Do you think that life is a game? Filled with decisions, plays, and wins based on your knowledge, skill, and grit?
How much weight do you put into the quality of your decision making? If you’re like most of us, when you experience a setback, you are likely to look back at the choices you made leading up to that setback and blame yourself for poor decisions.
But you would be wrong. Here’s why.
Life is a Game of Poker, Not Chess
In her bestselling book Thinking in Bets, author Annie Duke explains how most of us place far too much weight on our own decision-making abilities, when in fact chance and luck play far greater roles in our lives than we realize.
Rather than being based purely on our own capacity for predicting the success of our decisions, Duke explains that outcomes are equally affected by luck.
Life is a game based on chance, not just stats.
We all know that life is a game. Are you playing a game of chess, or of poker? Click here to find out how we can help you play a smarter financial game.
You Can Never Know All the Facts
The sub-title of Duke’s book is “Making smarter decisions when you don’t have all the facts.”
She points out the uncertainty in our lives that most of us choose to ignore—and it’s the prevalence of this embedded uncertainty that makes our lives less than a game of chess and more a game of poker.
Chess is largely computational; you can plan your moves strategically based on the facts which are all laid out in front of you. In poker, you are making decisions with most of the facts concealed from you. Not an ideal way to play!
Throughout her book, Duke provides a myriad of examples demonstrating how the relationship between decision quality and outcomes is not nearly as closely related as we portend.
Understanding Our Decisions Means Learning the Right Lessons
Let’s pull back and look at the big picture.
The larger issue here is that we are learning from our experiences without really understanding that some of the good and bad outcomes were from luck, not our decisions.
This can create a feedback loop that disregards the element of luck that is present in your choices. It forms the foundation of our beliefs and can be a very stubborn source of information even in the face of contrary facts.
Our Brains Look for Patterns
Our brains like order and are always looking for patterns, even where they don’t exist. This fact applies directly to investing, where observable data shows how different asset classes perform randomly on a year-by-year basis.
There’s an ancient proverb that says: “It’s difficult to find a black cat in a dark room, particularly when there is no cat.” We always look for the cat—some pattern in the data—even when it’s clearly not there.
Clients sometimes want to defer making financial decisions until all the facts are laid out on the table—but the thing is, you can never have all the facts. There will always be facts that we can’t or don’t know in advance, no matter how much research we do. There simply will always be an X-Factor—facts that can’t be predicted because neither can the future. In physics and other fields, this is known as “irreducible uncertainty”.
In an Uncertain World, Life is a Game of Poker
In his 2013 Ted Talk “The Pursuit of Ignorance”, Dr. Stuart Firestein, a neuroscientist at Columbia University, describes how scientific inquiry can create more questions than it answers. As he says: “knowledge is a big subject; ignorance is a bigger one.”
Science changes; everything we know changes.
What We Can Learn From Outcomes
If everything’s based on luck, what, if anything, can we learn from particular outcomes?
Well, even that has an element of chance. Outcomes become essentially another bet—it’s important to realize that any single outcome can happen for many reasons. And when we try to sort that out, we come face-to-face with trying to sort out the skill from the luck.
And how do you do that? Duke details what she calls a “10-10-10” decision-making formula. When you are faced with a decision to make, break it down into three elements. Consider what the consequences of each of your options will be in 10 minutes, 10 months, and 10 years. This line of thinking will get you started on the analytics you need to think about.
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This article was originally published on November 17, 2018, and has been updated.