One of the world’s top pro poker players for 20 years, Annie Duke won more than $4 million and prestigious championship awards. Now, in an interview with ThinkAdvisor, she argues that treating investment decisions like bets — because they are bets, she insists — can lead to desired outcomes and stickier client relationships.
The game of poker is like real-life decision-making, Duke, 52, maintains. Both are suffused with uncertainty and risk. And where investment clients are concerned, they must embrace the uncertainty of the future. So says Duke, who became a corporate speaker and decision strategist when she retired from poker in 2012.
Her clients include Citibank, family offices and hedge funds; and she has spoken at conferences held by the Investment Management Consultants Association (IMCA) and the Global Indexing & ETFs Conference of 2018, among others.
Her new book, “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts” (Portfolio-Penguin – February 2018), details how letting go of the “impossible quest for certainty” and “getting better at evaluating facts, choices and probabilities” can help decision-making and managing risk.
In the interview, Duke discusses how to boost the probability of good investment outcomes and how thinking in bets can even help stock picking.
Look for the silver lining, do. Even better, look for hidden information, which can make the difference between a good investment and a bad one, Duke advises.
The former academic was completing her Ph.D. in cognitive science at the University of Pennsylvania and starting job interviews when serious illness forced her to take a year off. That’s when she began playing poker at the suggestion of her pro poker champ brother, Howard Lederer, now retired.
“I fell in love with the game,” she says. About eight years ago, she began work about decision-making that developed into her new book. It merges real-world application of decision science at the poker table with her former graduate studies.
ThinkAdvisor recently interviewed Duke, on the phone from her office outside Philadelphia. She discussed how thinking in bets helps forecasting and creating client investment-commitment contracts, among other benefits.
Nowadays Duke is at the poker table just a few times a year and for charity only. Pro poker player-cum-decision strategist. Unique. “It’s an odd CV to have,” she agrees.
Here are highlights of our conversation:’
THINKADVISOR: What’s the longest poker session you’ve ever played?
ANNIE DUKE: About three days in Las Vegas. It was a super-unusual situation. I won, but not a ton.
What does thinking in bets mean?
Thinking in a way that acknowledges that all decisions are bets. A decision is informed by the belief you have about an uncertain future. When you’re betting, you’re investing a limited resource in a gamble, which means an uncertain future, and that you’re going to get a return on your investment.
Why is it advantageous to think in bets?
It allows us to be better decision-makers and better risk managers. It improves the whole process. When we bet, we’re acknowledging that we have skin in the game. The person who wins is the one who had the more accurate beliefs.
What’s the opposite of thinking in bets?
Not viewing that your beliefs are under construction but are permanently formed; believing that “you know” as opposed to “you’re discovering”; believing that you can perfectly predict how the future will turn out; not acknowledging uncertainty.
You write that poker is a version of real-world decision-making. How so?
There’s information asymmetry: I know what my cards are — I don’t know what everybody else’s cards are. There’s all sorts of information that poker players don’t have access to that’s hidden from view. There’s a source of uncertainty that comes from things we don’t know.
How else is poker like real-life decision-making?
They both have the luck element. And this is what really trips us up. Whenever we’re making a decision, we have to acknowledge that luck is in the system. In poker, you don’t have control over the cards that are dealt. In the same way, when making a decision, you don’t have control over that luck element.
What’s the overarching goal in decision-making?
We need to make decisions that increase the probability of good outcomes and decrease the probability of bad ones. When you’re betting, you’re thinking about the probabilities and whether your money is going to earn the best return. That’s what really good investment advisors do. To acknowledge the uncertainty of the future can make your decisions and forecasting better.
“Investments are clearly bets,” you write. But if an advisor tells a client that, they’re bound to say, “You mean you want to gamble with my money!”
What hangs people up about the word, bet, is that they think about it in a casino, betting money on a gambling game, which generally has a negative expectancy: We’re hoping to get lucky. It’s zero-sum: If I win, you lose an equal amount that I win. But that’s not what a bet is. You can bet in situations where you have a positive expectancy and situations where both sides win.
So what, actually, is a bet?
Making a decision under conditions of uncertainty — in other words, where there’s risk. The investments you decide to make are based on your beliefs. That allows you to forecast the future — an uncertain future with risk involved. Investments are bets because you’re investing a limited resource: money.
What else do betting and decision-making have in common?
You’re trying to get the best results across a whole set [in poker and with a portfolio] and that any time you make a decision, it’s not always going to work in your favor. So it’s important [to tell clients] that there are no guarantees. There’s always some percentage chance that an investment won’t work out — and if it doesn’t, this is what the situation will be.
What happens if we don’t accept the uncertainty of our beliefs and how the future might unfold?
We get into all sorts of traps. Overconfidence is one. It can get us into decision paralysis more easily because a little voice inside us is saying “You know for sure.” And so it becomes very hard to make a decision.
How can thinking in bets help financial advisors the most?
As an advisor, you need to work with clients to lay out what the outcome of a particular investment decision would be. You need to communicate the value of thinking in advance about what the downside might look like as well as the upside so that clients aren’t surprised. That way, you’re reducing hindsight bias and the tendency for [clients] to point a finger: “You should have seen this coming!”
What happens if you don’t make clients aware of uncertainty?
The decision-making is going to suffer and you’ll end up with people who are really unhappy when things don’t work out. You need them to understand that with a portfolio of investments, no [single] one is guaranteed to work in and of itself; you’re working across the portfolio. And they need to think: Am I getting the best probability without a guarantee?
How can thinking in bets help advisors become better stock pickers?
It’s the same idea as when I bet on a hand of poker: I have different choices. I have to think about my values, downside tolerance, risk tolerance, how much volatility I’m willing to take on. With investing, I have to do the same decision-making based on my beliefs — the knowledge I have — and recognize there are always going to be things I don’t know. I have to predict which stock is going to have the greatest return that will fit with the [client’s] values.
What, to your way of thinking, is especially critical to think about before making an investment?
You should always ask yourself: Is there some piece of discoverable information that, if I find it, would fundamentally change my decision whether or not to invest in this stock? If the answer is yes, try to find that information.
Anything else about stock picking and betting that advisors should know?
Always try to approach the decision by asking, “Why am I right?” because once we have a belief and think something is a really good investment, we’re very likely to start interpreting new information to fit with our view that this is a good idea.
Further, you say that we should also always ask, “Why am I wrong?”
Yes. That’s the last question you should always ask yourself before making an investment. “What’s the best argument I can come up with for why I should never invest in this stock?”
Why is it advisable to “move regret in front of a decision,” as you write?
By exploring bad outcomes and how we’re going to feel in advance, we’re less likely to experience regret because an [investment] didn’t work out. Wouldn’t it be nice if you could determine that something was a really dumb decision before you made it? That’s what the goal is when you think through different scenarios: “How did I get to failure:?” “How did I get to success?”
And how does that reduce regret?
We want to regret our bad decisions; we don’t want to regret something just because it had a bad outcome. We can have a bad outcome from a perfectly good decision. So we don’t want those to get mushed up.
How can thinking in bets motivate clients to save for retirement and help protect against bad outcomes?
Take the client through different paths and how the things they want to commit to now will help them reach the goals they’ve explored and set.
What’s the way to have clients envision all that?
You can use backcasting [vs. forecasting] — working backward from an [envisioned] future that would turn out positively — and a pre-mortem — working backward from what would turn out to be a negative future [opposite of post-mortem].
Please explain backcasting.
You’ve achieved your goal [hypothetically]; then you look at how you got there. This makes it possible to identify low-probability events that must occur to reach it. That, therefore, could lead to developing strategies to increase the chances those events occur or else recognize that the goal is too ambitious.
What about the pre-mortem?
It will reveal that if I fail, what are the things I did that got me along the way to failure? Suppose the client at age 70 has had a catastrophic illness that took away all their cash. What do they think is the probability of such a catastrophe? Sometimes people are afraid of incredibly low-probability events, and they’ll be giving up a lot to try to protect themselves. But if they can’t tolerate that, help them figure out how to insure [financially] against such a thing.
In practical terms, how can a backcast and pre-mortem help in retirement planning?
They let clients take a long, 10,000-foot view. Once they’ve figured out what things have to happen to reach their goal, they can set contracts; for example, automatic paycheck deductions toward their retirement account.
How can a pre-mortem be put to use?
You’re analyzing a failure — a death — before it happens. So if, for example, you [thought] a market crash were coming, what would you have done with your money? Maybe you should have put part in an instrument that would protect, or even thrive, in a crash. So now you can start thinking about making an investment decision that would protect against that.
Would this be another benefit to asking, “Why am I wrong?”
Yes. It forces you to think about those scenarios that don’t fit in with your beliefs and then to be able to argue against them.
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