Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts

by Annie Duke

Thinking in bets starts with recognizing that there are exactly two things that determine how our lives turn out: the quality of our decisions and luck. Learning to recognize the difference between the two is what thinking in bets is all about.

Take a moment to imagine your best decision in the last year. Now take a moment to imagine your worst decision. I’m willing to bet that your best decision preceded a good result and the worst decision preceded a bad result. That is a safe bet for me because resulting isn’t just something we do from afar. Monday Morning Quarterbacks are an easy target, as are writers and bloggers providing instant analysis to a mass audience. But, as I found out from my own experiences in poker, resulting is a routine thinking pattern that bedevils all of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day, potentially with far-reaching, catastrophic consequences.

Hindsight bias is the tendency, after an outcome is known, to see the outcome as having been inevitable. When we say, “I should have known that would happen,” or, “I should have seen it coming,” we are succumbing to hindsight bias.

We link results with decisions even though it is easy to point out indisputable examples where the relationship between decisions and results isn’t so perfectly correlated.

our brains evolved to create certainty and order. 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 for us to imagine the world as an orderly place, where randomness does not wreak havoc and things are perfectly predictable. We evolved to see the world that way. Creating order out of chaos has been necessary for our survival.

Seeking certainty helped keep us alive all this time, but it can wreak havoc on our decisions in an uncertain world. When we work backward from results to figure out why those things happened, we are susceptible to a variety of cognitive traps, like assuming causation when there is only a correlation, or cherry-picking data to confirm the narrative we prefer. We will pound a lot of square pegs into round holes to maintain the illusion of a tight relationship between our outcomes and our decisions.

Most of what we do daily exists in automatic processing. We have habits and defaults that we rarely examine, from gripping a pencil to swerving to avoid an auto accident. The challenge is not to change the way our brains operate but to figure out how to work within the limitations of the brains we already have.

Game theory was succinctly defined by economist Roger Myerson (one of the game-theory Nobel laureates) as “the study of mathematical models of conflict and cooperation between intelligent rational decision-makers.” Game theory is the modern basis for the study of the bulk of our decision-making, addressing the challenges of changing conditions, hidden information, chance, and multiple people involved in the decisions.

‘Chess is not a game. Chess is a well-defined form of computation. You may not be able to work out the answers, but in theory there must be a solution, a right procedure in any position. Now, real games,’ he said, ‘are not like that at all.

The decisions we make in our lives—in business, saving and spending, health and lifestyle choices, raising our children, and relationships—easily fit von Neumann’s definition of “real games.” They involve uncertainty, risk, and occasional deception, prominent elements in poker. Trouble follows when we treat life decisions as if they were chess decisions.

Poker, in contrast, is a game of incomplete information. It is a game of decision-making under conditions of uncertainty over time. (Not coincidentally, that is close to the definition of game theory.) Valuable information remains hidden. There is also an element of luck in any outcome. You could make the best possible decision at every point and still lose the hand,

Resulting, assuming that our decision-making is good or bad based on a small set of outcomes, is a pretty reasonable strategy for learning in chess. But not in poker—or life.

Just as we have problems with resulting and hindsight bias, when we evaluate decisions solely on how they turn out, we have a mirror-image problem in making prospective decisions. We get only one try at any given decision—one flip of the coin—and that puts great pressure on us to feel we have to be certain before acting, a certainty that necessarily will overlook the influences of hidden information and luck.

We are discouraged from saying “I don’t know” or “I’m not sure.” We regard those expressions as vague, unhelpful, and even evasive. But getting comfortable with “I’m not sure” is a vital step to being a better decision-maker. We have to make peace with not knowing.

Embracing “I’m not sure” is difficult. We are trained in school that saying “I don’t know” is a bad thing. Not knowing in school is considered a failure of learning.

Admitting that we don’t know has an undeservedly bad reputation. Of course, we want to encourage acquiring knowledge, but the first step is understanding what we don’t know.

What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur. The accuracy of those guesses will depend on how much information they have and how experienced they are at making such guesses. This is part of the basis of all bets.

The secret is to make peace with walking around in a world where we recognize that we are not sure and that’s okay. As we learn more about how our brains operate, we recognize that we don’t perceive the world objectively. But our goal should be to try.

An unwanted result doesn’t make our decision wrong if we thought about the alternatives and probabilities in advance and allocated our resources accordingly,

When we move away from a world where there are only two opposing and discrete boxes that decisions can be put in—right or wrong—we start living in the continuum between the extremes. Making better decisions stops being about wrong or right but about calibrating among all the shades of grey.

Redefining wrong allows us to let go of all the anguish that comes from getting a bad result. But it also means we must redefine “right.” If we aren’t wrong just because things didn’t work out, then we aren’t right just because things turned out well. Do we win emotionally to making that mindset trade-off? Being right feels really good. “I was right,” “I knew it,” “I told you so”—those are all things that we say, and they all feel very good to us. Should we be willing to give up the good feeling of “right” to get rid of the anguish of “wrong”? Yes.

First, the world is a pretty random place.

Second, being wrong hurts us more than being right feels good. We know from Daniel Kahneman and Amos Tversky’s work on loss aversion, part of prospect theory (which won Kahneman the Nobel Prize in Economics in 2002), that losses in general feel about two times as bad as wins feel good.

The promise of this book is that if we follow the example of poker players by making explicit that our decisions are bets, we can make better decisions and anticipate (and take protective measures) when irrationality is likely to keep us from acting in our best interest.

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:

How can we be sure that we are choosing the alternative that is best for us? What if another alternative would bring us more happiness, satisfaction, or money? The answer, of course, is we can’t be sure. Things outside our control (luck) can influence the result. The futures we imagine are merely possible. They haven’t happened yet. We can only make our best guess, given what we know and don’t know, at what the future will look like.

Poker players live in a world where that risk is made explicit. They can get comfortable with uncertainty because they put it up front in their decisions. Ignoring the risk and uncertainty in every decision might make us feel better in the short run, but the cost to the quality of our decision-making can be immense. If we can find ways to become more comfortable with uncertainty, we can see the world more accurately and be better for it.

part of the skill in life comes from learning to be a better belief calibrator, using experience and information to more objectively update our beliefs to more accurately represent the world. The more accurate our beliefs, the better the foundation of the bets we make. There is also skill in identifying when our thinking patterns might lead us astray, no matter what our beliefs are, and in developing strategies to work with (and sometimes around) those thinking patterns. There are effective strategies to be more open-minded, more objective, more accurate in our beliefs, more rational in our decisions and actions, and more compassionate toward ourselves in the process. We have to start, however, with some bad news. As Mr. Carlson learned in WKRP in Cincinnati, our beliefs can be way, way off.

This is how we think we form abstract beliefs: We hear something; We think about it and vet it, determining whether it is true or false; only after that We form our belief. It turns out, though, that we actually form abstract beliefs this way: We hear something; We believe it to be true; Only sometimes, later, if we have the time or the inclination, we think about it and vet it, determining whether it is, in fact, true or false.

“Findings from a multitude of research literatures converge on a single point: People are credulous creatures who find it very easy to believe and very difficult to doubt. In fact, believing is so easy, and perhaps so inevitable, that it may be more like involuntary comprehension than it is like rational assessment.”

Gilbert and colleagues demonstrated through a series of experiments that our default is to believe that what we hear and read is true. Even when that information is clearly presented as being false, we are still likely to process it as true.

The same belief-formation process led hundreds of millions of people to bet the quality and length of their lives on their belief about the merits of a low-fat diet. Led by advice drawn, in part, from research secretly funded by the sugar industry,

Truthseeking, the desire to know the truth regardless of whether the truth aligns with the beliefs we currently hold, is not naturally supported by the way we process information.

We might think of ourselves as open-minded and capable of updating our beliefs based on new information, but the research conclusively shows otherwise. Instead of altering our beliefs to fit new information, we do the opposite, altering our interpretation of that information to fit our beliefs.

Whether it is a football game, a protest, or just about anything else, our pre-existing beliefs influence the way we experience the world. That those beliefs aren’t formed in a particularly orderly way leads to all sorts of mischief in our decision-making.

Flaws in forming and updating beliefs have the potential to snowball. Once a belief is lodged, it becomes difficult to dislodge. It takes on a life of its own, leading us to notice and seek out evidence confirming our belief, rarely challenge the validity of confirming evidence, and ignore or work hard to actively discredit information contradicting the belief. This irrational, circular information-processing pattern is called motivated reasoning. The way we process new information is driven by the beliefs we hold, strengthening them. Those strengthened beliefs then drive how we process further information, and so on.

Fake news isn’t meant to change minds. As we know, beliefs are hard to change. The potency of fake news is that it entrenches beliefs its intended audience already has, and then amplifies them. The Internet is a playground for motivated reasoning. It provides the promise of access to a greater diversity of information sources and opinions than we’ve ever had available, yet we gravitate toward sources that confirm our beliefs, that agree with us. Every flavor is out there, but we tend to stick with our favorite.

How we form beliefs, and our inflexibility about changing our beliefs, has serious consequences because we bet on those beliefs. Every bet we make in our lives depends on our beliefs: who we believe will make the best president, if we think we will like Des Moines, if we believe a low-fat diet will make us healthier, or even if we believe turkeys can fly.

yes, we all have a blind spot about recognizing our biases. The surprise is that blind-spot bias is greater the smarter you are.

It turns out the better you are with numbers, the better you are at spinning those numbers to conform to and support your beliefs.

Incorporating uncertainty into the way we think about our beliefs comes with many benefits. By expressing our level of confidence in what we believe, we are shifting our approach to how we view the world. Acknowledging uncertainty is the first step in measuring and narrowing it. Incorporating uncertainty in the way we think about what we believe creates open-mindedness, moving us closer to a more objective stance toward information that disagrees with us. We are less likely to succumb to motivated reasoning since it feels better to make small adjustments in degrees of certainty instead of having to grossly downgrade from “right” to “wrong.”

Declaring our uncertainty in our beliefs to others makes us more credible communicators. We assume that if we don’t come off as 100% confident, others will value our opinions less. The opposite is usually true. If one person expresses a belief as absolutely true, and someone else expresses a belief by saying, “I believe this to be true, and I’m 80% on it,” who are you more likely to believe? The fact that the person is expressing their confidence as less than 100% signals that they are trying to get at the truth, that they have considered the quantity and quality of their information with thoughtfulness and self-awareness.

Experience can be an effective teacher. But, clearly, only some students listen to their teachers. The people who learn from experience improve, advance, and (with a little bit of luck) become experts and leaders in their fields. I benefited from adopting the learning habits of some of the phenomenal poker players I was exposed to along the way. We can all benefit from those practical strategies to become better decision-makers. Thinking in bets can help us get there.

We can’t just “absorb” experiences and expect to learn. As novelist and philosopher Aldous Huxley recognized, “Experience is not what happens to a man; it is what a man does with what happens to him.” There is a big difference between getting experience and becoming an expert. That difference lies in the ability to identify when the outcomes of our decisions have something to teach us and what that lesson might be.

Chalk up an outcome to skill, and we take credit for the result. Chalk up an outcome to luck, and it wasn’t in our control. For any outcome, we are faced with this initial sorting decision. That decision is a bet on whether the outcome belongs in the “luck” bucket or the “skill” bucket.

The bet on whether to field outcomes into the luck or skill bucket is difficult to execute because of ambiguity.

When Nick the Greek won with a seven and a deuce, he fielded that outcome into the skill bucket, taking credit for his brilliant strategy. When he lost with that hand—a much more common occurrence—he wrote it off as bad luck. His fielding error meant he never questioned his beliefs, no matter how much he lost. We’re all like Nick the Greek sometimes. Uncertainty—luck and hidden information—gave him the leeway to make fielding errors about why he was losing. We all face uncertainty. And we all make fielding errors.

Just as we are almost never 100% wrong or right, outcomes are almost never 100% due to luck or skill. Learning from experience doesn’t offer us the orderliness of chess or, for that matter, folding and sorting laundry. Getting insight into the way uncertainty trips us up, whether the errors we make are patterned (hint: they are) and what motivates those errors, should give us clues for figuring out achievable strategies to calibrate the bets we make on our outcomes.

The way we field outcomes is predictably patterned: we take credit for the good stuff and blame the bad stuff on luck so it won’t be our fault. The result is that we don’t learn from experience well. “Self-serving bias” is the term for this pattern of fielding outcomes.

Self-serving bias has immediate and obvious consequences for our ability to learn from experience.* Blaming the bulk of our bad outcomes on luck means we miss opportunities to examine our decisions to see where we can do better. Taking credit for the good stuff means we will often reinforce decisions that shouldn’t be reinforced and miss opportunities to see where we could have done better. To be sure, some of the bad stuff that happens is mainly due to luck. And some of the good stuff that happens is mainly due to skill. I just know that’s not true all the time. 100% of our bad outcomes aren’t because we got unlucky and 100% of our good outcomes aren’t because we are so awesome. Yet that is how we process the future as it unfolds.