Podcast: Annie Duke — Thinking in Bets — Poker, Decision Making and Behavioral Finance

Episode 18 of the Boldin podcast is an interview with Annie Duke — a best selling author, public speaker and former world champion poker professional. We discuss her new book Thinking in Bets which focuses on decision making, beliefs and learning when you have imperfect information through the lens of what she has learned at the poker table and in her own behavioral finance research.

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Full Transcript of Steve Chen’s Interview with Annie Duke

Steve: Welcome to the Boldin podcast. Today we’re gonna be talking with Annie Duke, who is a World Series of Poker bracelet winner, a former poker professional with $4 million in career winnings, author, and public speaking about behavioral finance, biases, decision making, learning and doing better in the long term through the lens of poker and Thinking in Bets, the name of her new book. Annie lives outside of Philadelphia, and I’m super excited to have her on our show. So, with that, Annie, welcome to our show. It’s great to have you join us.
Annie: I’m so happy to be here, thank you.
Steve: Yeah, I appreciate you making the time. So, before we get to your book and kinda all about the behavioral finance stuff, will you share a little bit about your life? Kind of how you grew up and some of the big milestones up to this point?
Annie: I’ll just start with my adult life, right? So, I went to undergrad at Columbia University, I was studying with a research assistant for actually for full year with a professor there whose name was Barbara Landau, and she was studying cognitive psychology and specifically interested in first language acquisition. What the undergraduate, at the end of college, rather at the end of undergrad, she encouraged me to go on to the University of Pennsylvania to study with her mentors, Lila Gleitman and Henry Gleitman at UPenn, which I did. And I spent five years there at the National Science Foundation Fellowship, and I was studying cognitive science, and I was specifically focused on first language acquisition. Which is really just a question of how do you learn in an … system when there’s a lot of noise, a lot of randomness? So, at the end of that I was going out to go become a professor, which is really what I thought the route was that I was going to take, and I actually got sick. I had been struggling with a stomach issue during my last year of graduate school, and it got very bad as I was heading off towards … To my job talks. So, I actually landed in the hospital for two weeks and had to cancel out my job talks, and needed some time to recuperate. And so, I was intending to take a year off nothing and go back out in the job market. During that year was actually when I started playing poker simply really because I needed money. I didn’t have my fellowship, and I just needed a way to make money. So, obviously the meantime turned into about 18 years. I never quite made it back to being a professor, but about eight years into just kind of getting really, really interested in poker. In 2002, I got asked to speak to a group of options traders, and I was being asked to speak about risk, and I really started to explicitly at point merge together my academic training around learning, and what this real life high stakes application of these kinds of principals was that you were sort of executing at the poker table, and how poker and what you were seeing at the poker table might form the kinds of things that I have learned at graduate school. The kinds of things about how we learn, and biases, and heuristics, and the way we deal with feedback particularly when it’s noisy. So, I started speaking on that and developed … A lot of my life was spent on that. In fact, more time was spent on that. Part of my life has been poker through the last decade when I was playing poke. And then in 2012 I retired and I started doing this full-time. I founded a non-profit called How I Decide that was specifically aimed at building the field, and creating energy, and programs in teaching kids decision making, critical thinking skills, which by that time I felt like I was a big evangelist for. And then I wrote this book thinking of that. So, that’s sort of, “There you go. That’s my life story.”
Steve: Okay. So, Annie that’s interesting. So, it sounds to me then you had this 18, 20 year professional poker career, but it sounds like in the latter half of that you actually spent more time digging more into the behavioral finance side of this of them playing poker, and starting to think much more about the decision making side. Is that right?
Annie: Yeah. Well, I think that I’ve always been somebody who wasn’t really satisfied with doing only one thing. So, when something is exciting me I kind of just dive into it, and I think that’s what happened. It was total accident that I ended up speaking in front of this group of options traders. They actually didn’t even come to me to speak to them. They came to my friend Eric Seidel. But lucky for me, Eric Seidel really doesn’t like public speaking. So, he then recommended me to do it instead, and the thing was when I was in graduate school as all graduate students do, I was teaching a lot, and I always really loved teaching. So, it’s this way for me to really think about the two things that I really loved as an adult. The academic work that I’ve done in cognitive and behavioral psychology, and this other thing that I done which was with kind of weird game that I had found my way to playing, and figured out a way to sort of bring those together, and get to start thinking about those again in a very rigorous way, but also get back to teaching, which was something that I really loved. And so, I felt like it was kind of the perfect thing for me to be able to be doing both things at once, and find the intersection between the two things.
Steve: Yeah. I can appreciate that. I was going to ask you why you wrote that book, and it sounds like it is a nice … It brings together those two sides where you spend 18 years playing poker, and learning how to play that game, and how you think about that, and then all your work around cognitive psychology, decision making. And it’s a really enlightening book. I really enjoyed it. I was notating the heck out of it when I read it, so I could circle back and come up with some good questions. And any big takeaways that you would want people to have after reading your book?
Annie: I think takeaway number one is embracing uncertainty. I think that a lot of what we’re trying to do in our lives is pretend or fool ourselves or convince ourselves or convince other people that we’re certain of our decisions, that we’re certain of our beliefs, that we’re certain of the way that things will turn out. And it’s not a particularly accurate model of the world, and I think it actually causes you quite a bit of anxiety, and actually creates a lack of compassion a lot of times like for ourselves, for other people. The anxiety comes from sort of … All of a sudden like things don’t work out well, and it’s like the recrimination, and “I should have known” and “Why didn’t I see this coming?” And those kinds of things that come along with it that are very anxiety provoking, and not particularly self compassionate. And I think that if we think about the fact that at the base of any decision that we make it’s informed by our beliefs, that if we have this illusion of certainty about the things that we believe, the house is going to fall apart because the foundation that isn’t going to be very good because it’s not an accurate model of the things that we believe. There’s no beliefs that we have that’s informed by perfect information, just kind of by definition. And we can think about it. We can think of the scope of human history the number of things that human beings believed that it kind of turned out not to be true later like the Earth is flat, the sun revolves around the Earth. I mean those are simple ones, but I mean there’s lots of things like that. There are lots of species that we believed were extinct that now have become unextinct as an example. But there’s lots and lots of things that you can think about like that, and that’s a pretty good description of your own beliefs at any state, and when I say to people, “What are things that you believe when you were 20? Is there anything that you now realize even though you were so certain about when you were 20 that actually you should have been certain of it?” And they’re like, “Oh yes, everything.” And I’m like, “Yeah, so don’t assume that you should view your beliefs now in any different way.” So, I think that the foundation of really good decisions, I think is the foundation of being decisive. I think the foundation of building an accurate model of the world, of really being good of thinking about what the future might hold comes from embracing uncertainty, not swatting it away. So, I would say that would be the first main takeaway. And then the second main takeaway would be don’t try this at home. Kind of don’t try this on your own because yeah. We’re just sort of built to interpret the world in a biased way. There’s all sorts of reasons for it, but I mean I imagine most of the people that are listening are familiar with confirmation bias for example, that we notice things that confirm our beliefs, and tend not to notice things that don’t. Hindsight bias. That’s that feeling of things that actually occur are inevitable. So, you can have something that has 1% chance of happening, and after it happens it feels like it had to have happened that way for example. So, that’s a bias. We have a bias towards false positives. So, there’s all these different types of ways, and people who have read, for example, and thinking pass and flow should be pretty familiar with a lot of these kinds of biases that are kind of running our brainware. And the thing is that if I tell you about them and I make you aware of them, and you’re a smart person it doesn’t mean they go away. In fact, in some cases there’s been evidence that shows it gets a little bit worse. So, I’m just a very strong believer in recruiting other people into the process to really kind of help you to be a better decision maker. On the idea when I’m watching other people I can see their bias a mile away, in a way that I can’t see my own bias. So, I can use that to my advantage by saying, “Hey, let’s make a team, and you’ll watch my bias, and I’ll watch your bias, and then we’ll sort of both be better off for it.” So, that would be the second big takeaway is get some people in the process with you to really commit to trying to be better decision makers, and help each other out.
Steve: Yeah. That’s great. That’s a great insight. So, the two things are kind of embrace uncertainty, right? Don’t assume that there’s only going to be one outcome, but her there’s a range of outcomes with various probabilities, which I-
Annie: And your beliefs are somewhere in between true and false. That’s the other thing.
Steve: Right. And your beliefs and your own biases heavily influence how you perceive the world. Yeah, the idea of having a team around you, I think that totally makes sense. In companies, this easy to do. How about in people’s personal lives? I guess it’s their spouse or partners and friends if they should be recruited to be a part of this?
Annie: Yeah. You can sort of find people anywhere, but I just want to go back to saying it’s not so easy to do in a company. For the reason that our natural tendency is when we get into groups is to default into a confirmatory style. So, that would go under groupthink, echo chamber, that kind of thing. And particularly there’s a lot of people who sort of think about a good team as people being on the same page, what they then sort of interpret as agreement. So, they’re purposely trying to create cohesion on the team around people sort of having the same point of view, and the same beliefs, and the same sort of commitment to the same kinds of ideas, and that actually … I understand why people interpret being a team player that way, but that type of team environment is going to create an echo chamber where people aren’t going to feel necessarily free to offer alternative perspectives or sort of challenge the group because they’re going to seem to dissenters, or naysayers or sort of like one of the Debbie Downers.
Steve: Yeah. Totally.
Annie: No.
Steve: I got that.
Annie: Right.
Steve: Yeah, and some companies, and I know that in some firms they really try to encourage people to have healthy debate, and a strong voice, other opinions. Some people are like, “Hey, arguing is great. I don’t care if we get into it in these meetings because we want to make the best decision,” and you have to kind of strongly advocate your position. But I think that’s probably the exception in a lot of firms. I think you’re right. A bunch of people come together to come talk about it. Someone has got a strong idea, and everyone is kind of piles on and says, “Okay, great. Let’s do that.”
Annie: Yeah. And I think it’s listening to Shane Snow who wrote Dream Teams, and he was talking about kind of the genesis of this. There was some research, so I sort of feel like it’s the same as some of the self-esteem research, and how that sort of developed into everybody getting a trophy. It was this kind of interpretation of this evidence that turned into something that I’m not sure was so helpful. But he said that there was just this research that show that people are happier at work when they feel like they’re on the same page. But there’s different ways that you can define being on the same page, like for example, we could be on the same page because we feel like within our team we’re on the same page about process, and we agree that the best process is to foster healthy debate. But the simple version of being on the same page is that we agree with each other. That’s sort of the simple way to interpret being on the same page, and that when they saw when this research came out that people are happiest at work when they’re on the same page, it kind of got interpreted as, “Well, that means we should be fostering this situation where everybody is sort of agreeing with each other.” And of course, the problem is that think about how that might clash with the drive towards diversity, right? You’re saying you want to bring diverse people onto the team. I assumed because they have diverse points of view, so they have different perspectives that they can offer. I think about how that’s going to bud up against this idea of being a team player or being on the same page means that you agree with each other, and now you’ve brought somebody on because they have a different perspective, but they feel like their perspective is being silenced or that somehow they’re not being a good team player if they’re expressing that disagreement, which is supposed to be pretty bad. So, I really liked his sort of perspective on kind of the genesis of it. And then the other that I would say is that one of the things that we’re kind of not aware of is that the way that within a team, particularly from a leadership position we can create kind of a situation where we’re all sort of being driven into that confirmatory style or that echo chambery kind of style, simply because we in fact the group with our own beliefs, right? So, you can think about the difference, and this is something that people don’t even realize they’re doing. They have an intention to have a healthy discussion, and yet they sort of infect the process because they don’t realize that doing things like, for example, just offering your belief first when you’re in a leadership position will actually cause other people to now reason towards what your belief is. So, as an example, if you have four different people interview a job candidate, and then you all convene in a room to discuss it, everybody is going to sort of influence each other, and it’s not going to be as productive, and that the opinions aren’t going to be as high fidelity if you actually allow each person to write a report independently before seeing what the other people think. Because there’s just like this cross contamination that occurs, so that’s the other thing that you have to watch out for, and that’s on towards the intention is actually to allow for disagreement. You can be sort of killing the disagreement without even know that you’re doing it.
Steve: Right. I think that’s pretty interesting, the idea of … We struggle in our farm work kind of like, “All right. We want to be in alignment, right?” But also, I the idea of healthy debate, and I think reframing it as we’re going to agree that we’re all going to strongly advocate for our positions, and that’s okay, and it’s not the focus to just always be perfectly in agreement. It is kind of an interesting way to look at it. I wonder how many firms actually think about decision making as much as you do. What’s your take when you’re out there interacting with these companies?
Annie: Well, yeah. For sure Bridgewater does, right?
Steve: Yeah.
Annie: They just go read Principles, so that you can see kind of this kind of approach on steroids.
Steve: Yeah. I read some of his stuff (Ray Dalio).
Annie: Yeah.
Steve: Yeah. He’s out there thinking about this.
Annie: Yeah. So, I mean look. I think that almost any company is thinking about decision making. It’s just the question of whether they’re thinking about it from a way that’s informed by the science, right? So, as an example the majority of companies that I work with when they ask me to come and work with them on, for example, strategic plan, and I start working with them on what the possible outcomes are, right? So, we sort of figure out … It’s sort of scenario planning, right? Here are the possible outcomes from decision A, here are the possible outcomes from decision B. Obviously, those can be overlapping. And then I ask them this question, “Okay. So, let’s start putting probabilities on the outcomes.” And the majority of people I work with are like, “What? No. I can’t do that.” And I’m like, “Well, why do we agree? Can we agree that there’s some sort of likelihood of each of these outcomes?” And the answer is that they’re afraid they’re going to be wrong. In other words, what they say is, “There’s no way for me to know for sure what the probability of this thing occurring si in the future,” and so therefore they default to, “I refuse to give you one.” So, once you see that what you see is yes they’re committed to decision making, but clearly in terms of process they don’t actually know how to get to the right process because they don’t understand that the whole point is that making a guess at what the likelihood of something occurring is better than not guessing at all number one. So, even if all you can say is that this particular scenario that might occur is going to happen 30% and 70% of the time. They sort of feel like, “Oh, I don’t want to say that because that’s not a right answer.” Because they’re not thinking about it right. But what I say to them is, “That’s better than sort of pretending like there is no probability to it at all and just sort of leaving it in the dark,” number one. Number two is you know more about this than anybody else does, so your guess is going to be better than anybody else’s, and the fact you’re guessing is already going to be good. And number three is that just the process of trying to assign a likelihood or a probability to a particular scenario actually causes you to in a real way when I go back to that original takeaway to really embrace the uncertainty, and the uncertainty comes from two places, right? One is from luck. So, when you’re thinking about the probability of any outcome occurring, you have to acknowledge the luck element, right? You have to start thinking about, “Well, what are the things past the decision that I don’t have control over that may have influence on the way that this might turn out?”
Steve: It’s back to that uncertainty, right? Except that uncertainty is out there.
Annie: Right. Exactly. And then the second form of uncertainty is hidden information. What are things that I don’t know? And in order to make a good estimate of how likely something is to turn out, you also have to be thinking about what’s the information that I have that’s informing the prediction, that’s informing the forecast. And it causes you to actually become very information hungry. If you think about, “Well, our best guess is between 70% and 30%,” that actually drives you to start asking yourself, “Well, how can I narrow that range? What is it that I could find out? What information can I possibly discover that could cause me to narrow that a little bit because the more that I can narrow it, the better off I am?” So, what I would say is I think that in the abstract I don’t think you’re going to find someone who’s not like, “Yes, I run this business.” I’m very much thinking about decision making. But I think that for most people it’s not particularly informed by the science, it’s not particularly informed by real probabilistic thinking by building out these kinds of trees, by really mapping out the future in a real way, I think that most of them are doing decisions where they’re trying to get consensus in the room, number one. So, they think that’s really important. We have to get consensus, and then we have to land on one possibility. And once we’ve done that, we’re going to be sure of it, and I think that’s what most people’s process looks like.
Steve: Yeah, and I have so many comments. But some quick thoughts. One is, I think so much of our education is around how to think critically, which is important, right? And also, I was an engineer, right? How to solve problems and build things versus thinking about how do you make a decision? And when you look at your life, right? The outcome of your life is the sum of the decisions that you made and whether or not they worked out, right? The luck and uncertainty part of it. Back to poker, which the more I hear you speak about it I think it does have so many lessons for decision making around that concept of kind of risk/reward, right? So, every time you’re making a decision in poker, you’re like, “Okay, how much am I risking?” Right? “How much money am I putting in the pot? What’s my potential upside?” Right? “How big is the pot?” And is it worth it especially with Texas Hold’em, maybe many of our listeners aren’t familiar with it, but basically you pay as you go to get more information because there’s cards that are turned over when the game is played. So, you have to decide do you bet, do you call as you go along to kind of get additional information. And that idea does translate perfectly to business. There’s this concept called lean startup where essentially you’re trying to learn as quickly as you can, as cheaply as you can. You come up with a hypothesis, you build these MVPs. Minimum Viable Products to kind of test your ideas, so you’re trying to spend as little as possible and see what happens. You’d run an experiment and see what happens. It’s similar, but when you’re doing that, when you’re framing this up ideally you’re also thinking about, “Hey, what’s the potential upside of this works? What’s the cost to run this experiment?” I mean a lot of startups out in Silicon Valley run this, and I think more and more new companies are doing it. But do you see your company as kind of embracing that approach?
Annie: So, some of them yes. Some of the people that I work with are in agile development, which is obviously exactly that type of mindset. So, again it just depends on the company. Some of them are. But I think that the thing that’s important is even with a company that is not a lean startup, still thinking about the world in that way that you can be making these small tests, these small pokes for information, and using that you don’t need to necessarily settle on exactly one strategy, right? That you can do these kinds of very small AB tests and just start poking around to sort of see what works and see what doesn’t. Again, and I think that it has to do with are you approaching the world as someone who’s saying that I need to be epistemically open, right? Like I need to not feel like I need to know for sure that there’s all sorts of different ways that this could work out, and I have other be open to sort of trying and seeing which things do I want to test as opposed to deciding on the right answer.
Steve: Right, which is our bias, right? We want to kind of-
Annie: Which is this very different way.
Steve: Right. I think very often especially people that lead companies they’re used to making quick decisions, and they kind of have a “gut feel” for what the right answer is, which they bring to the table.
Annie: Right.
Steve: And they want to quickly get to that conclusion, and probably influence everyone else that’s helping to make that decision to say, “Okay. Here’s the right …”
Annie: Yeah. I mean that goes back to that kind of the contagion problem, right? When someone comes in and says, “Here’s what I think we should do. This is my belief. I feel this very strongly that this is the right answer.” Good luck having anybody in that room really challenge you in any kind of way, and not necessarily that they’re not going to do it on purpose. They’re just like, “Wow, this person has a lot of experience, and they really strongly believe this. So, whatever I thought must be wrong.” I mean it’s just sort of a natural way to think about it, and very often I try to tell people to sort of test this out in their own life in small ways, so they can see how hard it is to sort of execute on this in this anti-contagion way. And you can tell me if this rings to you. When somebody reads an opinion piece on politics for example, how often do you hear them to say, “I read this opinion piece in politics. Will you read it?” Like literally end of sentence. Or do they say, “I read this opinion piece. I thought this, this, this, and this. Will you also go read it and then tell me what you think?” And of course it’s the latter. This is how we communicate to each other, and I think part of it is that we feel like our opinion or our beliefs are the things that we’ve noticed are important data for me to communicate to you prior to getting your opinion back. I don’t think that we’re doing it in a way that’s like ill intended.
Steve: It’s unconscious.
Annie: I think that we really believe that … Right. It’s important data. Like, “Well, I have thoughts about it, so let me communicate those because it’s important for Steve to know that before he gives me any advice back.”
Steve: Well, yeah. And I would say even the fact that you’re even presenting something, you’re probably already subject to your own confirmation bias like, “Oh, I saw this article, which reinforces what I believe, and what do you think about that?” I mean you’re not saying that like reinforced what you believe, but just by presenting it.
Annie: Exactly. But I’m going to do a lot better if I say, “Hey, I read this opinion piece. I kind of like to know what you think. Will you please read it?” And literally I give you no other information, and I challenge people to try to start interacting with people in this way, and they’re surprised by how hard it is, how often they have to sort of withhold their own opinion, it’s really hard to keep it inside. And the other thing I think it’s not only that you feel like it’s important data. But I think that you have a little bit of a fear of what if the person thinks I agree with it when I don’t? Or what if the person thinks that I don’t agree with it when I do, and that somehow that would be bad? The person will get a misperception of you. Or they might think differently about you, and it feels sort of like you’re sort of opening yourself up to an attack on your identity in that way as opposed to just saying, “I really am just presenting this to you in a neutral way because I really would like to get high fidelity feedback back from you, and it’s irrelevant whether I agree with it or not. And please don’t try to guess it.”
Steve: Yeah. It makes me think of one thing. I’m an angel investor in this company called Cloverpop. Their whole idea is to try to improve decision making. I’m interested in this. I think it’s an area of opportunity in our economy where there is all this investment around; how do we execute better, how do we track things better, but there’s not a lot of technology enablement around how to make decisions better. I think one of the things they do is they actually blind off who is making a suggestion. So, you can have a group of people that, “Hey we know this problem really well, we’re all interested in solving it”. And have the CEO presents his position, the CMO and dah, dah, dah. Then you were the information is coming from, right? And as we were just about if they are presenting their opinion about it as well, it biases everybody, but if you come and say, “I don’t know whose presenting it.” And ideally, what you’re saying is, they just say, ask for consideration back. Hopefully, you’d get better outcomes. But I almost think you do have to have other … It’s so hard for us to fight our biases all the time. Doing it through tools might help. I’m not trying to sit here and pump them up but I just think it’s an interesting area.
Annie: Oh, I agree. Yeah. No I completely agree. I mean this is what I say, like, I tell people to try this exercise just in everyday conversation and people just fall apart to that. It’s so hard. And, I mean, I love the idea of what you just said because one of the things that I talk about in the book, is how do you implement these scientific norms, like norms for scientific communication into the way that you’re interacting with other people in terms of not just sort of making decisions, prospectively, but deconstructing decisions retrospectively? Both have their own challenges. There is a wonderful acronym, which is CUDOS. Which was put forward by Robert Murton and he was really talking about norms for scientific communication. CUDOS stands for … The C is communism, obviously not the political kind, it’s that data should be treated communally within the team trying to decide about it. That doesn’t mean I’m supposed to share my data with another company, obviously, but within a team data needs to be communal. And then the U is basically what you just talked about, which is universalism, which is that the message and messenger should not be equated. So, obviously there are certain times when you need to know things about the messenger, for example, their level of expertise in something helps you decide whether the information that they’re presenting, it helps you put a probability on whether it’s true or not right? So, if there’s an expert, if I know that you are somebody who’s an expert on East Asia for example, I’m going to trust what you tell me about the population among better than somebody who knows nothing about that. So, in that case there are certain features that might be important, but outside of that kind of thing the fact is that there are things that are true no matter who says them, and very often we will trust or distrust the information based on our trust or distrust for the person. So, the thing I say is, like, the Earth is round whether it’s Mussolini, or your mother, or your best friend telling you that right? Or your worst enemy telling you that. The Earth is round none the fact, nonetheless. So, things have trust to them regardless of who the deliverer is, and this is actually really important because otherwise what can happen is that not only on a global sense information can be distorted in a political way depending on who the deliverer is, and I think we see this a lot in these sort of claims now about fake news, and the way that people interpret information if they’re coming from one part or the other depending on who they agree with in a way that’s actually very destructive, but then also you have to think about that in your own life right? So, when you’re talking about Cloverpop what they’re trying to do is actually implement universalism, they’re to implement that norm of universalism, which is to blind whether it’s a CMO, or the CEO, or an intern who is offering it up so that you can evaluate the information independent of the person who has delivered it. Just really quickly, D is disinterestedness. So, you want to eliminate conflicts of interest. And then the OS in CUDOS is objective skepticism, which to sum that up really quickly; approach the world asking “Why am I wrong?” rather than “Why am I right?”. So, I didn’t want to just leave people hanging as to what the rest of the acronym meant.
Steve: That’s great. Yeah, that’s actually the first time I’ve heard that acronym. So, this is Robert K. Merton right? He was the sociologist?
Annie: Exactly.
Steve: We had his son Robert C. Merton on the podcast.
Annie: Oh!
Steve: He was a Nobel Prize winner in economics.
Annie: That’s amazing. Yeah.
Steve: Yeah, small world.
Annie: Yes. But that’s wonderful. I’m a very big fan of his fathers, and him as well by the way.
Steve: Right. And just a side note, Robert C. Murton is also a poker player. Apparently he plays in a game in Boston. I was going to ask him about it, and then he was like, “I don’t want to talk about that on the podcast.” I didn’t get a chance to ask him, but I think you find that with a lot of math oriented and kind of analytical people, many of them do play poker and they probably take useful lessons from it that they apply in all kinds of places. Wow. So, yeah, it’s amazing listening to you talk about decision making, and just for audience right? Making good decisions, being thoughtful about, or aware of all of the biases that we carry in and how that affects our thinking and our behavior, which ultimately affects the outcomes. You know, that’s how hopefully this discussion is useful to you. Alright. So, a couple of … You know, back to poker a little bit just since its got lessons for us, one of the topics you talk about is, and we touched on it a little bit earlier, but this concept of resulting. Can you elaborate on that a little bit? I think it would be helpful for folks to understand that.
Annie: Yeah, for sure. So, I just alluded to we can think about how are you thinking about decisions prospectively and also retrospectively right? So, you know, prospectively as in making a decision, and trying to scenario plan, map out the future, figure out what the probabilities of those futures might be. So on and so forth. But the retrospective problem is trying to figure out what you’re supposed to learn from your own experiences because presumably you should have some sort of feedback loop where the feedback that you get is looping back in so that you can be better at decision making going forward, and so on and so forth. But, what the requires is that we be taking good lessons from the result of our lives, and this is where uncertainty can wreak a lot of havoc. So, out in the world, in life, and in poker, the connection between the quality of an outcome, and the quality of the decision that leads to that outcome is very loose on one trial. Now, certainly you can run a Monte Carlo and get 10,000 trials of anything where it’s the same decision and you’re just seeing what outcomes happen to fall in some sort of simulation, or you could flip a coin 10,000 times, now you can start to see something from outcomes, but on a given outcome or a small number of outcome where the sample size is very small there is an incredibly loose connection. So, to sort of get there let’s think about the difference between chess, and then poker, and then a really simple life decision. So, in chess, you can see how decision quality and outcome quality are incredibly tightly linked. So, if I lose a game of chess to you, what do we know about my decision making relative to yours?
Steve: That hopefully I understand, or process the information a little bit better than you did since we all have the same information available to us.
Annie: Right. Exactly. So, if I lose a game of chess to you it’s because I played worse than you did, and it’s a completely reasonable thing to work backwards from the fact that we know what the quality of my outcome was; it was bad, it was negative, I lost; to figure out what the quality of my decision was and determine that that was also negative, and it was bad, and I didn’t do as well in comparison to you. And the reason that that’s the case, that we can do that in chess is that you’re eliminating these two sources of uncertainty, so there isn’t a strong element of luck. So, in other words, the pieces stay where they are until someone moves them because of an act of skill right? Not because somebody rolls the dice and now your pieces just randomly move around or something. So, we’ve eliminated the strong influence of luck, and then we’ve also eliminated most of the hidden information in a sense that you can see my position, I can see your position, so there’s no information asymmetry there, and what that means is that when I’m looking at your board I could theoretically figure out every possible move that you could make in response to any moves that I make. So, what that means is when you’re reducing the really strong influence of uncertainty in that game, what that means is that outcome quality and decision quality become very tightly correlated. Now, you can think about a game like poker in contrast. If I lose a single hand of poker to you what do we know about my decision making in comparison to yours?
Steve: Not a lot because there’s a big element of luck in each hand right? But if you win the tournament it’s saying a lot more right? So, if you make a series of decisions really well then you have a much higher chance of winning the whole thing. Is that true?
Annie: Yeah. So, if I lose a hand to you we know almost nothing about the quality of my decisions based only on the results right? Now, obviously, if I lost the play, if I can dig into the process I’d know more, but all you can see is the result, we don’t really know very much about my decisions relative to yours. Even after the end of a particular tournament we don’t know that much. We know more because you had to play more hands, but in order to start to get some kind of clear idea of somebody where you can see what the decision quality is sort of starting to shine through you need to see, you know, 1,000 to 1,500 hours out of a poker player and then you can start to really, really see it. You know, you can see it after a month you’re narrowing it down as you go along as you add hours in right? But in order for the skill element to really start showing through you need a lot of hours of play. So, that’s assuming you’re at a live game where you’re getting 30 hands an hour or something like that. And the reason for that, again, there’s this luck element right? I can’t control the cards that are yet to come so the deal is random, and then there’s also now we have this information asymmetry right? I can’t see your cards and so I’m guessing at them. So, that’s what creates this disconnection between outcome quality and decision quality. Now, we can say is life more like chess or poker? That’s sort of the question, and let’s take a really simple example like driving through a traffic light. Well, you can see more quickly that life is more like poker than chess because if all I know is that you went through an intersection and you got in an accident in that intersection, that’s the only thing I know is that there was an accident that occurred, do I know a lot about the quality of your driving?
Steve: No, because someone else could have made a mistake versus you.
Annie: Exactly. Right. So, now that immediately we can see, “Aha. Okay. So, this is more like poker than chess.” So, now here’s where the resulting problem comes in. We took a long winding road down to resulting. Going back to that first point I made, people really aren’t comfortable with uncertainty, they don’t like the fact that you can’t really see into the decision quality right? So, it’s like after the fact and you’re trying to figure out if a decision is good when you had no way to observe the process, and so that’s pretty opaque to you, but you want to know, and so you use this shortcut which is called resulting, which is saying “Well, I know the quality of the outcome so therefore I must know the quality of the decision.” So, if I know that the outcome was bad I can derive that the decision making must have been bad. Now, again, this is completely reasonable in chess, but it’s completely unreasonable if you’re playing poker. So, if life is more like poker we know it’s a relatively unreasonable thing to be doing in life. So, the example that I open the book with, which I think it’s one of the most powerful examples of resulting that I’ve seen is the 2015 Super Bowl. Pete Carroll, coach of the Seahawks, the Seahawks are on the 1 yard line of the Patriots, and there’s 26 seconds left in the whole game. The Seahawks had one time out, and obviously they need to advance the ball 1 yard in order to score. They’re down by 4 so a field goal will not do the trick right? So, they must score a touchdown at that play. So, as you’ll recall, Pete Carroll called a particular play that was pretty unexpected.
Steve: That’s right. He called a pass play. I was going to say, and he had Marshawn Lynch as a running back, who is a really good short yardage carrier.
Annie: Right, exactly. So, exactly to that point. So, he’s got Marshawn Lynch, everybody is expecting he’s going to hand the ball off to Marshawn Lynch, Marshawn Lynch will just try to barrel through, and that’s obviously what he’s going to do, and with his one time out he’ll be able to try that twice. And instead he calls a pass play as you said and it ended in spectacularly bad fashion. Malcolm Butler intercepted the ball and that was the end of the game. And the end game calling from Cris Collinsworth is incredibly brutal. You know, “I can’t believe this call. This is a crazy call.” So on and so forth. And then the next day, even after people had time to think about it, most people were echoing Cris Collinsworth, and there seemed to be an argument among the major outlets about whether it was the worst play in Superbowl history or the worst play in all of football history, which seems pretty … You know.
Steve: Pretty brutal.
Annie: Pretty brutal. So, I think this is a really good example of resulting because you can see this very clearly that what people are seeing is that this result was spectacularly bad, and so therefore they are going back in and deriving that the decision quality must have been pretty bad, but we can actually get to the heart of the people by I can just ask you this thought experiment. So, Steve, let’s imagine that Pete Carroll passed the ball and it was caught for a touchdown in the end zone. What do you suppose the headlines would have looked like the next day?
Steve: He’s a very creative genius for running that play. That was completely unexpected.
Annie: That’s exactly right, and in fact, for those people who are football fans, what did they say about Doug Peterson when he ran the Philly Special which resulted in a touchdown?
Steve: Yeah. Exactly. Super clever right? Unexpected.
Annie: Super clever. Out Belichicked Belichick.
Steve: Yep.
Annie: Exactly. And you can kind of see what’s happening here right? Remember, I said this problem is we can’t see through to what the decision quality is and so we use this shortcut. So, you can kind of see people feel like they know whether the hand off to Marshawn Lynch is good or not. They feel like they know something about that decision process. They feel like they have access to the quality because it’s a play that’s pretty agreed upon you know? There’s sort of consensus around that this would be a good choice. So, by choosing something that people really weren’t expecting he’s choosing a play that is not well understood, which means that people don’t really understand whether it’s a good decision or not sort of right? Like, they don’t get it. They don’t know ex-ante. So, now what happens is that because that’s opaque, because the decision is not understood, because there isn’t consensus around it, how do you then figure out if the decision is good? Oh, you use this shortcut called resulting. The result was really bad, so therefore I know that the decision must have been really bad. Now, one little factoid, the probability of an interception in that particular situation was between 1 and 2%. So, the minute you kind of know that fact it feels like, well, how could you possibly say that was the worst call in Superbowl history? It was only going to turn out the way that it did less than 2% of the time. So, I mean, that right there reveals sort of the obscurity of the whole bias.
Steve: Yeah. It would be interesting if you kind of put football analysts into cohorts, or football fans into cohorts of people who are real, I don’t want to say real, but like in poker you see this right? You’ve got amateurs doing things that are crazy, and then you have people that play a lot of poker and they analyze this and they’ll call him a donkey, or say this guy is doing all of this kind of crazy stuff and that’s why he’s a bad player is because he doesn’t know any better, and giving color commentary on the result because they’re not behaving, quote/unquote, “rationally”. But, in this case I bet Pete Carroll, and I think you mentioned this in your book right? Later on he was being thoughtful about it. He was trying to out play his opponent right? He was trying to do something unexpected on purpose to try and win. And as you said, his odds were totally in his favor because it was very unlikely that it would get intercepted and he just kind of got, quote/unquote, “unlucky” in that one case.
Annie: Right. Exactly. And you can actually ask yourself what was he getting in return for the cost of an interception? And what he was getting in return was an extra play. But, you know, there was a clock management problem. He had 26 seconds left in the game with only one timeout. As you know, if you hand it off to Marshawn Lynch and he fails to get into the end zone a lot of time has rolled off the clock, so once you’ve done that you’ve actually only got one play left, whereas if you execute on the pass play … You know, this is where it’s really important to think about the three outcomes that would a running play. So, not including a sack, or Russell Wilson fumbling the ball or anything like that. So, let’s just put those in the all things being equal category and think about the three outcomes of the pass itself which are it’s caught for a touchdown, okay, so they win the game. It’s intercepted right? That’s going to happen 1 to 2% of the time, but the third outcome is the ball is incomplete, and when the ball is incomplete of course the clock stops on its own, you don’t use a timeout for that, and that play gets executed really quickly. So, very little time comes off the clock and because you still have that one timeout left you can. So, remember they have three downs. It’s second, third, and fourth down to execute on it. So, he was actually maximizing the number of plays, the number of chances that he would have at the end zone with this particular choice, and in exchange it was costing him that 1 to 2% chance of an interception.
Steve: Yeah, that was the risk. Right. You know what would be really interesting is has anyone talked to Bill Belichick about how he thought about it? I wonder if he was like, “Oh, okay. They have 26 seconds left. Maybe they are going to run a passing play because they want to do clock management and it’s likely to be a slant because I’ve seen their,” whatever, and I appreciate all of the color on that decision in football. You know, as you were talking about poker and chess we know that AI is really good at and now pretty much can’t be beaten with chess and also with Go, where you also have information, perfect information. Is anybody working on AI for poker?
Annie: Oh yeah. So, it’s getting better at poker. So, there’s an AI that is very, very good at a particular form of poker, which is Heads up poker. So, it’s just one on one. So, obviously that reduces the set of possibilities right? Because I’m just playing against one person, and in particular it’s a form of poker where both players are likely to be playing almost every hand that they’re dealt. But, this is a relatively recent development, but it’s now very good at that. It seems to really beat the best players in the world at that, and then we’ll see whether it can expand to, you know, how well it expands to a multiplayer situation, but it is getting better, but it’s solving a different problem right? So, when you look at, for example, these Backgammon computers they can really just brute force the game right? Again, because you don’t have the hidden information, and this is true with chess as well, you can just play out every possibility until the end. So, once you have enough computing power you can solve the game so there’s just this brute force approach to it, which is not something that you can do in poker. You can’t brute force the game. That’s where the difference is, which is there wasn’t really any progress made in poker until you were starting to get machines that were more like deep learning machines.
Steve: Yeah. It seems like with poker, I remember we were talking about it, there’s kind of three levels of poker right? You’re playing, at least with Texas Holdem right? You’re playing your cards, just straight up right? And what are the probabilities of you winning in any outcome. And then, you’re playing against what your opponent is likely to have right? And so therefore, then you need the emotional intelligence, and also some math right? And also this kind of, ideally, a history of what they’ve done in the past, which is probably hard for a computer to get right? I mean, if you see the same people in a poker tournament you can kind of study what do they do? How do they behave in certain situations? And that’s the third part right? How is your opponent likely to behave, and that also goes to kind of game theory for yourself, but also for them. I mean, I think one thing that’s interesting about poker, we’re talking about football, and it’s like, when I play poker, or when people play poker sometimes they’re giving disinformation on purpose right? They’re trying to mislead so you can bluff later, or kind of play a little bit erratically so people can’t quite predict your behavior. I don’t know how that translates to … I mean, I could see that translating strategically when you’re in business to kind of trying to outthink your opponents in the business arena.
Annie: Well, yeah, I think it actually translates pretty well. I mean, I think this idea that I was talking to about even just thinking about what are the probabilities of different outcomes is something that I find when I’m working with groups that are trying to do strategic planning that they’re just very loathe to do. You know, I have a narrative in the book about working with a nonprofit just trying to get them to start thinking in expected value about their grant proposal, their grant process, and it was hard. I really had to do some very deep work with them to start getting comfortable with thinking about assigning probabilities to the chances that you get a grant or that you don’t so that you could really understand what the grant is worth because, you know, when you walk around in this world where you’re thinking about things in binary and this is how you’re making your decisions. You know, when you’re applying for a grant that’s 100,000, and you’re just thinking about it as 0 or 100,000, where obviously if you’re thinking probabilistically and you say, “Well, there’s a 40% chance I’m going to get this grant.” You can now assign a value to it of 40,000, which does all sorts of wonderful things for you right? Certainly it allows you to more efficiently create a work staff. It allows you to really think about when you’re winning to hiring an outside contractor for example. It allows you to be much better at budgeting right? Like, at forecasting what your inflows are going to be right? I mean, there’s all sorts of really good things that come out of it, but people are very loathe to do even just that step of thinking about, you know, how do I assign probabilities. That’s beyond starting to think about what are the payoffs of it? How do I deal with unknown information in a way that I really think about it? How do I deal with the connection between decision quality and outcome quality? How do I start to try to figure out good process for working back? And then this sort of basis thing of what you just said, which is; how am I thinking about as a good Bayesian right? Like, what are the base rates? What are people’s natural dependencies? What could I expect them to do in these situations? How could I think about how my actions appear to another person? So, people also don’t do that as much right? People have this idea, for example, that if you come into a negotiation and you’re speaking very forcefully that you’ll come off as being very forceful, but we know that very often that when people hold a very strong they’re actually less forceful in the way that they present it, and that’s a very, very strong human tendency that you can’t get to unless you think about it from the other side. Unless you think, well, what if you’re watching someone be really forceful in front of you, and if you said to yourself, “Well, wait a minute. If I had a really strong position how would I be acting?” And the answer is I wouldn’t be yelling at everybody telling them this is the final offer right? I mean, just as an example right? But, you can’t do that until you start to think about how do I look from other people? What is the story that I’m telling? What are their opinions of me? What am I signaling to them with my actions? What are my base rates? How do I incorporate new evidence in order to actually adjust my base rates? These are all kinds of the things that the way poker players are thinking that I think aren’t incorporated into most people’s every day decision making.
Steve: Right. We’re going to see if this works out for Kavanaugh soon, if his strong position.
Annie: Right.
Steve: I remember I was reading some poker book and it was talking about people that have strong hands tend to kind of act relaxed, sit back, and that’s an indicator that they’re strong, and weak players they’re a little bit more aggressive, or maybe they’re bluffing at it, and very often their actual position is opposite of how they present themselves.
Annie: Yeah. I mean, think about it, when was the last time that you sat in a negotiation and you had a really, really strong position in the negotiation and you were red faced, yelling at the people across the table that this was your final offer, take it or leave it? That’s not the way that somebody who’s in a really strong position behaves. And yet what happens is that when you’re sitting across from someone who behaves in that way, you think there’s a one-to-one mapping, right? And you’re like, “Oh, they’re behaving in a strong way. They must be really strong.” But if we took a second to step back and say, “Wait a minute, how do humans really behave in this situation?” And the way I can figure out is by thinking about how I would behave in that situation. You get to the truth really quickly. So we tend to be very reactive. We tend to make snap judgment about what the connection between people’s behavior is, and what their positions actually are in a way that we would be better to start doing some better perspectives making, that would help to actually get to the answer. Because it seems to obvious once I say it to you, right? When was the last time you had a great position and you were red-faced screaming at somebody that it was your final offer? And of course you’re laughing and saying, “Never.”
Steve: Yeah. Right.
Annie: And then you say, “Well, how come you think that that’s the case when they’re doing it to you?” “Oh.”
Steve: Yeah.
Annie: Yeah, right.
Steve: Yeah, never.
Annie: Okay, great. So yeah, but this is the way, this is just human nature, and that’s part of the thing, is that what our gut tells us is often not right, we need to hold our gut up to some sort of rational process, in order to make it accountable to something other than our feeling.
Steve: Yeah, I was just gonna say that … When we were talking here, so much of our life is about trying to make sense of the world, and we try to use these patterns, our brains are good at patterns, right? And pattern recognitions, where … I know you talk about system one and system two, and the emotional side of your brain, and then the more … The limbic system, and then the more rational side, and so much of our life is about trying to bucket things up, put them into … To identify patterns and make it quicker for us to assess things. But the reality is, we live in a much more complex world, and we need to be much more rational about it. But it’s so hard, because we’re constantly fighting against the desire for our brains to make these snap decisions out of system one, and get the conclusion, right?
Annie: Well yeah, and if you think about it, it’s of course, right? Because if you were to make every single decision on system two, building out some probabilistic decision-tree, you’d never get out the front door in the morning, it would take too long. And the fact is that, most of our brain is this very big, ancient animal brain, and then we have this very thin layer of prefrontal cortex, that is trying to take up this more executive functioning, rational thought. There isn’t a lot of it. And I talk pretty early in the book, but this is something that Michael Shermer has talked about, that we just have this default toward certain types of thinking, because when evolution was selecting features, it wasn’t necessarily selecting for accuracy, but rather efficiency. So you can think about this pretty simply. For example, we have a bias toward false-positives. So I’m on this savanna and there’s rustling in the grass; evolution isn’t selecting for the human that now builds out a probabilistic decision-tree, about whether that is a lion. Because that human is dead too much of the time. So instead, it selects for the human who runs away. And sometimes that human is wrong, but it doesn’t matter, because 100% of the humans who’ve run away, have lived, right? So the wrong ones and the right ones have lived, and who cares? So you have this strong bias toward false-positives, rather than false-negatives, right? So that’s just how it is, and it’s part of the reason why I said right at the beginning, that one of the things is, “Don’t try this at home, folks. Go get some other people to help you with this, because … I have only a little bit of prefrontal cortex, but you also have a little bit of it, and somebody else has a little bit of it, and if we get together, we can get more of that executive functioning stuff working for us.”
Steve: Right. You’re making me think about … I was listening to Elon Musk on the Joe Rogan podcast, the one where he smokes pot on it, but before all that, I had this really interesting discussion about AI, and how the fact that we’re actually … Companies are actually cybernetic organisms if you will, they’re a bunch of people but also enhanced by technology and we ourselves, with our devices that we’re carrying around, are becoming almost like enhanced … And we are enhanced, essentially, right? Because we can talk to these things, and it can look up any information pretty much immediately, which is amazing. And you do see … I can see this happening, faster than people think, because take navigation, right? So you can talk in your phone and say, “Hey, I wanna go from here to whatever. Los Angeles, on public transportation. What’s the fastest way?” And it will look at … It does a couple things, right? It finds the different routes that you can take; I mean, you can fly there, you can take a bus, you could drive, whatever, and it’ll solve for that. It’ll also solve for what’s happening right now. So you’re gonna drive, what the traffic patterns are today, and also what they’re predicted to do. That’s what’s interesting. Google just rolled out, “Tell me when you’re going to drive from here to San Francisco.” And it’ll say, “Oh, the anticipated drive time is, is three hours, versus four hours, versus five hours.” It’s just amazing, right? And you could start to see this with maybe … Based on this conversation, I believe we need help making decisions, and a lot of this stuff may have to be built into computers to get more positive or more optimal outcomes. At least help us get to more optimal outcomes, to manage against all these system one biases and beliefs that we carry around, that’s baggage, if you will.
Annie: Yeah, yeah. Exactly. I agree. That all happened … Obviously before I decided to. I have no problem with I just thought, given that people were questioning Elon Musk’s judgment, that maybe that wasn’t the best-
Steve: The best example? Yeah. Well, he did make … That Tweet he sent looks like it’s gonna cost him $20 million bucks and the company $20 million bucks, plus he lost the Chairmanship.
Annie: Right, yeah.
Steve: Maybe he should be using some AI-enhanced decision for filtering when he sends his Tweets out.
Annie: Yeah I actually just had a discussion on a podcast just very briefly about that, and I think that it sounds like he doesn’t sleep very much, and lack of sleep really has a very deep effect on your judgment. There’s all sorts of ways in which … There’s a lot of research being done, in terms of essentially what happens to your … In terms of increased cognitive load, and what is the equivalent to, in terms of drops in IQ points, for example. So work done in scarcity, where people feel like their resources are not enough for their needs, for example, what happens to their ability to think well, their cognitive capabilities, and it looks like it’s equivalent to about a 13 point IQ drop, which is pretty shocking. But that also the same as what you get if you miss a night’s sleep. So missing a night’s sleep really reduces your ability to think clearly. I think all of these things are actually really interesting to look at. There’s a great book called Scarcity, actually, that I think is a really great book to read, where you can really see what the cognitive costs of poverty are. And you also get some of these same effects, for example, if you’re feeling excluded from friend group; that’s another way to end up getting the same effects. So anyway, when we were talking about Elon Musk and what’s happening, it sounds like he’s having some sleep issues, so that makes part of the explanation for what’s going on, yeah.
Steve: Yeah, what is the average IQ? Is it 130 or something like that?
Annie: The average IQ, by definition, is 100.
Steve: Is 100, right. Okay, fine. So if you’re talking-
Annie: That’s definitional.
Steve: So, if you’re taking a 13 point drop, that’s more than 10% loss in your cognitive ability. That’s pretty significant.
Annie: Yeah. It’s really huge. When people are stressed, because they feel like their resources cannot meet their needs. And this can be in a relative sense, by the way, this doesn’t mean that you’re living in poverty in an absolute sense. What was interesting is that it’s relative. If you live in a place where people are quite wealthy, and say you’re having trouble paying your mortgage, even though in an absolute sense, you might have quite a bit of money relative to the world, in a relative sense, you do not. And that seems to be what the trigger is, and that’s outside of, obviously, the other effects of living in actual poverty that you can measure in an absolute sense, relative to anybody in the world. But I think it’s really important for us to think about that, because when we’re talking about … Obviously in order to dig yourself out of poverty, part of what goes along with that is having the … Basically being able to envision what the future is gonna look like for you, identifying what your goals are, and then figuring out how to execute on them. But what we’re finding is that there’s so much cognitive load placed on you, by being in scarcity itself, that it essentially short-circuits a lot of that ability, and you end up making much more short-term decisions all the time. So there’s some very interesting work in this space, in terms of what it’s doing to people’s ability to think, and how much it reduces people’s ability to actually realize what their own potential is.
Steve: It’s hamstringing us. Well, good, you’re supporting the thesis behind this business, which is we’re trying to help people get control over their future, right? So, feel financially secure, so that they can make the most of their human capital. And this is what I saw with my own mother, where she was freaking out about money, and we’re like, “Okay, let’s try to solve that problem.” And then once that was addressed, and you’re like, “Okay, I have a sense of stability. I’ve got some money in the bank, I have enough income in my life to pay for my life, so I’m not gonna go broke.” Which is the number one financial worry that everybody has. “Will I run out of money and end up being destitute?” Once that was taken care of, it created the cognitive space to be like, “Okay, what do I want to do in my life? What could I do, and what’s most interesting to me?” Which, I think then leads you to do hopefully much better work with your life, right? Use your human capital in the best way possible.
Annie: Yeah, and we think about that, from a societal standpoint, right? When we look at this cyclical effect of poverty, when you really understand scarcity, you can start to see where some of that is coming from, right? Same thing with your mother, right? There’s all these different ways in which just having those worries about what are your resources, and are my resources enough to meet my needs? What that does to your ability to start thinking about the other things in your life, because it just ends up taking up your whole brain capacity. So, from a societal level, how are you addressing that?
Steve: Yeah. I think we talked about this a little bit before, but there’s this movement called FIRE, right? Financial Independence, Retirement Early. It’s mostly FI, Financial Independence, and especially being embraced by millennials, where they’re really trying to live much more frugally. And it’s really a mindset thing. So I was just at this ThinkCon Conference, and I saw a panel where they had four FIRE people, and you see people like, “Well, I’m feeding my family of four for $25 or $30,000 a year, and we live a pretty good life.” I think what they’re doing is … I know what they’re doing, is they’re saying, “Hey, look. I can live more efficiently, and I also wanna reframe how I look at my life very differently, so that I am coming from this place of abundance, and not being driven by what my neighbors had.” And one of these guys who talked, Mr. Money Mustache, was like the … He’s one of the founding guys that does this, he’s like, “If you reframe how you look at your life, where for most people, they’re in a community and then they see their neighbor or friend drive around in a fancy new car, and then they look at their old 10 year old car, and they’re like ‘God, my car’s a piece of junk, I really need to get a better car.’ If you then reframe that to be like, ‘You know, how awesome is it that I have this inexpensive to insure, and to maintain, and to register car, and I have all this extra free capital. How awesome is that?’ It totally changes your life, because you’re then no longer trying to, ‘Ah, I gotta spend money on this or that to keep up with these people.’ And that creates a sense of freedom and also the sense of ‘I have more space in my life to think about other things.'” There’s gonna be a movie about it coming out.
Annie: Oh, that’s cool. I think that, that actually is a very good example of what I talk about in my book, which is changing what the inputs are that give you the reward. Right? So this idea of don’t fight our tribal nature, right? What tribe is giving you, tribe is giving you two things. One is belongingness, right? I belong to a group, and the other is distinctiveness from other people, and this is something that’s actually just very important to us, in terms of our human condition. And what the general default for that tribal nature does, is it causes you to compare to your neighbors, right, in the way that you’re saying, where, “Oh, they have a really nice car, I need to have one of those as well.” Just like for me in my poker group, the general default in poker is you see these tribes being formed in poker, and I’m sure you know this from sitting at enough poker tables, is people saying, “Oh, I got so unlucky when I lost that hand.” And other people agreeing with them, and then saying, “Let me tell you about how I got unlucky.” Right? Where we want to offload that bad feeling of loss, into a way that socializes it to the world, right? As opposed to privatizes it to ourselves, where we’re onboarding the blame. But you can reframe what it is that you get the reward from. So the group that I worked with said, “Okay, this is our tribe, what makes you belong to our tribe and be distinct from others is we’re gonna try to be the mistake-admitters. Right? We’re gonna try to be the ones who are trying to poke around into the hands that we want, and figure out all the disastrous decisions we made in those. And when we lose, we’re gonna try to figure out what was our part in it? And we’re gonna challenge each other when we hear people talking in a way that we think is biased.” And all these things, so that we’re still getting that need for tribe fed, and we’re still getting the social approval that comes with being in a tribe. That was all really good, it was just that the features that were being rewarded were different. And I feel like that’s the same that you just described to me, that most of us are naturally getting our reward from, “I have a car that’s just as nice as my neighbor’s, or nicer than my neighbor’s.” Or whatever. But they’ve created a tribe now where it’s, “We belong to a tribe where we have turned that on its head, and the reward for us is that we have an older car. That our expenses are lower, and that we’re in on a secret that they’re not in on.” Right? Because you need that distinctiveness. “We have a secret that they don’t have, and so they’re looking at me in a certain way, like, ‘Oh, look at you with your poor, schleppy car.’ And I’m like the Hobbit, you don’t know the secret. This is the secret to success in my life, right here; that I can resist the temptation to give in to what normal humans are giving in to, in terms of what the comparison is.” I think it’s a very good example of how you can remold tribe to fit in with what your long-term goals are, by allowing you to still get the short-term reward that we all need. It’s just that, that short-term reward is aligning with what you actually want in the long run.
Steve: Right. That’s a great … I mean, I love how you analyzed that, because that’s exactly what’s happening, the folks that are in this Financial Independence movement, they totally reframe it to be like, “Hey, I’m proud of how frugal I am.” And they go out of their way to demonstrate that to their friends, but also in their outside lives. I mean, just quick story. I met the community manager of this site called BiggerPockets, and I’m gonna hopefully go onto their podcast or get them on here as well. They’re real estate. But this woman-
Annie: I just went on BiggerPockets. [crosstalk]. Yeah, you can go listen to me on BiggerPockets.
Steve: Oh did you? That’s awesome. Did you talk to Mindy Jensen?
Annie: No, no. Who did I talk to? David and-
Steve: I know they run two podcasts. There’s BiggerPockets, and there’s BiggerPockets of Money, so I’m talking about the one BiggerPockets of Money. But anyway, so I was gonna grab coffee with her, so we’re in this resort and everything’s super expensive, and I’m like, “All right, why don’t we go in here?” And she’s like, “I can’t buy this food. It is just way too overpriced.” And I was like, “I’ll buy for you.” She’s like, “I won’t let you spend the money on this.” So we had this whole negotiation about where we could eat, and what was possible. She’s like, “I wanna go out to the store and get food.” I was like, “All right. But there’s also the time value of money and everything else.” Anyway, I appreciate that she stuck to her principles. She ultimately did let me buy her a bagel with cream cheese on it, for $4.50. That was the one thing we could find, and we got some water. But I appreciated the fact that hey, the core founding principle is, “Look, we’re gonna be frugal, we’re gonna be efficient with our money.” And on the other hand, she’s doing huge real estate deals. It’s not like she’s short of money, she just chooses to live her life this way, and it creates this sense of … Because we’re all sitting here worried about, “Oh, am I gonna run out of money, da, da, da …” And then you look around and you’re like, “oh, what are the current costs of my life? What if it was a quarter of what it is? What would my life be like then?” Well it’d be pretty friggin different. So I think you’re gonna be hearing more about this, but cool.
Annie: Yeah, well it’s a great example. I hadn’t really thought about that movement in that way, but the way that you described it, really triggered that connection for me, as a really wonderful example of how you can create tribe around thoughtfully thinking about how can we use this belongingness, and the distinctiveness, to actually get us toward a goal that we really want to get to? As opposed to the default of how we normally act, and it’s really a beautiful example, and I mean I know about the movement, but I’d never thought about it in that way, until you described it in that particular way.
Steve: Well, I’m just learning more about it, too. I just think that there’s a lot of lessons for folks from that community, because they have detached themselves successfully from the normal framework. I mean, we’re all conditioned, we grow up, we’re getting stuff, and we’re taught, “Well, the American Way is to buy more stuff.” I mean, that’s our whole economy right? We gotta buy and consume more stuff, it drives the economy and employs everybody. On the flip side, we’re getting more and more efficient at creating this stuff, we’re realizing stuff doesn’t make us happier, because hedonic adoption, so I do think that there’s more-
Annie: Choice makes us unhappy.
Steve: Yep. Exactly. There’s all the … Now that we have all this stuff around us, and all this information coming at us all the time, now more and more people are moving towards hey, they wanna see people in person. They wanna have more thoughtful conversations. So hopefully, we will get to a happy place in our society where we can have our core needs taken care of, but still have time in our lives for our family and friends, and the things that are meaningful to us, and do meaningful work, right? Which is what I think really is the source of happiness, not the new 911 in your garage that makes you happy for about a week, and then you’re like, “Wow, this thing’s a lot to insure.” So look, Annie, I appreciate your time. I know we’ve gone way over, but I just wanna … I’m gonna try and summarize what I’m learning here, and feel free to correct me. But my takeaway from your book, Thinking In Bets is one, there’s a ton to learn. You’ve learned a ton from playing poker and you’ve applied … And also, obviously, all the work you’ve done and research about decision-making, and we almost have to be aware of the biases and beliefs that we bring to the table, and how that affects our thinking. And then there’s a lot of great lessons if you start to accept the uncertainty in life, try to weight the potential outcomes, and make decisions accordingly. So if there’s a high likelihood, you can put that amount of resources into it. Or high likelihood something will happen, and also high likelihood it’s gonna be really influential for your life, or whatever your business, you can put more resources into that. And if it’s low likelihood, or low outcome, you should invest resources accordingly. And another big thing is, just learning, right? Having a system to get feedback, and welcome that feedback loop in your life, where you … Annie, one thing you mentioned to me that I thought was great, was you wanna have, I think it was strong beliefs but loosely held. Or evolving beliefs, I guess, is how you put it.
Annie: Yes, but I shouldn’t get credit for that, by the way. That’s a common … Don’t give me credit for coming up with that exact thing that you say, I just wanna not take credit for it.
Steve: All right. But I think that idea of having evolving beliefs, right, that the world is changing, we’re learning, and don’t always default back to how you thought about things, it’s an important part of evolving as a person. Anything else that I missed there, in that summary?
Annie: I think that was a pretty darn good summary, I gotta say.
Steve: I appreciate that. I really did enjoy the book, a lot, and I’m gonna share it with our team, and hopefully our listeners pick up on it. So anything else you wanna cover, any big influencers, or things you wanna call out?
Annie: Yeah, I would love [crosstalk] make it, because it sounds like we’re mission-aligned. Yeah, and the second thing I would say is that, I think this kind of thinking, and this kind of decision-making takes practice. So I have a newsletter that I put out every Friday, which is really looking at current events, and it’s four or five pieces in each newsletter, which is looking at things that are happening out in the world currently, and how do you apply this kind of thinking to them. So as an example, in the last newsletter, I think I had a piece about the Serena Williams to-do, and what the world really tells us about whether there was sexism or not, and what different arguments people were making, and how you can evaluate those. Just as an example, look at things that are coming out in social science, or behavioral economics, and look at some results that are coming out. Looking at things that are in politics, and how to apply this kind of thinking to evaluate things in business. I think probably in the next newsletter that I put out, I’m gonna do something about what the shift in opinion before and after the Kavanaugh hearings were, on opinion about who was telling the truth and who wasn’t. Not such a surprise, it seems to be aligned completely with what your political party is, and nobody’s opinion changed very much from the new information, which isn’t that surprising. So I’m gonna talk about that, and talk about how tribe really drives what your opinion is, and affects the way that you process information. So that’s just a flavor, but people can go onto my website, annieduke.com, and they can see archives of the newsletter there, so they can see if it’s to their taste, that way you can try it before you subscribe to it. But hopefully some people will find some value in that, and will subscribe to it.
Steve: Thanks, Annie, for being on our show. Thanks Davorin Robison for being our sound engineer. Anyone listening, thanks for listening. Hopefully you found this useful. Our goal at Boldin is to help anyone plan and manage their retirement so they can make the most of their money and time. And if you made it this far, I encourage you to, as you said, check out Annie’s book, Thinking in Bets, and her website and newsletter, and How Do I Decide, as well. And also welcome you to check out our site, and planning tools at boldin.com, where you can build your own plan for free, and take advantage of our premium advanced tools, and personal support. We also have a private Facebook group, and you can find us on Twitter as well, @newretirement. The last thing here, which we haven’t asked for it before but if you like this, we would love to … Either way, would love to get reviews on iTunes, or Stitch, or anywhere. We read them and we’ll try to change the show, based on your feedback. It just helps us build awareness for what’s going on out there. All right, so that’s it. Thanks again, and have a great day.