In her excellent book Thinking in Bets, author Annie Duke describes how most of us downplay the role of chance or luck in our lives. We want to believe that the quality of our choices and decisions translates directly into outcomes. Actually, Duke says outcomes result from “both good decisions and luck.”
You Never Know All the Facts
The sub-title of Duke’s book is “Making smarter decisions when you don’t have all the facts.” She describes how our lives are much more like poker than chess because of the embedded uncertainty. Chess is mostly a computational game where all the facts are known; In poker, you are making decisions without knowing all the facts.
Annie Dukes knows a thing or two about luck as she was a championship poker player with a substantial academic background in psychology as well. Throughout her book, she provides a myriad of examples showing how the relationship between decision quality and outcomes is not nearly as tight as we portend.
The bigger problem is that we learn from experiences without really understanding that some of the good and bad outcomes were from luck, not from our decisions. These outcomes provide a feedback loop reinforcing the content of the choices but disregarding any element of luck. This feedback forms the foundation of our beliefs, which can become very stubborn, even in the face of contrary facts.
Our Brains See Patterns
Our brains like order and always look for patterns, even where patterns don’t really exist. This has direct application to investing. Observable data shows how different asset classes perform randomly on a year-by-year basis. There’s an ancient proverb that says “It’s difficult to find a black cat in a dark room, particularly when there is no cat.” We like to believe we can find the cat, or some pattern in the data, even when these aren’t there.
Often clients want to defer making definitive financial choices until all they have all the facts. That essentially is never, since there are always facts we don’t or can’t know in advance. There simply are no facts about the future. In physics and other fields, this is known as “irreducible uncertainty,” which is the imperfect unknown information that is an irreducible property in nature.
Dr. Stuart Firestein, a neuroscientist at Columbia University, in his 2013 TED Talk The Pursuit of Ignorance, describes scientific inquiry as often creating more questions than answers. As he says “knowledge is a big subject; ignorance is a bigger one.” Science changes, what we know changes.
What We Learn from Outcomes
What, if anything, can we learn from particular outcomes? Whatever this may be ends up essentially being another bet. It’s important to realize that any single outcome can happen for many reasons. When we look at this objectively we come face-to-face with trying to sort out what is skill and what is luck.
Annie Dukes details what she calls a “10-10-10” decision-making format. What are the consequences of each of your options in 10 minutes, 10 months, and 10 years? Start there. Ready for a real conversation?