Thinking in Bets: How to make smarter decisions

I read a lot of books. Nearly every book has some nugget of wisdom I can take from it, but it's rare indeed when I read a book and feel like I've hit the mother lode. In 2018, I've been fortunate enough to read two books that I'll be mining for years to come.

The first was Sapiens, the 2015 “brief history of mankind” from Yuval Noah Harari. I finished the second book yesterday: Thinking in Bets by Annie Duke. Duke is a professional poker player; Thinking in Bets is her attempt to take lessons from the world of poker and apply them to making smarter decisions in all aspects of life.

“Thinking in bets starts with recognizing that there are exactly two things that determine how our lives turn out,” Duke writes in the book's introduction. Those two things? The quality of our decisions and luck. “Learning to recognize the difference between the two is what thinking in bets is all about.”

We have complete control over the quality of our decisions but we have little (or no) control over luck.

The Quality of Our Decisions

The first (and greatest) variable in how our lives turn out is the quality of our decisions.

People have a natural tendency to conflate the quality of a decision with the quality of its outcome. They're not the same thing. You can make a smart, rational choice but still get poor results. That doesn't mean you should have made a different choice; it simply means that other factors (such as luck) influenced the results.

Driving home drunk, for instance, is a poor decision. Just because you make arrive home without killing yourself or anyone else does not mean you made a good choice. It merely means you got a good result.

Duke gives an example from professional football. At the end of Super Bowl XLIX, the Seattle Seahawks were down by four points with 26 seconds left in the game. They had the ball with second down at the New England Patriots' one-yard line. While everbody expected them to run the ball, they threw a pass. That pass was intercepted and the Seawhawks lost the game.

Armchair quarterbacks around the world complained that this was the worst play-call in NFL history. (I've linked to just four stories there. They're all brutal. You can find many more online.)

Duke argues, though, that the call was fine. In fact, she believes it was a smart call. It was a quality decision. There was only a 2% chance that the ball would be intercepted. There was a high percentage chance of winning the game with a touchdown. Most importantly, if the pass was incomplete, the Seahawks would have two more plays to try again. But if the team opted to run instead? Because they only had one time-out remaining, they'd only get one more chance to score if they failed.

The call wasn't bad. The result was bad. There's a big difference between these two things, but humans generally fail to differentiate between actions and results. Duke says that poker players have a term for this logical fallacy: “resulting”. Resulting is assuming your decision-making is good or bad based on a small set of outcomes.

If you play your cards correctly but still lose a hand, you're “resulting” when you focus on the outcome instead of the quality of your decisions. You cannot control outcomes; you can only control your actions.

Note: As long-time readers know, I grew up Mormon. One of the songs we were taught as children has this terrific lyric: “Do what is right, let the consequence follow.” This has become something of a mantra for me as an adult. If I do the right thing — whatever that might be in a given context — then I cannot feel guilty if I get a poor result. It's my job to do my best. Beyond that, I cannot control what happens.

Luck and Incomplete Information

Why don't smart decisions always lead to good results? Because we don't have complete control over our lives — and we don't have all of the information. Fundamentally, Duke says, results are influenced by luck. Randomness. Chance. Happenstance. She writes:

“We are uncomfortable with the idea that luck plays a significant role in our lives. We recognize the existence of luck, but we resist the idea that, despite our best efforts, things might not work out the way we want. It feels better to imagine the world as an orderly place, where randomness does not wreak havoc and things are perfectly predictable.”

Duke contrasts poker (and life) with chess. Chess is a game of complete information, a game of pure skill. There's no luck involved. At all times, all of the pieces are available for both players to see. There are no dice rolls, nothing to randomize the game. As a result, the better player almost always wins. (When the better player doesn't win, it's because of easily identifiable mistakes.) Because chess is a game of complete information, luck isn't a factor — the outcome is only a matter of the quality of your decisions.

In poker, however, there's a lot you don't know. What cards do your opponents hold? What cards remain in the deck? How likely are your opponents to bluff? And so on. Experienced poker players learn to think in terms of odds. “With this hand, I have a 74% chance of winning.” “I should fold. These cards only give me a 18% chance of coming out ahead.”

It's because our decisions are made with incomplete information that life sometimes seems so difficult. You can do the right thing and still get poor results. You can opt not to drink on New Year's Eve, for instance, but still get blindsided by somebody who did to drink and drive. You made a quality decision, but happenstance hit you upside the head anyhow.

Duke cites a scene from The Princess Bride as an example of how incomplete information affects the outcomes of our decisions. Criminal mastermind Vizzini and the Dread Pirate Roberts engage in a battle of wits:

Vizzini pours two goblets of wine, then Roberts (actually our hero, Westley, in disguise) poisons one of them with deadly “ioacane powder”. The challenge is for Vizzini to choose the non-poisoned goblet. Vizzini cackles with glee when Roberts/Westley downs the poison — but then falls dead after drinking his own goblet. It turns out both goblets had been poisoned, but Roberts had spent the previous few years building an immunity to iocane powder.

Vizzini made a quality decision based on the information he had, but he didn't have all of the information: both goblets were poisoned, and his opponent in this “battle of wits” was immune to the poison in the first place!

Thinking in Bets

Duke argues that in order to make smarter decisions, we have to embrace both the idea that there's a lot of luck in life and the reality that we're swimming in uncertainty. There's a stigma in our culture about appearing ignorant, about being unsure. Duke says that becoming comfortable with uncertainty and not knowing is a vital step to becoming a better decision-maker.

“Admitting that we don't know has an undeservedly bad reputation,” she writes.

“What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of ‘I'm not sure'.”

Duke suggests that by moving to a framework of “I'm not sure”, we're far less likely to fall into the trap of black and white thinking, of false certainty. She cites Stuart Firestein's TED talk about the pursuit of ignorance:

We should be pursuing “high-quality ignorance”.

Based on all of this, how then can we make smarter decisions? Duke says that we should stop thinking in terms of right and wrong. Few things are ever 0% or 100% likely to occur. Few people are ever 0% or 100% right about what they know or believe. Instead, we should think in bets.

“Decisions are bets on the future,” Duke writes, “and they aren't ‘right' or ‘wrong' based on whether they turn out well on any particular iteration. An unwanted result doesn't make our decision wrong if we thought about the alternatives and probabilities in advance and allocated our resources accordingly.”

Duke says that because pro poker players learn to think in terms of odds during their games, they transfer this way of thinking to everyday life. “Job and relocation decisions are bets,” she writes. “Sales negotiations and contracts are bets. Buying a house is a bet. Ordering the chicken instead of the steak is a bet. Everything is a bet.

Just as each poker bet carries a different chance of success (based on the quality of the hand, the hands of the other players, etc.), so too the bets we make in life carry different chances of success. And our personal beliefs have (or should have) varying degrees of certainty. Duke wants readers to begin thinking about their beliefs and decisions in terms of probabilities rather than in terms of black and white.

Turns out I already do this to a small degree — but usually for minor stuff. In fact, I've done it several times in the past week.

  • A few days ago, I was listening to a Big Band station on Pandora. The song “Green Eyes” came on. “I wonder what year this is from?” I thought. I listened to the vocals, to the band, to the recording quality. “I think there's an 80% chance this song is from 1939 — give or take two years,” I thought. I looked it up. The song was released in 1941. (I listen to a lot of older music, and I play this game often.)
  • Because it's been hot in Portland lately, folks in my neighborhood have all been taking early morning walks. We all tend to follow the same two-mile loop because it's easy. I've started playing a game when I pass somebody. “Okay, the dog and I passed David Hedges at the llama farm. Where will we encounter him on the top side of the loop? I'll be it's between Roy's house and the bottom of the hill.” It's fun for me to see how accurate my guesses are.

Duke believes that we should each do this sort of thing whenever we make a decision. Before we commit to a course of action, we should think about possible outcomes and how likely each of those outcomes is to occur.

Let's say you've only got $200 in the bank and it's a week from payday. Should you join your friends for that weekend motorcycle trip? Or should you save that cash in case something goes wrong? Or, thinking farther in the future, what outcomes are you seeking in life? What decision will improve the odds of achieving those outcomes?

Or, imagine that you're trying to decide whether or not to buy a home. As you consider the possibilities, think about the probability that each possible future will occur. Don't simply cling to the outcome you're hoping for. Be objective. If the odds of success seem reasonable, then pursue your desired course of action. But if they don't, then pull the plug.

Duke writes:

“In most of our decisions, we are not betting against another person. Rather, we are betting against all the future versions of ourselves that we are not choosing. We are constantly deciding among alternative futures: one where we go to the movies, one where we go bowling, one where we stay home. Or futures where we take a job in Des Moines, stay at our current job, or take some time away from work. Whenever we make a choice, we are betting on a potential future.”

Every choice carries an opportunity cost. When you choose to save for the future, for instance, you're giving up pleasure in the present. Or, if you choose to spend in the present, you're giving up future financial freedom.

Final Thoughts

Thinking in BetsFor a long time, I've argued that the best books about money are often not about money at all. Thinking in Bets is another example of this. While Duke uses plenty of personal finance examples, the book itself is about self-improvement. It's not a money manual. Yet the info here could have a profound impact on your financial future.

There's a lot more in this book that I haven't covered in my review. (I've really only touched on the first third of the material!) For me, the biggest takeaway comes early: It's vital to separate decision quality from results. The rest of the book explores how to improve the quality of your decisions.

Among the strategies Duke advocates are these:

  • Learn to examine your own beliefs. Be your own devil's advocate. If you're certain about something, explore the opposing viewpoint. (If you're liberal, seek conservative opinions. If you're conservative, look for liberal voices.) Be skeptical — of yourself and others.
  • Build a network of trusted advisors, people who can give you feedback on your beliefs and decisions. But don't make these support groups homogeneous. Draw on people from a variety of backgrounds and belief systems. If you only associate with people who think the same way you do, you never give yourself a chance to grow, and you'll never spot possible errors in your thinking. (This is like the current problems Facebook is facing with its deliberately-created echo chambers, which only serve to reinforce the way people think instead of challenging them.)
  • When you make decisions, think of the future. Use barriers and pre-commitment to do the right thing automatically. Practice backcasting, a visualization method in which you define a desired outcome then figure out how you might get there.

The book is dense — dense! — with ideas and information. When I finished it, I wanted to go back and read it again. Plus, I wanted to plow through the nearly 200 other works that Duke lists in her bibliography. I feel like I could spend an entire year diving deeper into this book and its related reading.

But, as much as I wish it were, Thinking in Bets isn't perfect. A strong argument could be made that this material would work better as a TED talk or a 5000-word essay in The Atlantic (or on Get Rich Slowly!). The book is so packed with info that it sometimes loses its way. There's also a lot of repetition — too much repetition. Plus, it seems to lack a clear sense of organization.

These quibbles aside, Thinking in Bets has earned a permanent place on my bookshelf. If I ever get around to putting together a Get Rich Slowly library (a project I've been planning for years!), this book will be in it. I got a lot out of it. And I bet you will too.

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Frogdancer
Frogdancer
1 year ago

Well, it was time well spent! I really enjoyed this review, which I’ll admit, I didn’t expect to as soon as the word “poker” came up. I hate card games. But you’re right, the ideas in this book were fascinating. Chess, for instance. I haven’t played chess for YEARS, yet she’s absolutely right when she says that all the information is there. It makes me want to go and join the chess club at work and start honing my skills again. I’m used to thinking about life in terms of the random effects of luck – I don’t call myself… Read more »

John Zeratsky
John Zeratsky
1 year ago

JD, I’m curious: Why was Sapiens so impactful for you? (I found it fascinating and useful, too; just want to get your take.)

Biggreydog
Biggreydog
1 year ago
Reply to  J.D. Roth

Agreed. Most important book I’ve read in a long time, a very long time. Yuval Harari put one of the “biggest” books ever together on that one. Your wheat example is one of many in the book.

I was blown away by the short conclusion chapter which ends and ties the book’s themes together so brilliantly. If you read nothing else, it could stun a reader. I was literally shaken by the clarity of the messaging about what path Sapiens are on and what we are likely to do next if we survive.

stellamarina
stellamarina
1 year ago
Reply to  J.D. Roth

The most mind expanding class I took in college was Human Evolution. It was co-taught by a biologist and an anthropologist. Religion teaches us that we are all brothers and sisters under God but that class made me see the whole journey mankind is on and really made me feel connected with all people and how we need to work together for our future. Thank you for the book recommendations.

John Zeratsky
John Zeratsky
1 year ago
Reply to  J.D. Roth

“explaining why people are they way they are, how are present-day psychological make-up is derived from our animal origins”

Yes! This was the thing that made Sapiens so amazing for me. Understanding our behavior through the lens of evolution is helpful in finding clever ways to change that behavior. Reading Sapiens, there were so many things where I was like, “oh… THAT’S why we do that.”

Ross Williams
Ross Williams
1 year ago

“You can opt not to drink on New Year’s Eve, for instance, but still get blindsided by somebody who did to drink and drive. You made a quality decision, but happenstance hit you upside the head anyhow.” Actually, you made a bad decision. You decided to go out on New Year’s Eve when there are drunk drivers all over the place. Which is what makes the distinction between good decisions and good outcomes not very useful in real life. Not only do you lack all the information, you also lack the ability to evaluate the odds. Your decisions are often… Read more »

Joe
Joe
1 year ago

The book sounds interesting. I’ll put it on my reading list.
I think we already do this to a certain degree. Most of our decisions are based on experience. I try to make good decisions, but I know the results might not work out well all the time.
It’d be great to be able to think in term of percentage, though. Life is more complicated than poker.

Anne
Anne
1 year ago

What a fantastic review. This puts into language much that I have thought about life. There is only so much we can do about our lives, but we still have to do it. In fact, I would go so far as to say, you summed it up so well I don’t think I need to purchase the book. Thanks for this.

WantNotToWantNot
WantNotToWantNot
1 year ago

Excellent topic on decision-making and outcomes, J.D. Yes, luck is the thing that is out of our control. But check this out—-my favorite article on the topic of LUCK was in the NYTimes’s Business Section, and the result of a 9-year study of companies that considered themselves “lucky” or “not lucky.” https://www.nytimes.com/2011/10/30/business/luck-is-just-the-spark-for-business-giants.html This study was a mind-blower to me, showing that having the attitude of “being lucky” or “being unlucky” directly affected the quality of decisions the businesses made. As this article details, a business’s positive or negative belief made a quantifiable difference in how companies dealt with setbacks or… Read more »

Matthew Mullins
Matthew Mullins
1 year ago

The Knowledge Project, a great podcast done by Shane Parrish and the people at Farnam Street, released a podcast episode with Annie Duke just yesterday. For whatever reason, the link to this episode isn’t yet available on their website but it is available on both of my podcasts apps. Synopsis – This is a whirlwind of an episode, and we cover all kinds of fascinating topics, including: • The strange circumstances that shifted Annie’s path from finishing a Ph.D. in linguistics to becoming a professional poker player • What it was like to be a female poker player in a… Read more »

Jen G
Jen G
1 year ago

“….battle for freedom in spirit and might.” I also grew up Mormon. Great, thought-provoking read. We just sold our Seattle home and we’re moving down to Portland later this month. We’ve made the decision to set aside our windfall from the sale and rent for awhile, with the thought that the market will cool and we’ll be able to get a deal. At this point, we’re definitely “clinging” to this desired outcome rather than looking at the objective possibility that house prices will continue to rise. We need to make some contingency plans in the real possibility that housing prices… Read more »

Jason@WinningPersonalFinance
1 year ago

As an amateur poker player, thinking in bets (the concept, not the book) has very much impacted my life. Every decision we make has a potential benefit, risk and opportunity cost. Carefully considering these things helps us make better decisions.

I’m a strong believer that a true understanding of poker can help one apply solid personal finance principals.

Thanks for reviewing this book. I enjoyed your view.

ScoreShuttle
ScoreShuttle
1 year ago

Well written article! Thanks for a good read! One part that many people probably can resonate with – being uncertain doesn’t have to be bad! Although it looks like someone else might know what they are doing, they could have spent the last 5 hours trying to figure out which direction to go.
Many people experience the same feeling of uncertainty when it comes to credit cards, finance, homebuying etc. My suggestion is: use the resources already in place to get knowledgable.

Erman
Erman
1 year ago

Dear J.D.

I don’t know if it is my place to say this but you deserve every single penny you have earned from blogging. The effort you put in, the research you do and most important of all, your writing is simply great. I have learned so much and gained so many new insights reading your articles over the years. Thank you for everything.

P.S. We had some beers in Antalya a few years back !!

Jennifer
Jennifer
1 year ago

And, another two books were just requested from the library. 🙂 Thanks! Being raised by an accountant/attorney, I grew up considering most things using statistics and quantifiable risk. I have to say that most of my regrets were decisions that I knew were risky/bad, did them anyway, and they turned out about the way you’d expect. “Learning experiences” from rebelling against all that boring logic . . . (!) I think the hardest part of making certain bets is going against conventional wisdom and dealing with the feedback and concern, because we don’t share all the details of our unconventional… Read more »

Janet
Janet
1 year ago

I like the logic behind this “thinking in bets” strategy. I’m going to check out this book! Thanks for the share!

Snazster
Snazster
1 year ago

“We have complete control over the quality of our decisions but we have little (or no) control over luck.” For thirty-five years or more I’ve thought of life as something like playing a game of Zaxxon with a joystick where we control left or right (side-to-side on the joystick) completely, but up or down (away from us and towards us on the joystick) is pretty much random. Consequently, I try to steer sideways to whichever point offers the least possibility of damage, and the best possibility of reward, should I suddenly rise or dive. But sometimes these possibilities are not… Read more »

Ron C.
Ron C.
1 year ago

Poker taught me that the game…and life…(and investing!) is more affected in the short term by luck, but in the long term by decisions. The best poker player can lose in the short term to a rookie, but in the long term they’ll win. You can have undeserved poor or great outcomes in life in the short term, but in the long term (way more often than not) life isn’t based much on luck and instead on decisions. Granted, catastrophically bad luck happens on occasion (something like cancer, not something like an absent father) but it’s our decisions that ultimately… Read more »

Brian
Brian
1 year ago

I’m of the opinion that the more viewpoints you have (from advisors, opposing viewpoints, casting of possible futures — as you suggest in the end), the HARDER it is to make the decision. Almost akin to the paradox of choice or analysis paralysis. More information IS better — but only up to a certain extent.

Brian
Brian
1 year ago
Reply to  Brian

In other words, I become more unsure when there are more things to consider because it reveals additional potential outcomes.

Other than that, interesting article!

Maria
Maria
1 year ago

JD, it looks like we were reading Thinking In Bets at the same time! I, too, recently finished, and found it to be a good read (even with my background in mathematics). Thank you for the summary — it’s a great reminder of what I’ve just read.

I was wondering if you’d read Principles by Ray Dalio? That would be an incredible addition to your library. Highly, highly recommended.

Tom Murin
Tom Murin
1 year ago

Annie’s book was added to my reading a month or so ago. I listened to her on a podcast (Jordan Harbinger’s, I think) and found it fascinating.

There’s a classic business book “Good to Great” that covers quality decision making. In short, if you follow the right decision making process you will get a good decision the majority of the time. You won’t always be right – but you’ll know that you got there through a rational process. You can make a decision based on any criteria that turns out to be correct – but how often can that happen?

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