Thinking

in Bets
MAKING SMARTER DECISIONS
WHEN YOU DON’T HAVE ALL THE FACTS

ANNIE DUKE
Thinking
Supplemental Graphics

in Bets
Copyright © 2018 by Annie Duke

PORTFOLIO/ PENGUIN

MAKING SMARTER DECISIONS

M 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 car-
rying 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
 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 BELIEFwere theBETpredictable result
( sET OF of particular
OUTCOMEs ) deci-
sions we made is a bet of great consequence. If we determine our
decisions
As thedrove
future the outcome,
unfolds into we can
a set of feed the data
outcomes, wewe
areget follow-
faced with
ing those
another decision: Why did something happen the way it did? cre-
decisions back into belief formation and updating,
84 T H I N K I N G I N B E T s
atingHow
a learning
we figure loop:
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
wereIcaused
made poor decisions,
figuring LEARNING LOOP 1
out whether those outcomes mainly
applying the skill elements of the game poorly, or because the
by luck

other player got lucky.

BELIEF BET OUTCOME BET 2
Chalk up an outcome to skill, and we take credit for the re-
sult. Chalk up an outcome to luck, and it wasn’t in our control.
For any outcome, we are faced with this initial sorting decision.
4 AM 9780735216358_ThinkingIn_TX.indd 79 12/1/17 1:24 AM
That decision is a bet on whether the outcome belongs in the
“luck” Webucket
have theor the “skill” bucket.
opportunity Thisfrom
to learn is where
the Nick the future
way the Greek
went wrong.
unfolds to improve our beliefs and decisions going forward. The
moreWe can update
evidence thefrom
we get learning loop to represent
experience, this like so:we
the less uncertainty
have about our beliefs and choices. Actively using outcomes to
LEARNING LOOP 2
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 improve withL time as we
our betsOUTCOME
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 deci-
sion,Think
making about
our this like we about
predictions are anthe
outfielder catching
future more a fly ball
accurate. As
with runners on base. Fielders have to make in- the-
you may have guessed, when it comes to how we process experi- moment
game “ideally”
ence, decisionsdoesn’t
about where
alwaystoapply.
throw the ball: hit the cutoff man,
throw behind might
Learning a baseproceed
runner,in throw out
a more an advancing
ideal basemore
way if life were run-
ner. Where the outfielder throws after fielding the ball
like chess than poker. The connection between outcome quality is a bet.
We makequality
and decision similar bets be
would about where
clearer to “throw”
because an outcome:
there would be less
into the “skill
uncertainty. bucket”
The (in our
challenge control)
is that or theoutcome
any single “luck bucket” (out-
can happen
side of our control). This initial fielding of outcomes, if done
well, allows us to focus on experiences that have something to
 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.
You Now zoom insitting
can imagine on a random
at the lowdaypoint
in late January
around 2017.
11:30, The
feeling
Now zoom
upticks and in downticks
on a random daylarge
look in lateand
January 2017. The
potentially upticks
frightening.
like your
and losses look
downticks are spiraling.
large and potentially frightening. You can
You can imagine
imagine sitting at the sitting
low at the around
point low point around
11:30, 11:30,
feeling likefeeling
your
like your
losses losses are spiraling.
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

 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‑
ing theduring
stock the
banking banking
crisis, crisis,2008
September September 2008
to March to you
2009, March 2009,
would feel
terrible
you wouldmostfeel
days:
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 209
120,000

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,
we given what
shouldn’t
40,000
they
plan ourknew
futureabout
without each doingof those
advance thingswork(and,on the of
course,
range ofnumerous
futures that others)? Just asfrom
could result theyany relied
givenon decision
reconnaissance,
and the
20,000
we shouldn’t plan our future without
probabilities of those futures occurring. doing advance work on the
0
range For ofus
futures
9/2/08 thatbetter
to10/2/08
make could decisions,
11/2/08 result
12/2/08fromwe any given
need
1/2/09 to decision
perform
2/2/09 and
3/2/09recon-the
probabilities
naissance on of
thethose futures
future. occurring.
If a decision is a bet on a particular fu-
Yet we
ture For
based
Yet us
knowtoknow
weon make
from better
the
our from first
beliefs, decisions,
thethenchart,
firstbeforethewewe
chart, need
big
the to apicture,
picture,
place
big perform
bet recon-
thatweallthatthose
should all
minute‑to‑minute
naissance
consider on the and even
future.
in detail what thoseIfday‑to‑day
a decision
possible changes
is a bet had
on little
futureschangesa effect
particular
might look on the
fu-
like.
those minute-to-minute and even day-to-day had little
investment’s general upward trajectory.
ture
Any based
decision on our
can beliefs,
result in athen
set before
of possible
effect on the investment’s general upward trajectory. we place
outcomes.a bet we should
consider
Our in detail is
problem what
thatthose
we’re possible futures of
ticker watchers might
our ownlook lives.
like.
Any decision
Happiness (however BETTING ON A FUTURE
can result
weinindividually
a set of possible define outcomes.
it) is not best mea-
sured by looking at the ticker, zooming in and magnifying
moment-by-momentBELIEF BETTING ON A FUTURE
or BET
day-by-day ( sETmovements.
OF OUTCOMEsWe ) would be
better off thinking about our happiness as a long-term stock
Thinking
holding. aboutdo
We BELIEF
would what futures
BET
well to vieware sETcontained
(our OF OUTCOMEs
happiness inthrough
that
) set (which
a wide-
we do lens,
angle by putting
strivingmemories
for a long, together
sustainingin a novel
upward waytrendto imagine
in our
how Thinking
things about
might what
turn futures
out) helps are
us contained
figure out
happiness stock, so it resembles the first Berkshire Hathaway chart.in that
which set (which
decisions
wemake.
to do by putting
Mental memories
time travel makes together
that kind in aofnovel way to possible.
perspective imagine
how
We canthingsusemight turn and
our past- out) future-
helps usselves figuretoout pullwhich
us out decisions
of the
to make. FUTURE A
FUTURE B
BELIEF BET
FUTURE CA
FUTURE DB
BELIEF BET ETC.
FUTURE C
FUTURE D
Figure out the possibilities, then take
ETC.a stab at the probabil-
24 AM 9780735216358_ThinkingIn_TX.indd 193 12/1/17 1:24 AM
ities. To start, we imagine the range of potential futures. This is
also Figure
known out the possibilities,
as scenario planning.then
Natetake a stab
Silver, whoat compiles
the probabil-
and
ities. To start, we imagine the range of potential futures. This
interprets data from the perspective of getting the best strategic is
alsoofknown
use as scenario
it, frequently planning.
takes Nate
a scenario- Silver, who
planning compiles
approach. and
Instead