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World Poker Champ: Why Gut Feelings, Pro-Con Lists Are Lousy Decision-Making Tools

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The pervasive uncertainty the pandemic has spawned can fool people into making deeply regrettable decisions, argues decision strategist and $4 million pro-poker winner Annie Duke in an interview with ThinkAdvisor.

For financial advisors, having the option to reverse a decision when new information surfaces should be a top priority, says Duke, bestselling author of “Thinking in Bets” (2018).

She holds that decision-making and poker have much in common: For starters, both are awash in uncertainty and risk.

Duke’s new book is “How to Decide: Simple Tools for Making Better Choices” (Portfolio Penguin-Oct. 13, 2020).

“No one could explain the process of high-stakes decision-making better than Annie Duke,” chess grandmaster Garry Kasparov enthused in a blurb.

A famed top international pro poker champ for 20 years, Duke retired from the game in 2012, pivoting to corporate speaking and decision-strategy consulting. Her clients include Citibank, Gartner, Hartford Funds and numerous other companies to whom she consults privately.

In the interview, she discusses the importance of developing a high-quality decision-making process now to put in place once the pandemic is over.

What she calls “the power of negative thinking” — which can help people react deftly in the face of downturns — is high on Duke’s list of decision-making tools. She explores the topic in our interview.

Her new book is packed with exercises and techniques to help raise the caliber of one’s decisions; and in the interview, she unpacks several.

Co-founder of the Alliance for Decision Education, Duke, 54, now limits her poker-playing to games for charity. As for the $4 million-plus she won as an international tournament champ, she invested the winnings — in her four children’s education.

ThinkAdvisor recently conducted a phone interview with the Concord, New Hampshire-born-and-bred Duke. The conversation included her judgement as to why gut decisions and pros-and-cons lists don’t cut it as high-quality decision-making methods.

Here are excerpts from our interview:

THINKADVISOR: To what extent is the coronavirus pandemic a factor in making important decisions?

ANNIE DUKE: The pandemic is a really interesting learning opportunity. Here’s the way I look at it: In the original book of “The Wizard of Oz,” you needed to put on spectacles with green lenses that lock onto your head when you enter The Emerald City because it really wasn’t The Emerald City — it was a beige city. Likewise, we’re [normally] walking around with “certainty spectacles” on.

What do they do for us?

They make us see certainty where it doesn’t exist: We have an illusion of control; so we think we have much more control over our outcomes than we actually do.

Did the pandemic change that?

Yes. It forced the “certainty spectacles” off our heads because now uncertainty is impossible to ignore. The information landscape is shifting so rapidly. The idea that today will be predictive of what the world will look like in six months isn’t something that people are falling for very much right now.

Once the pandemic is over, will we go back to wearing “certainty spectacles” and see some stability?

Things will still be very, very uncertain. But if you develop a really good decision-making process now, you should be able to make high-quality decisions when the pandemic goes away.

What are some of the less apparent components of uncertainty to focus on?

A really good decision-making process must take into account uncertainty, including luck, which we have no control over. What we do have control over is our reaction to luck and the options we choose that would make it so that luck is more or less likely to go in our favor. You also need to include hidden information in the decision-making process.

When there’s high uncertainty, what should financial advisors keep in mind?

You need to prioritize a couple of things. The main one would be liquidity. That means prioritizing “reversability” — reversing your decisions when new information may reveal itself. One way is through liquidity. Another is hedging a position that you have. Even if the investment is illiquid, if new information comes along, it gives you a way to do something that would essentially cancel out the investment.

Please elaborate on hedging.

When there’s a lot of uncertainty, you want to be hedging more. Think about the ways in the future that an investment could go well but also the ways that in, say, a year it could fail. That’s called exercising options in parallel — and it’s key.

How significant is it for an advisor to explain their hedging strategy to the client?

It’s really important to state it clearly upfront. Tell them you hope you never have to use it but that it’s specifically to mitigate exposure to the downside if the future unfolds in a way that you don’t like.

You devote a whole chapter in your book to “the power of negative thinking.” Please explain what that is.

It’s getting really good at identifying the obstacles that might lie in your path. That way, you can figure out what would be true in the future that would cause you to, for example, change the investment you’re in. The power of negative thinking will identify hedges and help you figure out in advance how you’ll react to a downturn.

What are some exercises in negative thinking?

You imagine what the future could hold for you and explore ways it might go wrong: You make a plan for how you’re going to react when things don’t go your way — for instance, if the market goes down 5%.

What other “negative-thinking” exercises are effective?

You can create signposts that will tell you to “exit the highway.” They would be really strong signals that your thesis is incorrect. This can absolutely help you react more quickly and nimbly. Signposts give you a secondary way to be right: Now you’re right because you were right about the signposts that would occur.

Your gut isn’t a decision-making tool, you stress. Why not? People make gut decisions all the time.

I’m not saying your gut doesn’t make decisions. But one quality of a tool is that it can be used by more than one person for the same purpose. That’s the opposite of your gut — you can’t teach it to somebody. Your gut is a black box. It’s preferable to have real tools [by definition] to use because you’re trying to create a decision process. There are specific types of decisions when going with your gut is more OK than at other times. It’s important to understand the difference.

A list of pros and cons is a low-quality decision tool, you say. That method is so common. What’s wrong with it?

A pros-and-cons list doesn’t have the magnitude of how bad the con is or how good the pro is — that is, how much [the decision] is going to advance you toward your goals, or when it’s time to retreat from them. The other dimension that’s missing is probability: You don’t have a sense of how likely those pros and cons are to occur in order to evaluate the decision.

Is there anything else that makes a pros-and-cons list a poor way to make many decisions?

You don’t get the outside view that will move you to a more rational place [beyond] your own perspective. Also, you can’t compare options and figure out if you’re willing to risk the downside to get the positive expectancy. So a pros-and-cons list generally becomes something that supports your decision as opposed to helping you arrive at a more objective one. Like your gut, it gets you to the decision that you want to make rather than the decision that is objectively better.

You emphasize that taking new information into consideration is important when making a decision. But some experts in a particular field might just dismiss it, sure that they already know everything they need to know. Thoughts?

People who have very strong models within, say, value investing or growth investing, are more likely to interpret the world to fit their model as opposed to the other way around. Or if someone thinks the stock market is going up and invests accordingly, they’re going to be less likely to react to signals that maybe they should be getting more bearish. If someone is very bearish and shorts the market, they’ll be less likely to react to signs that, maybe, they should be more bullish.

Why is that?

If you’re very bullish on the stock market and have a very robust “trench” that you’ve built out of your expertise, when new information comes along, you [typically] don’t climb out of that trench and look at it. In other words, that information isn’t going to be evaluated open-mindedly.

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