Abridged and adapted from Thinking in Bets by Annie Duke
Suppose someone says, “I flipped a coin and it landed heads four times in a row. How likely is that to occur?”
It feels that should be a pretty easy question to answer. Once we do the maths on the probability of heads on four consecutive 50-50 flips, we can determine that would happen 6.25% of the time (0.5 x 0.5 x 0.5 x 0,.5).
The problem is that we came to this answer without knowing anything about the coin or the person flipping it. Is it a two-sided coin or three-sided or four? If it is two-sided, is it a two-headed coin? Even if the coin is two sided, is the coin weighted to land on heads more often than tails? Is the coin flipper a magician who is capable of influencing how the coin lands? This information is all incomplete, yet we answered the question as if we had examined the coin and knew everything about it.
Now if that person flipped the coin 10,000 times, giving us a sufficiently large sample size, we could figure out, with some certainty, whether the coin is fair. Four flips simply isn’t enough to determine much about the coin
We make this same mistake when we look for lessons in life’s results. Our lives are too short to collect enough data from our own experience to make it easy to dig down into decision quality from the small set of results we experience. If we buy a house, fix it up a little, and sell it three years later for 50% more than we paid. Does that mean we are smart at buying and selling property, or at fixing up houses? It could, but it could also mean there was a big upward trend in the market and buying almost any piece of property would have made just as much money. Bitcoin buyers may now wonder about the wisdom of their decisions.
The hazards of resulting
Take a moment to imagine your best decision or your worst decision. I’m willing to bet that your best decision preceded a good result and the worst decision preceded a bad result. This is a safe bet for me because we deduce an overly tight relationship between our decisions and the consequent results.
There is an imperfect relationship between results and decision quality. I never seem to come across anyone who identifies a bad decision when they got lucky with the result, or a well reasoned decision that didn’t work out. We are uncomfortable with the idea that luck plays a significant role in our lives. We assume causation when there is only a correlation and tend to cherry-pick data to confirm the narrative we prefer.
Poker and decisions
Poker is a game that mimics human decision making. Every poker hand requires making at least one decision (to fold or to stay) and some hands can require up to twenty decisions. During a poker game players get in about thirty hands per hour. This means a poker player makes hundreds of decisions at breakneck speed with every hand having immediate financial consequences.
It is a game of decision making with incomplete information. 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, because you don’t know what new cards will be dealt and revealed.
In addition, once the game is over, poker players must learn from that jumbled mass of decisions and outcomes, separating the luck from the skill, and guarding against using results to justify/criticise decisions made,
The quality of our lives is the sum of decision quality plus luck. Poker is a mirror to life and helps us recognise the mistakes we never spot because we win the hand anyway or the leeway to do everything right, still lose, and treat the losing result as proof that we made a mistake,
Decisions are bets on the future
Decisions 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 had thought about the alternatives and probabilities in advance and made our decisions accordingly.
Our world is structured to give us lots of opportunities to feel bad about being wrong if we want to measure ourselves by outcomes. Don’t fall in love or even date anybody if you want only positive results.
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