Over the next few weeks (maybe months — blame my vacation), I plan to focus on decision making. It's a subject I'm passionate about because it was life-changing from the moment I started paying attention to it. Not only in my financial life but also in my career and my relationships. My goal here is to (hopefully) introduce you to some new concepts, and get you excited about making decisions. You won't learn it all here. I'll link additional books and resources that can help you further your understanding at the bottom of each post. As always, reply to the newsletter or email me if you have questions.
Every decision you make is a bet. Saying yes to something is betting on the future you expect by making that choice. Similarly, you're betting against the alternate realities where you provided a different answer. Not all decisions require contemplating. Ice-cream or no ice-cream, for example, won't result in drastically different futures. Not unless your potential soulmate is the one selling the ice-cream. It's not all deep, but sometimes it is. Some of the 'small' decisions I made in the past turned out to be huge leaps in retrospect. Like me, you won't know it at the time. But hindsight is twenty-twenty, therefore it's important to make fewer bad decisions.
Annie Duke's Thinking in Bets has arguably had the most influence on how I view odds. The book tries to help you make smarter decisions when you do not have all the facts. It is one of the few books I continue to recommend — I've read it more than once (this is rare). Let's say you're having an ardent conversation with a friend about who will be the NBA Finals MVP. You could continue to go back and forth for hours or you could ask them: Wanna Bet? It's a simple and effective way to cut an argument like this one short. Talk is cheap (monetarily and mentally). Anyone can say anything as long as there's nothing to lose. The bet only gets interesting if something valuable is at risk. It could be money, reputation, or a future favor.
Consider the following statement: LeBron will definitely be the NBA finals MVP next year. Play along here; forget how you feel about James and the Lakers for a few minutes. It doesn't cost you anything to be wrong, therefore uttering that statement didn't require any critical thinking. But what if something is at stake? How much between $100 and $10,000 would you be willing to bet on your position? There's a good chance you'd want to take a step back to evaluate the odds. Maybe you are not $10,000 sure, but you are sure enough to bet $100.
If you're still willing to bet $10,000, you either don't value the money, or you have some hidden information about the outcome of the NBA season and the fate of its athletes. But what if you don't have all the facts? What if, like me, you can't predict the future? How do you approach betting? Now that you're thinking, the statement now reads... LeBron will likely be the NBA finals MVP next year.
We process information to support our beliefs instead of using it to calibrate our beliefs - Annie Duke (Some Podcast)
Calibrate Your Belief
The chances that LeBron James will be the Finals MVP isn't a yes or a no question. Contrary to how we've been wired in school, most questions can't be answered with true or false. The world is more complicated than that. LeBron James could get injured. The Lakers may not execute as well as they did this season. The season could be postponed due to some unforeseen circumstance like a virus, war, or aliens. Before you finish laughing at the part about aliens, remember that unknown information can have an outsized impact on the outcome of your decisions.
Remember that the things we don't expect tend to have asymmetric impacts on our lives compared to what we prepare for. This is especially true in a year like 2020, but keep it in mind moving forward.
Stop thinking in black and white or right and wrong. You should try thinking in percentages instead. Sure, the outcome is binary. At the end of the season, LeBron will either have the MVP title or not. But the road to each of those realities isn't as clear. James is going to fall somewhere between the most undeserving player and the most deserving player in the NBA. It's difficult to know for sure because luck plays a big role here. But the answer isn't either 0 or 1, it is somewhere between. Try to calculate the odds by breaking down the statement.
- What are the chances that the Lakers will make the playoffs? Don't ignore the other teams; even 'bad' ones can surprise you.
- What are the chances that they will make the finals? What other teams have a good chance?
- What are the chances that the Lakers win it all?
- What are the chances that LeBron James will be chosen? It could go to another teammate or a player on the losing team. (Rare, but it's happened before)
If you're interested in how to come up with these parts and how to combine them, I recommend reading Superforecasting. It's a great book to start with.
At the end of this step, the statement should read: I'm 90% sure that LeBron will
definitely be the NBA finals MVP next year.
Should You Bet?
Be careful when asking people to bet; it can backfire. Usually, I win stalemates with my girlfriend by asking her to bet on her position. She'd agree, then I'd raise the stake till she backed off. But she caught on quickly. She realized that I was raising the stakes because I wasn't as certain with my odds. She figured out that I was taking advantage of her risk averseness. After that, she flipped the game on me and took whatever amount I presented. She'd smile with her hands drawn to lock in the bet with a handshake no matter how high the stake. I ask her to bet less frequently now after losing a few rounds.
Money is a weird topic for a lot of people. Personally, I view money differently and believe it should be a casual topic. You probably do too if you're reading this. But most people won't be pleased if you continually ask them to bet. Alternatively, you can shake on it for a chance to be right in the future. Depending on how you view the other participant, this feeling (or vindication) can be more rewarding.
You can also do this exercise with yourself. No one else has to be included. You can bet yourself how much you'd throw into your retirement account if things don't go your way. The whole point of this is to change your thinking, not to continually ask people (yourself included) 'Wanna Bet?' It's to get you to start questioning your beliefs. Start to consider what the other party knows that you don't. Start wondering why you may be wrong instead of searching for evidence that only supports your position.
Illusion of Understanding
Thinking in Bets - Annie Duke
Superforecasting - Philip Tetlock & Dan Gardner
🎙️ Business and Investing Podcast: YouTube | Audio Sources
📚 Currently reading Black Swan - Nassim Taleb
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