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Annie Duke

Financial Planning > Behavioral Finance

The Key to Knowing When It’s Time to Quit

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“’Quit while you’re ahead’ is incredibly bad advice” for selling stocks, argues Annie Duke, the $4 million-plus pro poker champ turned decision strategist, in an interview with ThinkAdvisor.

The real issue is: “Would you buy the stock today? If you wouldn’t, then you should sell it; if you would, you should hold it. It’s really that simple,” Duke says.

“The whole key is being able to distinguish between things that have a positive expected value and those that have a negative expected value,” she explains.

Duke retired from professional poker in 2012 to develop a burgeoning career as a corporate consultant, speaker and writer. (Well, there was another reason, too, as she reveals in the interview.) Her clients include Citibank and Hartford Funds, among numerous other companies.

Now the bestselling author of “Thinking in Bets” and “How to Decide” has released a provocative new book, “Quit: The Power of Knowing When to Walk Away” (Portfolio/Penguin, Oct. 4, 2022).

In the interview, she stresses: “Quitting is a trait that’s as important to develop as is grit.”

What prompts folks to quit too early or too late? A myriad of rationalizations and biases.

Financial advisors need to know when it’s correct to quit or to stick to help clients make better investments, Duke notes.

Clients “are not super-rational about those decisions,” Duke says. For example, they’ll often “blow through” their stop-loss orders — if indeed they’ve established any at all.

But sticking with something can be “downright destructive,” argues the strategist, explaining why in the interview.

Co-founder of the Alliance for Decision Education, Duke contends that though setting goals is motivating, it “can create really bad behavior.” And she explains why unchecked optimism prevents you from quitting “when you ought to walk away.”

ThinkAdvisor recently held a phone interview with Duke, who was speaking from her base outside Philadelphia.

She highly recommends working with a “quitting coach.” That could be a financial advisor, of course. And she maintains that it’s a great idea to take calls from recruiters even if you’re happy at your firm.

“It’s not disloyal to your job,” she insists. “You’re just doing some exploration.”

Here are highlights of our interview:

THINKADVISOR: “The tragedy of quitting while you’re ahead costs money,” you write. Most people usually subscribe to that aphorism. Why don’t you?

ANNIE DUKE: It’s not about quitting while you’re ahead or staying when you’re behind, or whatever.

It’s quit when it’s not worth continuing, and stick when it’s worth continuing.

If the issue is [selling a stock, for example], quit while you’re ahead is incredibly bad advice because it’s not giving you the right reason to quit, which is, essentially: Would you buy the stock today? If you wouldn’t, then you should sell it; if you would, you should hold it. It’s really that simple.

Retail investors will blow through their stop-loss orders to hold those stocks and keep the gamble on to get their money back.

What’s interesting is they also cancel take-gain orders.

They might have a take-gain order to sell at $60 a stock they bought at $50, but they may sell well before it ever gets to $60.

In other words, they’re “quitting while they’re ahead.” They’re selling too early because they’re ahead.

They don’t like to keep the gamble on when [they’re] ahead, so they sell earlier than when [they] committed to in advance.

Why is it so important for financial advisors to know when to quit?

Their role is to help people improve their decision on both sides of the [stick or quit] equation: when we should hold, when we should sell. People [clients] are not super-rational about those decisions.

If you’re holding a stock that you wouldn’t buy today, that’s clearly an error.

So an advisor has to know when it’s correct to quit or stick to help clients be better investors, both through coaching and the way they think about making a particular investment decision [at the outset].

The whole key is being able to distinguish between things that have a positive expected value and those that have a negative expected value. [For the latter], you have to think not just in terms of the absolute but relative to other things.

This is a little bit of why you want to have exit criteria.

Please talk about that, also known as kill criteria. Why is it important?

Science is very clear that once we start down a course of action, when we get signals telling us that we ought to stop, we’re very good at rationalizing away or ignoring them; and we’ll actually escalate our commitment and believe in it even more.

This is where kill criteria come in.

Please continue.

[Before] you enter into something, [determine] what the signals could be that would tell you that you ought to exit.

So you’re making a commitment to exit when you see those kill criteria.

Having a stop-loss is a good example of part of your kill criteria.

“Goals can motivate you to stay longer than is worthwhile,” you write. How so?

Goals are motivating forces, but the bad thing about them is that they create a very clearly defined finish line.

Some roads aren’t worthwhile. So setting goals with that clearly defined finish line can create really bad behavior: We’ll continue on roads that we ought not continue on.

By setting a goal, you [may] stop making decisions about whether to hold a stock based on the reality of the quality of the investment because you don’t want to sell it short of your goal.

Sometimes sticking with something is “downright destructive,” you write. In what situations?

You’ve made an investment, and all the signs are telling you that it isn’t going well. But you stick to it for a variety of reasons: You don’t want to have wasted the money you’ve put into it, for instance.

The pain of selling now and [maybe] having to watch the stock go up is so great that you won’t let it go for fear of having to experience that.

So you hold onto the stock. If you were to look at it with fresh eyes today, you would never buy it.

But you hold on to it. That’s obviously disastrous for your bank account. You’re holding a dog simply because at some early point it looked like a pretty good buy.

But you’re not being forced to hold it. Right?

The good news is that we have the option to sell the stock. The problem is that we don’t exercise that option.

This is why I say to set deadlines and kill criteria because there’s a huge cost to sticking to something too long.

Does having kill, or exit, criteria mean you’re throwing emotion out the window?

People think that when you take your emotion out of it, you become a robot. What I’m saying is to [decide] things in advance, when you’re calmer, when you’re not actually facing down the decision.

It’s really not about emotion; it’s about what you value — what makes you happy and what doesn’t.

Please discuss what you alluded to before: an “escalation of commitment when you’re in the losses.” Sounds like weird behavior.

Everybody is this way, so I guess it’s pretty normal.

When we get bad news from the world, and it’s obvious that we should quit, we don’t do that. We escalate our commitment to the cause — we double- and triple-down and increase our commitment.

You can see that in people continuing to hold investments even though the world tells them it’s wrong.

We see this behavior in all sorts of ways. The concept of our identity has a lot to do with it.

What’s a famous example of that?

Sears, Roebuck was a huge catalog company that by the 1950s had become [America’s largest retailer]. It owned stores with sales representing 1% of the gross national product. But by the 1990s, it was being squeezed out of the market.

However, by the 1990s it was also a huge [successful] financial services company: In the 1930s, it had founded Allstate Insurance Company; and in the [1980s] it founded the Discover Card and acquired Coldwell Banker and Dean Witter.

But later, their retail business started to falter and was a drag on the company; so they decided they needed to get back to their retail roots and sold the financial [units], even though they were all doing amazingly well.

Why did they do that?

Getting back to their retail roots meant, “I want to protect the identity of the company because we’re a retailer. So we’re going to sell off the successful part of the business in order to try to save the part of the business that we’re identified with: retail.”

It was a big mistake! Eventually, Sears went bankrupt.

That was a big commercial enterprise. Do individuals make that same type of error?

Each of us [displays] this behavior [to retain our identity] all the time. Why won’t people quit their job? Sometimes it’s, say, because “I’m a doctor. If I quit, who am I?”

I experienced this myself with my decision to retire from poker [in 2012]. Everybody knew me as a [professional] poker player.

Why did you quit?

Because I was miserable. I was just unhappy. I wasn’t enjoying it anymore. And also, since 2002 I’d been doing other things: speaking, consulting, starting to write.

I definitely stayed longer [at poker] than I should have because my identity was involved in what I was doing, no doubt.

However, you were still making money playing poker. Right?

Sure. [Quitting] has to do with what your values are. I was making money at the other things I was doing, as well.

But I was trying to find happiness and fulfilment. I did eventually quit, just too late.

You write that when it’s a close call between pursuing something and walking away, quitting is the better choice. Why?

When we’re experiencing the decision as a close call, it’s usually not close at all. There are all sorts of forces that make it hard for us to quit: identity; cost; ownership; fear of the unknown. And just the fact that if I call you a quitter, I’m [in effect] calling you a loser.

So by the time we really consider the situation, it’s usually far beyond the point at which we probably should have quit.

There’s some good scientific data on this from Steve Levitt, who [co-] wrote “Freakonomics.”

What’s another example of people quitting too early?

That tends to be when they bandwagon — they herd along with the panic.

For example, the stock market crashes, people go into a panic and want to quit.

A financial advisor has to think: Is this the right time for the client to quit — or are they quitting too early?

It’s important for an advisor to sometimes tell [a client] that it’s worthwhile in those situations not to quit.

Why should folks have a quitting coach, which you recommend?

A quitting coach can give you a rational perspective that isn’t tethered to a lot of things like your identity and history [regarding the decision], and the fear of wasting your time.

This is one reason people should have a financial advisor. They offer the perspective that allows investors to be better about decisions concerning when to stick and when to quit.

A quitting coach can see things more clearly than you can.

That’s why I’m a huge fan of investment advisors — they can come to something more objectively than you can and help you see what you yourself can’t see.

This is an issue of calibration. I’m not saying you should quit everything no matter what or you should stick to everything no matter what.

But quitting is a trait that’s just as important to develop as is grit. We need to be very good at distinguishing when we’re supposed to grit it out and when we’re supposed to quit. Those are very hard decisions to make for ourselves.

Do you have a quitting coach?

I have many, depending on the domain. I have someone who helps me with my investments, where, hopefully, I’m not making really stupid decisions.

I consider my editor to be a quitting coach because she helps me figure out when a book I’m working on is worth continuing [etc.]. My husband acts as a quitting coach, and so do my friends.

In my consulting business, I’m helping a lot of people that I work with figure out when to exit employees, which is a really hard decision and a form of quitting.

Is “exit employees” the same as laying off or firing employees?

Yes.

It’s good to take calls from recruiters “even if you love your job,” you write. How come?

Because you don’t know if you’re going to love it tomorrow. You don’t know if it’s even going to be there tomorrow. We always want to keep our options open.

If you have other options available to you, when things aren’t going well, it’s much easier to quit because you know you’re quitting towards something.

Also, your life could change, like you get married and have a kid and maybe you’re not going to love working 80 hours a week anymore.

Or leadership could change, and all of a sudden you’re reporting to someone who’s super-toxic; and you don’t want to be there anymore.

Of course, sometimes you’re forced to quit: The company could shut down, or you could get fired. So it’s really, really good to have relationships with recruiters and to have explored other options.

It’s not disloyal to your job — you’re not quitting that day. You’re just doing some exploration.

And sometimes when you talk to a recruiter, it turns out that there’s an amazing opportunity that would be available to you.

But you’re never going to know if you don’t take that call.


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