact right answer for you is, this is something that we're going to explore together, that's someone who you're going to want to trust more.
So, what's interesting is a little bit opposite of what our instincts are. So, when people first start playing poker, and those people really pound those chips in the pot, that people fold to that all the time, there's a reason why people do that, because against players who aren't as experienced, they're just like, oh, that person must be really strong, look at what they did. And you can see this with political punditry, it's like the ones who are like, it's nuanced and it's complicated, and there's all sorts of different ways to look at it. They're not on television.
Casey Weade: Yeah. So, just say, what politician did you see?
Annie Duke: Right. Like, they want the person who's saying, I have the answer for you, and I can tell you how to think about this, and I know the truth. That's the biggest sign of a bluff that you can find. So, what's really nice is that like, if you went in approaching your financial advisor with the method that I said, where you say, hey, I'd really like to talk to you about forming a relationship. This is what I'd love to do. I'm thinking about how much risk I'm willing to take on, how much liquidity I need, how out there I want to get in the asset classes, whatever, like you're figuring out all that stuff. I'm going to write that all down on a piece of paper. You could even, if you have a form, give me that form. And then, I'll give you the facts you need about my age, and how much money I have and stuff, but I want you to fill that form out for me also. And then I want to come in and talk about it.
If the person balks at that, run away. Then, when you actually get into the discussion, this is a really good way to find someone who's a bluffer. Are they really trying to understand what you're saying? Or are they telling you that you're wrong in whatever way because they're interrupting you or they're saying, well, you haven't thought about it this way? Or you're not realizing that this asset class does this, or whatever? Are they actually sitting and hearing what you're saying? And then, when you ask them to explain themselves, are they offering that in a way where they're saying it's nuanced, that this is what they think, that they have this amount of certainty around it, that the performance is going to be an upper bound and a lower bound, here are the conditions under which it will do poorly, here are the conditions under which it would do well, where they're really actually exposing the information to you, as opposed to saying, here you go, this is the answer?
So, that's that strong means weak. Generally, when people are offering you something that where there's trying to sell you like a silver bullet, as much as they can within obviously, there are things that they must say to satisfy the licensing, but assuming that that's literally the limit of where they're willing to go, that's usually a sign that you would want to run away and that they're not the person for you.
Casey Weade: That's good. And as humans, I think we crave absolutes. We want a hard answer, we want a concrete answer for everything, and that's the problem with finance. I think, healthcare, there really isn't. We want it really bad, but in a large part, there's so many options, and there isn't a definitive answer. There's so much behavior and psychology that goes into it on the back end, but there isn't a perfect answer, it is very nuanced. So, with that…
Annie Duke: And by the way, what you just said, the more that you say that to your clients, and the more you say, you're going to run into a lot of people who tell you they know exactly what's what. And it's not just going to be your friends, it's going to be financial professionals. And I'm telling you right now, this is a world with a lot of uncertainty. And if you really want to perform well over time, accepting that, accepting all the things that you just said, because you just said it really beautifully. That's actually the secret to success. And what that means is that sometimes, something isn't going to perform well, and you're going to wish you had been in something else, but you're not going to do what everybody else does, you're going to say, well, I knew that, in advance, because I’m not omniscient, don't have a time machine, and I knew that going in.
The more that you can make them part of a tribe of people who really, really get that deep down, then they can start to compare themselves favorably to the people who are doing the other thing. And if you don't do that, what happens is they hear about their buddy, whose advisor put 30% of their portfolio in Bitcoin. And now, whatever, they have all this money, they're going to come running to you, but why am I moving all of my money into Bitcoin? And that's what's going to happen otherwise, because naturally, they're going to be comparing themselves unfavorably because they're going to be just thinking about the results and not what the process was, and they're not going to say there is no good process that has a 70-year-old put 30% of their money in Bitcoin. So, whatever results that person got, I know that we have a better process here, and I'm going to be more durable in the long run.
Casey Weade: Yeah, that's awesome. So, I know we're running tight here, last question. And it was just because I saw some things in here that reminded me of my childhood, the one was just humility and not overselling ourselves and our knowledge, but the other one was where you said, there's a lot of value in an educated guess. And when I was a kid, everything was a guess. Everything was a guess. How far do you think it is? How long do you think it's going to take? Who's singing the song? Dad always wanted us to guess at everything.
Annie Duke: That’s amazing.
Casey Weade: And it drove my mom nuts, but it kind of got ingrained in me. And now, I drive my wife nuts in it, I drive my kids nuts with that.
Annie Duke: That’s amazing, though.
Casey Weade: What is the power in the guessing? What is the power in that educated guessing that I kind of grew up with?
Annie Duke: Oh my gosh, first of all, that's incredible. Like, what a great parenting tip. Like, I never thought about it as, oh, that would be a really good parenting tip.
Casey Weade: That's where I was trying to carry this over. I go, wow, maybe I should really go deep on this with the kid.
Annie Duke: Yeah. Okay, so here's the great thing. Who's singing the song? Well, you could say, I don't know. Somebody asked me this on a podcast, that was like, how many weeks of singles that were streaming number one has Drake had? And I just don't know a lot about Drake. So, anyway, I got the right answer if the right answer is a good lower bound and upper bound, but I just sort of worked it through, I'm like, well, how long has Drake been around? He's pretty popular. How many singles do I think he's producing in a year? Like, so I started going through, even though I don't know exactly, I didn't say I don't know. I said, what do I know? What can I apply to this in order to get me closer? Because obviously, I don't know implies that you're saying it could be anywhere between zero number one single and infinity. Well, that's ridiculous. That's actually doing the opposite of the other thing. It's underselling my knowledge.
And we do this a lot when we feel like we aren't going to get the right answer is we do one thing, we either oversell, and we say it's 40, and I know it, or we undersell and say, I don't know anything at all. So, if you take your example, who's singing? Well, you may not be able to get it exactly, but I'm sure that if you started to think about what could I apply to this guess? Like, how could I get some educated into this guess? Well, you can listen to the music style. So, you can say, well, it's emo. Who do I know, it's like an emo singer, it's a woman, not a man? And you can start to narrow it down. And you can say, well, it could be one of these three people. Well, one of these three people, as opposed to every single person that you could be hearing on the radio, that's actually really, really valuable in and of itself.
So, the first thing it does is it gets you to start to think about if one of our biggest problems as decision makers is that we have incomplete information, that we don't know everything we need to know in order to make a perfect decision. Forcing yourself to make these educated guesses makes you start to think about to start, what do I know? That would help me narrow this down. And the more educated that I can get in terms of what I know, the better off I'm going to be. Now, the next thing it does, it gets you to think about what do other people know? What could I go find out? Could I go Google something? Is there an expert that I could find out? Is there somebody listening to this song that could help me? Could I go find the biggest Drake fan in the world, and maybe they could help me do it? Obviously, with Drake, I could have looked it up on Google. They were asking me to do it without looking at all. And I think I said a lower, like, I can't remember what I said, but I got it. I can't remember what the number was, but I got it. So, that tells you, what can I go look at in the world?
And then, the last thing it does, which is really incredibly helpful, is that when I express that, saying, this is the lowest it could be or this is the highest it could be, like in the case of Drake, let's say I say, well, I'm sort of thinking about how many it could be and how many things he's released, I'm going to say it's a low of 40 and a high of 60. Okay, so let's just say I say that. Inherent in that is me saying to you, this is how much certainty I have, it makes me sound very thoughtful, like I've thought about it and I've thought about things about Drake that I might know and how long he's been around and what his output likely is and how popular he's been, but this is the best guess that I can come up with between 40 and 60. What is implied in that is a question of you, which is, hey, do you think I've got the right range? Could you help me narrow it down? Do you think I should shift the range?
And now, all of a sudden when we think about, like what is one of those superpowers that we can really charge up in order to improve our decision making, it's getting other people to tell us what they know, because we decide when we don't have very much information. The more information we can bring into the decision process, it's part of the reason why when you go to your advisor, each of you answer separately, and then actually discuss the differences to get that information out. When I give you a range, I'm asking for your information, which then improves the foundation of the decision I'm making, because the foundation of the decision I'm making is the quality of the information that's being input into that decision process.
Casey Weade: Well our kids are about to get a whole bunch more questions about guesses that they're going to have to make, and we're going to start it tonight.
Annie Duke: Yeah. And then, have them explain their rationale, like that's the great thing. Like, how many number one singles do you think Drake has had? When they give you an answer, say, well, how'd you come to that answer? Like, just have them give you a rationale. And it's so good for honing the quality of your thinking, as you're thinking about what do I need to know in order to decide here?
Casey Weade: I love that, Annie. Thank you so much for that, it's a great place to wrap things up. And I want to wrap it up with a special offer. Annie so graciously sent us over a box of copies of How to Decide, and we're going to be giving them out until they're all gone. If you'd like to claim your free copy of Annie’s book, all you have to do is go on over to iTunes, write an honest rating or review for the podcast, and then shoot us an email with your iTunes username at firstname.lastname@example.org with your mailing address. We'll drop it in the mail at no cost to you, and put it in your hands so that you can make better decisions.
Annie, thank you so much for joining us here on the show.
Annie Duke: Thank you for having me. This was fun.