How to Make Better Decisions (ft. Annie Duke)

0:03 For this next chapter, I am joined by a special guest. Annie Duke is here. Annie Duke is a former professional poker player, an author, a business consultant, an educator, and a mother of four. Annie Duke has won multiple World Series of Poker bracelets and over $4 million worth of winnings throughout her career. More importantly, Annie Duke is an academic and an educator. She has a PhD in cognitive psychology from U Penn, where she specializes in decision science. She's a three-time author of Thinking in Bets, How to Decide, and Quit, When to Know When to Walk Away. And today, she is here with me to help break down how to think about luck in our day-to-day lives and make better decisions in the face of it. So, Annie, welcome to the show. It's great to have you here. And my

0:48 first question for you is what Napoleon asked all of his generals, which is how lucky are you? >> Oh, how lucky am I? >> Yes. >> I'm going to give you a slightly unexpected answer. >> Okay. >> Um I assume when you're asking me how lucky I am, you're asking me if on average I've had good luck or bad luck. >> Exactly. >> Um but I actually think of luck as a relatively neutral term. Luck is just a force that happens up, you know, upon you, basically. Do I have a better than average outcome than expectation given what my possible outcomes were when I was born? I would guess yes. >> Okay. >> Right? Yeah. I would I would say I would say yeah. I I do. >> You're You're in your general of the

1:34 army. Welcome aboard. >> Thank you. [laughter] >> Let Let me set some context here. So, this episode we're talking about luck, and we're actually talking about it through there's a ancient Chinese framework called San Tsai. And the Chinese believe that there are three types of luck. They called it heaven luck, earth luck, and human luck. >> Okay. >> So, heaven luck is the luck that you're born into, right? It's the country you're born in, it's the year you're born, it's who your parents are, all those things. It's the the luck that's completely outside of your control. >> Yeah. >> The earth luck is the environment that you place yourself in. So, some environments are luckier than others, right? Like, you can The poker analogy is um is table selection, right? Like, there are better and worse tables to play at in terms of like increasing your chances of winning.

2:19 >> Okay. >> Right? So, like, the city you live in is a way to increase your earth luck. You can put yourself in an environment where good things are more likely to happen. And then human luck, which is what we're going to talk about today, is about navigating the probabilities of decision-making, right? It's like, there's always uncertainty around anything you choose to do. So, how do you develop an awareness and a consciousness of that uncertainty, and then how do you make good decisions in spite of it? >> Okay, so can we can I just take a second to like unpack those three things real >> Yes, I would love that. >> Okay, so I love I love that that's a great sort of three buckets to put things in. So, heaven luck, no quibble with, agree, and actually I was going to say in there's sort of two ways that I would

3:04 think about in the sort of colloquial sense, am I lucky? It's not just am I sort of at the right tail of my possible outcomes, right? That that were available to me, but it's also I was lucky with all sorts of circumstances of my birth. Right? So, so I always think about like, what if I'd been born in 1600? >> Yes. >> Right? [laughter] Um I would have been property. >> Yes. >> So, that would have been bad. >> And and your talents would have been wasted. >> Right, exactly. Okay, so so that's the heaven luck. So, agree completely. I think that we really need to focus on that in terms of how we understand how people's lives turns out, right? What environment you put yourself in means that you're changing the distribution of outcomes. That that

3:49 actually doesn't have to do with luck, right? So, any environment that you choose has different a different distribution of outcomes that are associated with it. That's true of like what city you choose to live in or uh what career you choose, uh what mate you choose or partner, um that's going to all have like a different distribution of outcomes that are associated with that. That's actually under the skill category, right? So, when we think about it, there's only two things that are going to determine how your life turns out. One is luck. We can't control that, but that's like the heaven luck. But, we can think about heaven luck in the same way. Heaven is like you're you're put on Earth, which is like this environment, and you're born into a certain environment, right? But, that's true of any environment that you end up

4:35 with it. That's really like heaven luck. The environments you end up with though, that's the quality of the decisions you make. >> Right. >> And the quality of the decisions you make is the other thing that determines how your life turns out because those decisions change the distribution of possible outcomes that are available to you. If you make bad decisions, they're going to make it more likely that you end up with bad outcomes. Um if you make good decisions, it's going to be more likely that you end up with good outcomes, but none of that is a guarantee cuz, you know, we can go through a green light and get in an accident and I've run some red lights, accidentally of course, but I've run I've run the red lights and gotten through just fine. >> The way I think about it is there's kind of these macro decisions that once made they kind of determine

5:22 the context of hundreds or thousands of other micro decisions, right? So, it's like who you marry, right? Like that is kind of a macro level decision that is going to set up the context for hundreds, thousands of other decisions that happen throughout your life. >> Yeah. So, now we can take that concept of heaven luck and say, "Well, that's really what Earth luck is." Right? It's just that we're aware that we hopefully are aware that we're making the choice about what environment that we want to be in. And depending on the environment we're in, there's going to be a different different probability that sort of good things happen to us and bad things happen to us. And what we're trying to do with our decisions is improve that distribution in our favor. >> Right. First, a quick word from our sponsors. This episode is brought to you

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6:53 the idea, it's in the starting, and Shopify removed every excuse not to. With Shopify, nothing stands between your idea and a real business. So, go make it one. Start your free trial at shopify.com/solved. Start your free trial at shopify.com/solved. And we're back. Welcome back to Solved. So, speaking of which, let's get into Thinking in Bets. So, why should people think about their choices in terms of bets? >> Because they are. >> [laughter] >> Explain that. >> Okay. So, whether you know it or not, every decision that you've ever made has been a bet. So, we can take this like into a simple like poker example, right? Here I'm going to use money or chips because that's what you bet in poker. If I have a hand, um I could choose to play

7:40 that hand or not, right? Um if I fold, I'm making a bet that that would have not been a good choice for me, that I would have moved away from my goals. Um but maybe that's not true, maybe it's not, right? But I have to make my best guess of that. It's called a forecast. >> Yep. >> Um and if I play the hand, I'm making a bet that this is going to be what we would call positive expected value. In other words, this is going to have a positive return on the money that I'm going to put into the pot. And I'm saying I think this is a better way for me to invest my money than other choices that I could make, which includes choices that I make might make in the future. So, if I invest in this hand, that may take money away from my ability to invest in hands in the future, right? Which kind of gets at the point you were making before of like when you choose to

8:26 marry someone, then there's all sorts of things that happen after that, right? So, there's some path dependency to how that's going to affect your future as well. So, when I make a choice, like I choose to raise, what I'm saying is that my forecast is that this is going to increase the chances that I make money on this hand, that I have good things happen to me. Now, we can take that into who do I marry, right? This is a bet as well. I have a set of values, um and people have different things that they want to get out of marriage. So, whatever your values are, you've sampled the world, right? So, you you have some sort of model of what you think is going to be a good partner for you. You know what your values are, and at some point you're going to have to make a choice, and that's going to be a bet. Um I'm going to bet that this person

9:13 is going to help me to achieve the things that I want out of this marriage more than other options that I might have available to me now or in the future. Because if I marry this person, that stops me from marrying somebody else >> Yeah. >> later. And so, it's always a sort of comparison between options and which thing is the best thing for me to invest in. But there's a hitch, and this is the hitch that's the big problem is that when we're making those bets, it's under the influence of uncertainty. Like it's highly uncertain for two reasons. One is we're not omniscient. >> Yeah. >> Bummer. >> [laughter] >> And then the second thing is just luck. So, I could be all-knowing. >> Yes. >> Right? So, imagine I'm omniscient now. I'm an all-knowing being, and I do know

9:59 that this is the best option in terms of the chances that I'm going to have a good outcome. I still have the word chance in there because that all that means is that that outcome is associated with a set of options. Those options are going to occur at some probability. And when I sort of calculate the payoff across that set of possibilities, that has the highest return than other options I might choose. But it doesn't guarantee I'm not going to get a bad outcome. That that's the influence influence of luck, and that's why these decisions are really bets. >> Yeah. Kind of in some, it's no decision in life is ever 100%. It's also never 0%. It's always some probability in the middle, and that probability is often opaque to us

10:45 due to lack of information and also just chance, right? Like it's >> Right. >> And so, our decision-making is very much determined by um accumulating as much information as possible and like and also I guess rationally interpretating that information when making a decision, but also understanding that like nothing is a sure thing. There's always a chance something could go wrong. >> I think there's kind of two ways that sort of that last bit can go wrong. Um there's two directions it can go. If you acknowledge that the world is probabilistic, right? That whatever you choose, there's going to be some distribution of outcomes. >> Mhm. >> Um they're going to occur at, you know, with some probability. Um and you sort

11:31 of you know, you understand that you you can't know. Like first of all, that that distribution is there and you can't control which outcome you actually observe. Like if I'm 95% to win a hand of poker, that means 5% of time I'm going to lose. Like by definition. And the problem is I don't know which that 5% is. Could it be this time that I'm playing or is it going to be the next time or the time after that? I just know that if I play that hand 100 times, 95% of the time I'll win and five times >> Yeah. >> you know, five times I'm going to lose and I just don't know. So, that's like a a very unsettling fact, I think, for people in general. Like cognitively for us to sort of wrap our heads around this

12:16 idea that like we can't we can't know what's going to occur on the next time. On top of that, what we sort of realize is because we don't have a lot of information, we don't even know what the probability distribution looks like. We're making some sort of forecast of that. We're making it a guess at that. I sort of see that there's two reactions that happen to that. Reaction number one is actually being way overconfident. Like thinking that you know a lot more about what could happen in the future than you actually do, right? Like and you see this all the time with people where they're just so sure >> Yeah. >> that if they, you know, make a certain decision that it's going to work out well, that they're almost they're constantly surprised by these bad outcomes, right? So, something bad happens and they're just like so surprised by it and then they say, "Oh,

13:01 I was so unlucky." >> Yeah. >> It's like not really. Like 5% is going to happen 5% of the time. Like the problem is that they just way overestimated. >> Right. >> Like they had way too much certainty about the way that the world was going to work. So, that's one reaction to it is basically to turn away from the uncertainty and say I know. And I think that's a very common thing that you see um in people, right? So, the other way thing that happens is people are like, "Well, I can't know, so I'm just going to go with my gut." >> Yeah, yeah. >> Right? Like, there's no way to know, so whatever. I'm just going to wing it. And that one is an equally bad mistake. Like, overselling and then just going, "Well, whatever. I'm just going to go with my gut." Um, those are both going to end get you into a very bad place cuz

13:48 you want to land somewhere in the middle, which is acknowledging the uncertainty, but being very careful to at least try to make your best guess >> Yeah. >> about what the outcomes are that might be associated with a choice that you might make and and what the probability of those things occurring is. Um, because here's the thing, and this kind of goes back to like, decisions are just bets. You're doing it anyway. >> Yeah. >> Somewhere in your mind, you have to be making these types of calculations, whether it's explicit or not, whether you realize it's happening or not. Because when you choose to get married to somebody, somewhere in there you're saying, "I think this is the best match for me compared to other people that I might be seeing. I can imagine the different outcomes that might come from this, and I think I'm more likely to be happy with them." Or like in the simplest sense, right? When you're

14:33 trying to decide when you're supposed to leave the house to get somewhere, you have to be making an estimate of how long it's going to take you to get there. Number one, number two, how bad it is if you're late. >> So, it's funny cuz I was actually going to use this example because this morning I came here late and >> Oh. Okay, let's talk about it. >> Yeah, and I was it's funny cuz I was thinking about it this morning in terms of bets, right? So, it it's I I I had a lot of work to catch up on this morning. >> Yeah. >> And I kind of sat there and I was like, "Okay, I can leave 10-15 minutes late. Probably nothing bad is going to happen. Maybe I raise my chance of getting a ticket or getting in an accident by like 1%." >> Yeah. >> But, I also get that extra 15 minutes to prep and to get some work done and and everything. And so, there's like this this cost-benefit analysis that kind of

15:20 goes on your head, but it's our minds don't seem like very defaulted to think in this manner. Like it's Right? Cuz it's in my head, it's immediately like like "Well, I leave all late all the time and I drive fast all the time, so I'll be fine. I was fine every other time, so I'll be fine this time, too." Right? Which is probabilistically not true. Like it's if I'm going to if I'm going to drive recklessly uh every time I leave the house, statistically at some point, I'm going to get in that accident. >> Yes, the risk accrues. >> Yeah. [laughter] Yes. >> The traffic example is such a good example, cuz So, this is what I would ask you. This is what I'm saying, like how much risk can you afford? Like imagine that you were making that same decision this morning. And And what you were talking about, by the way, is an opportunity cost problem. Right? So, if

16:06 you choose to leave where you're going to get here on time, you lose the opportunity and the gains that might come from the work that you wanted to catch up on. >> Mhm. >> Right? So, this is like these are the types of trade-offs that we have to make all the time. Imagine you were in a situation, though, where the thing you were going to, like if you were late, it was the end of the world. >> Yeah. Like >> When would you have left? >> Like hours earlier. >> Right. So, [laughter] So, this is This is kind of what I'm saying about like we don't realize that this is the way that all decisions work, but I think this traffic example is a good way to get people to think that under the hood, this is what's happening. Is you're saying, "Look, in my experience, this is how long it takes me to get there." And there's some sort of average and a distribution around that average, right?

16:52 So, there's like your fastest day and your slowest day when there's an accident on the 10. >> Right. >> Right? Which is super annoying, but whatever. >> So, to tie this back to luck, I think what all what a lot of people experience is bad luck is say they overestimate their ability to get to LAX and get through TSA, it's all backed up, there's something going on, that flight that is actually super important they do miss and they say, "Ah, this was bad such bad luck." Without realizing that there actually was a probability distribution of like all of their behaviors that they chose up until that point that they just weren't consciously thinking through. >> This is where like we just need to sort of separate out like sort colloquially how we think about

17:38 luck versus um the way that say in an academic sense you might think about this idea of luck. So, two things could be true. One is you attribute something to bad luck that was actually bad decision-making. That's what you just described. >> Yeah. >> Right. So, if you really can't miss and you leave at the average time, right, for travel, um hey, if you miss your flight, that's not really bad luck in that sense. Like you you made a decision that that where you know, some percentage of the time that was actually a percentage that you couldn't tolerate. Uh you were actually going to miss that flight. Right. So, so I would call that bad decision-making that you're actually

18:24 attributing to luck, right? But you could leave lots and lots of time and some crazy thing could happen. Like I think I remember one time like I left a ton of time to get somewhere because I was getting my son to a football game. So, it was in LA and the presidential motorcade >> [laughter] >> I mean, it would have been faster to walk. >> Yeah, yeah. >> Right. And so, obviously, like we didn't we were late and whatever. Right. So, I I made a reasonable decision in this thing that was like completely unknowable to me. >> Mhm. >> Right. Like at that time there was no way for me to know that um that this was going to occur and it was going to be like right in my way and then it didn't matter what data I had in terms of how long it took me to get there. Like I just wasn't going to get there, right? Colloquially speaking, we

19:10 would call that bad luck. Right. Because I made a good decision. >> Right. >> I left enough time. I thought about the distribution and I was at a good end of the scale for what my values were that day and how much risk I could tolerate. And then the president decided to I think this was like in 2009 or something like that, right? Like the president just decided to screw me up. Okay. >> Thanks, Obama. >> Thanks, [laughter] Obama. Right. So, let's call that in the colloquial sense bad luck. But if we step away from like, well, what really is luck? Remember, it's just a force of nature upon you. I would just call that luck. >> Yeah. >> Like there's volatility around anything that you do and sometimes you might be at the very, very far left tail of that outcomes. Right? This is like way, way, way, way out at the tail. And it's just in the

19:57 mix. And here's the thing is that I think I really, truly believe this, that you live a happier life if you stop putting the word bad and good on the word luck. >> It's just variance. >> It's just variance. And not only do I think you're happier because you're not sitting there thinking like, "Woe is me. Like look at this bad luck. Like da da da da." You know, I think that when you sort of get caught up in this sort of bad luck thing, you know, you ruminate and you sort of, you know, you're like droopy drawers. You know what I mean? >> me? Why me? Like what did >> What [laughter] did I do to deserve this?" And I don't think that's a particularly happy way to live. And if you um start thinking that your good that that the good luck is going to continue to come, that's going

20:42 to cause you to make some pretty bad decisions going forward. So, so there's kind of two reasons that I think that it it's really way better for your life to get out of this sort of good and bad thing when it comes to luck. Reason number one is that I actually don't think it's possible, even if you accepted the idea of good and bad luck, to know in the moment whether that was good or bad luck. Because I think that you need that to develop over time because there's this path issue, right? >> Right. to whether that was good or bad luck. I'll I'll give you an example actually from my own life of this problem. So, at the end of my first time in graduate school, cuz my first time in graduate school I did not actually get my PhD. I had done 5 years. So, when when people leave graduate school it's usually around their qualifying exams, otherwise they're called like major area exams, right? So, this is when you're

21:28 showing enough expertise that they say to you, "Okay, we're going to allow you to know now go and pursue your doctorate." It usually occurs like 3 year 2 and 1/2 3 years in. It's a really big hurdle, um and a lot of people leave at that point. I did not. I stayed, um and I actually did the full 5 years and I was had my dissertation research done and I was on the job market. I already had job talks lined up, right? So, like I'm really far down the road, but I'd been suffering for about the last year of graduate school with a chronic, um illness that then became really, really acute. And I landed in the hospital actually for a couple of weeks. So, I had to cancel all my job talks and pull myself off the job

22:14 market. Now, you can imagine at the time I was like felt like this was really bad luck. I was very like, "Woe is me. This is so terrible. I Why does this happen to me? Why is this happening to me?" Right? Like, you know, honestly like in retrospect I don't think it particularly helpful, but also I don't think it was bad luck in retrospect. So, I then leave graduate school. I take time off. So, I'm going to now take a year off and go back out on the job market the next year. And I had been there on a fellowship. And as I told you before, my dad was a school teacher and my mom didn't work. So, as you can imagine, nobody was like, "Here's a bunch of money while you recuperate." And when you leave graduate school, NSF says, "Oh, by the way, your stipend's gone." >> Yeah. >> Okay, so now I have no money. So, that's

23:00 actually why I started playing poker because I wanted to do something um that was like, "Okay, it's not restarting a new career, at least I didn't think so at the time. Um it's very flexible hours cuz I didn't feel very well." >> Yeah. >> So, committing to a 9:00 to 5:00 would have been really hard. >> Right. >> Right? Um and so it kind of like ticked the boxes and then like, "Okay, I'll just do this for a while and then I can leave and I'll go back to graduate school and I'll go back out on the job market next year." Um and obviously, I started playing poker and I kept playing poker and I didn't go back to graduate school for quite a while actually, for a couple decades. >> Yeah. >> Um to go finish my PhD. But like, in retrospect, if we're going to use the word good or bad, wasn't that good luck? >> Yeah. >> Because look what happened, right? Like, I became a professional poker player

23:47 before it was ever on television. Um you know, by 1999, I was the winningest woman in the game. I won World Series of Poker bracelets and the Tournament of Champions and like, then all of a sudden in 2002, I was on TV. And then we can even take it further, which is ending up on TV is what got businesses to pay attention to me and they then they asked me to get in touch with them and like come speak to them and they didn't know necessarily I had the background in cognitive psychology, so I started merging that together. Um and then I started building this business of going giving talks at the intersection of poker and cognitive psychology and then that allowed me to develop a consulting business where now I consult um uh mainly in finance, but also for startups in those two worlds because the finance people I work with are in venture, so that obviously um is a

24:33 reasonable crossover. I got back to teaching, which I absolutely love. I would have never had the audience for the books that I wrote had I not been on television. I would just been another academic writing a book, right? But now I'm like a poker player writing a book. So, look what that did. And so, you know, so on so forth, right? So, the thing is this thing that I was wallowing in. Wallowing in it at the time about my bad luck and why does this happen to me and so and so forth. You know, with the passage of time, I would completely re-judge that. >> Yeah. >> So, why not just not judge it at all? Wouldn't that be happier? >> Yeah. So, you have this concept of resulting, right? Which is >> Yeah. >> It makes sense that if if if everything is kind of a probabilistic distribution,

25:18 then you can't really judge the quality of a decision based on the quality of the result. >> Right. >> But, the point that you raise with that story is that like what is the result, right? Like you can go and redraw the goal posts 20 different times over 20 years and define a different result as the result of that decision. And you know, one of the things I've written before is that um is the concept of deserve is like itself often just counter counterproductive for almost any kind of conversation. Um and I think it's for a similar reason. Like it's just you don't know. Do you deserve for good things to happen to you? Like do I deserve good or bad things to happen? I don't know. I don't know.

26:05 >> You know what? That's so that's interesting. So, two things there is that now I have to go off and think more deeply about what is the result. >> Yeah. >> Um not something I have written about and now you have my mind turning. So, now now [laughter] I'm going to be distracted because that's such a good point. So, I'm going to I'm going to go mull that over now. Um but I think you're so like right in the zone there with that idea of deserve because when you're judging something as bad luck, what are you saying? I didn't deserve that. >> Exactly. >> Right? >> Yes. >> So, I think that's like such a deep point is that when we get into that idea of like what what do we deserve to have happen to us, right? Like it's I just think it's like a very a very unhappy way to live. >> It is and it's and it it's it's unhappy

26:52 regardless of which you go. So, if you are a person who believes everything good should happen to you, you deserve everything good in the world, that's not going to lead you to a good place. >> going to be sad a lot. >> [laughter] >> you're going to be very disappointed. But if you're also if you're a person who believes you don't deserve any good things to happen to you, that's also going to take you to a very dark place. So, it's almost like the only safe place to be is just to just be like, I don't know what I deserve. >> I think that's exactly right. And obviously if you feel like only bad things are going to happen to you, it'll be a self-fulfilling prophecy anyway. That gets you into the why should I try? >> Yeah. >> Here's one of the problems is that if you sort of automatically say, "Oh, that was such bad luck." You're not going to go back and look at what the quality of your decision was. If you say that was good luck, you're also not going to go

27:37 back and look at what the quality of your decision was. Both of those are true. Like so, once we start to sort of make this judgment. >> Yeah. >> Right? And instead we should be asking, "Well, what was the influence of luck?" Neutral. "What was the interest influence of luck and what was the quality of the decision that I made?" And look at sort of look at that as a as a question. >> Yeah. >> Right? Um because here's the problem. Just saying I got bad luck isn't going to make your life better in the future. Right? Because if you just say bad luck, then there's no examination. There's no looking back and saying >> agency >> Yeah. >> And you're you're you're going to lose an opportunity to learn. What was the decision that I made? What were Did Did I choose something that had, you know, a a probability

28:24 distribution that actually wasn't very good for me. >> Yeah. >> Right? Compared to other options I could have chosen because if I can figure that out, then the next time I make the same decision, my forecast will be better. >> Again, going back to that idea of like there's only two things that determine how your life turns out, luck and the quality of your decisions. What we really want to focus on is decision quality. >> Yeah. >> And say, "Look, luck luck is there in the background. It's going to happen anyway. And once we start getting caught up in this like, well, I just got so unlucky, we lose sight of, well, what was the quality of the decision in the first place?" And I think part of the reason is because in the moment cognitively it feels better to say it was bad luck

29:11 than to say it was a bad decision. Right? Like >> It's Yeah, it's it's a huge natural human bias, right? It's it >> actually called self-serving bias. There's a name for it. >> [laughter] >> Yes. It's uh if if something great happens, it's because I'm a genius, and if something bad happens, it's cuz the world's awful and I'm so unlucky. And >> So this is what we can think about, right? It's like, you know, you can go search Wikipedia for list of cognitive biases, right? And you're going to see like this ginormous list, right? Cuz there's a lot of dissertations that people have to write. >> Yes. >> [laughter] >> So Here's Here's a lot of individual biases resulting among them, right? And uh self-serving bias. Um but the thing is that I I think that for like the most parsimonious way to look at it actually comes from uh Daniel

29:58 Kahneman, which is that what we're really all sort of cognitively trying to accomplish uh is to advance our self-narrative in a positive way. >> Yes. >> Right? Like we want to feel good about ourselves, and every time we're interpreting things that are happening in the world, um we want to feel a little better about ourselves. >> Yeah. >> At all times, which is fine, and I wouldn't ask anybody not to do that, right? Like cuz otherwise you get sad and depressed, and I don't want anybody depressed. I want people to be happy. >> Right. >> Um so of course we want to feel good about ourselves. But the question is like which self? Which I know sounds weird, >> [laughter] >> right? Like what do you mean which self? Me myself right? >> Oh, but there's different versions of yourself. There's the version of you now. And then there's all the versions of you

30:44 in the future. And this is the real cognitive problem is that we have this constant street fight happening between us in the now, present us and future us. And that that is like the Jets and the Sharks, man. This is like a battle. >> Yeah. >> And what's happening when you say, "Oh, that was bad luck." is that you're protecting Right? Because if present you has to say, "Well, maybe it wasn't bad luck. Like me maybe I made a bad decision." Now you have to actually be opening to open to going and checking. >> Yeah. >> And you know what you might find out? You might find out that you made a bad decision. Does that advance yourself narrative? Uh not right then. >> Yeah.

31:29 >> Right? And that So now you now your self narrative is going to take a hit. You you have to take a step backwards and we don't like that very much. Right? But if you can spot that error in your decision-making guess what happens to all the future versions of you? They do better. Cuz going back to that idea of Earth luck right? Like I now get to make decisions that are going to put me in better neighborhoods. >> You you you just triggered a kind of a an epiphany in me, which is which is there's all these platitudes that you hear all the time. It's like everything happens for a reason or like the universe has a plan for me. >> No, it doesn't. >> Right? It's it's just all this like kind of gobbledygook, but like it it it's designed to make people feel better in the moment, right? When some when there's either a bad outcome or they

32:15 made a bad decision. That differentiation between present self and the future self, right? And it's like it the epiphany I had is that a lot of a lot of these kind of colloquial platitudes, I think they kind of evolved as mental tools to allow people who don't understand any of this stuff to be more adaptive when something it go their way, right? Because it's like if something bad happens and or you screw up or you make a poor decision or whatever, and you you're not a probabilistic thinker, you you're not a Bayesian thinker, like you don't you don't reason in these ways, it makes sense though of like telling yourself self something like, you know, God has a plan. And and and and it's this happened for a good reason. Everything happens for a reason. >> Yeah. >> That like mentally primes you to look

33:01 for those lessons and be aware of maybe the positive result that has not yet occurred. And whereas if you did not believe in that, you would just be kind of wallow away and be like, why me, poor me? >> I would say So, I'm going to agree with you partially. Um yeah, so I can understand what you're saying about it gets you to maybe think maybe some positive things will happen in the future. >> Yeah. >> But what it doesn't do is get you to look at your decisions. >> No, it doesn't. >> Right? So, that that's the thing [laughter] I want you to do. >> Yes. >> So, going back to this idea, of course I want you to feel good about yourself. I want to feel good about myself. I want to feel awesome at all times, right? Like I'm I'm like everybody else. If you can shift your mindset to say like, okay, I'm really going to take

33:47 care of future me. >> Yeah. >> I want future me to create better earth luck. And the only way I can do that is by choosing better environments to be in, and I can only do that if I examine the decisions that I'm making and try to figure out when I've made an error or when I've made a really good one. Because if I've made a really good one, I want to repeat that. If I made a really bad one, I don't want to repeat it. I want to get the lessons from that. So, I always have to be going back to that. Right? And instead of just saying, oh, this is bad luck, which makes me feel better now, I can say I'm one of those people who's willing to go look and find mistakes cuz I'm taking care of future me. And then you get to still feel good about yourself, right? So, you get the benefits of all those versions of yourself that are going to benefit from the examination that you're

34:32 doing and you don't have to feel bad about yourself cuz you know you're taking care of future me. So, you can kind of think about it as like you know, do I want to like hang out and like scroll and whatever or do I want to go to the gym? And I really don't want to go to the gym today. But why do you go to the gym? Because you're taking care of future you. And then you feel pretty good about that choice, right? So, do that with your decisions, too. If you can get yourself to feel good about your choice to go to the gym when you don't want to because you know you're taking care of all the future versions of you, particularly 80-year-old you who wants to be able to like go up the stairs and carry groceries, right? Then think about that with your decision making also. Right? Like shift that and then we don't get in that quandary of wait, do I have to be depressed in order to become a

35:18 better decision maker? No, you get to still feel good about yourself. There's actually a for people a great book that I would recommend from Hal Hershfield. It's called um Future You. Um he's just done a whole bunch of work in this space and uh you know, it's really leveraging this concept of mental time travel. Um and here here's the thing, like we don't have an actual time machine, which is a bummer, but we can imagine the future. Um and that is actually a big distinction between us and like a pigeon. >> Yeah. >> So, we can we we are as far as we know the only species that can imagine beyond our own death as a matter of fact, right? So, like we have this really powerful tool available to us. And so, just just constantly ask yourself which selves right? And start saying all those selves

36:04 that are going to be in the future are the things that I want to take care of and I'm going to get in my mental time machine and I'm going to travel over there. I'm going to look at how do I think their life is going to turn out >> Yeah. >> [clears throat] >> given the choice that I'm thinking about making this minute. >> It It's interesting cuz this kind of this brings a lot of themes of this episode full circle in that I think of what we experience as luck is very perceptually based, >> Yes. >> right? So, it's If you think about heaven luck, it is imagining all of the alternative contexts and situations you could have been born into, and then the one you were born into, and then depending on your ability to imagine better or worse situations, you are going to define yourself as having good or bad luck. >> Yeah. >> I think it's similar in our decision-making as well. In some ways, it's it's kind of having a lack of an

36:50 imagination of just not being able to imagine the alternative futures or the alternative past, >> Yeah. >> right? To orient yourself towards, you know, what actually happened. And so, if your imagination is kind of biased in one direction or the other, right? You're only thinking about the worst futures that you could potentially have, or you're only thinking about the worst past that you you could potentially have, you're not going to have uh you you're not going to have clarity around, you know, making these decisions, making these choices moving forward. >> So, there's actually uh so, that actually gets into like if you're if you're only imagining like sort of these worse for you know, versions of the future, um that that now you're getting like really deeply in into the work of Daniel Kahneman and Amos Tversky. So, Daniel Kahneman won a Nobel Prize actually for

37:35 work on just that >> Yeah. >> problem. Um not from like a clinical psychology perspective, but from a behavioral economics perspective. Um so, uh for those people who've heard of prospect theory, which is what he won the Nobel Prize for, Tversky would have won it as well, but he had passed away by then, yeah. When we think about prospect theory, what it shows is that we uh experience losses much more keenly than we experience identical gains, right? So, uh you can think about it this way. You know, there's arguments about whether it's like two to one or 1.5 to one, but we can think about it this way, that if you lose $50 at blackjack, >> Yeah. >> it's going to feel about as bad to you as winning $100 at blackjack feels good. >> But then why is blackjack so fun?

38:21 >> [laughter] >> Why do I like it so much? >> you lose though? That's the question. >> like it so much? >> when you lose? [laughter] So that gets into that like, why are we thinking like, "Oh, it's bad luck. It's bad luck." right? Um so now we can sort of take that into the future. >> Yeah. >> And we can talk about um what's called loss aversion. Um and this kind of follows from this central insight of prospect theory that when we're making choices, right? We know that there's a distribution of outcomes that could occur at some probability, right? And what we're really supposed to be doing is what we would call taking a weight of a weighted average of those things. So any of the outcomes have some payoff associated with them um and some probability and we can multiply those things together and we can come up with what we would call

39:06 an expected value, right? Like so uh what would you could think about that as a return on investment um but what we know is that for any um prospective return on investment we could end up getting a lot more or a lot less. We we're going to end up in there. That's just going to what's going to happen on average in the same way that if you flip a coin yeah, you could get three heads in a row on a fair coin, but like after 10,000 flips you're going to end up with 50/50. So this is kind of like a an abstract concept, but this idea of expected value is really important um and it's particularly important uh sort of to the resulting concept because on one flip of the coin I can't get 50% heads, right? So we misinterpret those outcomes a lot. But what what this insight about loss aversion is is that when we're sort of on the go forward and

39:51 we're thinking about do I want to choose option A or option B is that sort of independent of what the expected value is, independent of how much that on average is going to get us to either move toward our goals or away from our goals, we'll tend to choose the option that has uh the lowest sort of absolute loss associated with it. So in other words, we're living in kind of those the possibility of those bad universes and we'll pick options that have sort of have maybe a less bad universe associated with them even if the gains must might be a lot greater. >> Someone who's really loss averse, for example, would never start a company. >> Right. >> Right? They're less likely to quit the job that they hate even though they hate

40:38 their job because they're so focused on this what if I take the new job and I hate that, too. Right? Even though the chances of a better future version of themselves are greater if they were to take that risk and quit. Right? So, it's not just that like, "Oh, no, like it's really you know, it's sort of bad psychologically speaking like in a clinical sense like for your mental health um to be living in those bad you know, universes that might occur in the future, but it also makes you make bad choices. >> Mhm. >> Right? Like it it makes you choose things that are going to make your your life worse on average because you're not quitting the job you hate because you're so afraid that the new job might turn

41:24 out poorly, also. >> So, how do we counteract that? >> [laughter] >> I you said before something about, you know, if you don't think probabilistically or like a Bayesian. >> Right. >> Um so, let me just um add some nuance to that. >> Sure. >> Everybody thinks probabilistically and like a Bayesian because it's happening under the hood. So, the question is if you don't think explicitly. >> Right. >> So, I want to just sort of think about what's implicit and what's explicit because part of the way that you solve a lot of these problems is to make that explicit. >> Explicit, yeah. >> Right? And this is something really important and something I teach in my classes that um that you have to uh not allow these things to just run under the hood. And the reason is that um those forecasts that you're coming up with,

42:09 the way that you're sort of like forecasting what you think the probability is of things occurring in the future, what you think the outcomes might be associated with those and so on and so forth. Sometimes it's right. >> Yeah. >> But sometimes it's wrong. And if you leave it implicit, you can never figure out which. Right? So, making it explicit actually is going to help you to spot errors. You yourself spot errors. It's also going to help other people to see what your thinking is and they may have really good input, right? So, you can get other minds in there. So, so when we think about that kind of hidden information problem, right? Like we're not omniscient, well, uh if we make it explicit and we get other people to sort of look at our thinking, we get closer to omniscience. >> It it also kind of solves the self-serving bias a little bit. So, my wife loves to make predictions and whenever she's right, she always remembers and she's like, "I knew it. I

42:56 told you this was going to happen." And I always tell her, I'm like, "It's funny, you never remember the time the predictions you made that never happened." And she's like, "Oh, I didn't make those predictions." You know, so it's the making it explicit is important because it documents your predictions >> Exactly. >> that you can actually objectively go back and be like, "Okay, why did I think this was going to happen or why was I wrong?" >> Yeah, so that's actually an incredibly important point because um making it explicit improves your improves you in a variety of ways. One is the act of making it explicit has been shown to make your uh decisions more accurate. >> Yeah. >> It reduces error. Just the act of doing that right? >> Interesting. >> Number two is it allows other people to examine what you're looking at. So, they're more likely to help you and sort of fill in the gaps in and and give you different

43:42 ways to think about it, uh spot errors in your thinking. Um and so that's all kind of in the moment. So, we've got you're more likely to be more accurate, but then also other people you can bring other people into the equation and you can you know, inch >> Yeah. >> closer to omniscience, like inch closer to omniscience unfortunately cuz they're not omniscient either, but it helps you to get different perspectives on the thing. But then the accountability thing is really important. >> Yeah. >> Right? Because now it actually gives us a way to go and say, "Here's what I was thinking. Here's how these things turned out. Let me go back and look, right? Let me think like, was I anticipating this? Did what How How was I thinking about this? Did I um Did I actually foresee what happened? The things that I learned after the fact, could I have known them? If I could have known them, why didn't I

44:28 include it in the first place? So, maybe I should include that going forward, right? It's such an important point, this sort of accountability piece. >> Mhm. >> Because not only does knowing you're going to be accountable improve the quality of the of the of the decision that you make, because just the knowledge that someone might look at it in the future um makes you less biased. It's a It's a really good debiasing tool. But, then you also get to close the feedback loops, which actually does make you more accurate as well. >> Do you recommend keeping like a decision journal? Like, is this something Is this some sort of regular practice that normal people can do on a day-to-day, week-to-week basis? >> So, I love that question. I don't think you need a decision journal, cuz I think if you make a good decision, you'll create a record of it anyway. So, journaling sort of feels

45:13 like I make a decision and then I journal about it. >> Yeah. >> Um so, I just like have an aversion to that term for that reason, cuz I think any good decision process is going to produce a record. >> Yeah. >> How much, how deep, how big the record is is going to depend on uh how much time the decision deserves. And different decisions deserve different amounts of thought that are put into them. >> Um and the way that we think about how much time and effort and attention am I supposed to put into this thought, we want to think about, again, going back to tradeoffs, the more effort or time that I put into a decision, I should be increasing the accuracy of the decision, right? So, what this brings us to is like, well, how tolerant of a am I of error? Because obviously

45:59 every decision that I ever make, I can't put like full process into. I don't I shouldn't make every single thing explicit. I shouldn't be making probabilistic distributions about whether to brush my teeth in the morning. I hope you're not doing that. >> [laughter] >> Okay. So, because if we did that, we'd never get down the stairs. Right. Right. Right. Like you'd have to be like creating these distributions for like what shirt you want to wear. Like it would that would be nuts. All right. So, how do we actually figure this out? Well, again, through this frame of how much error can I tolerate. And that gets you to two really big ideas. Long-term impact, not short-term impact. Long-term impact of the decision and how easy it is to reverse the decision. Um because being able to reverse the decision or quit what you're doing reduces impact. So, they're actually sort of the same thing. We're just sort of putting it

46:44 into two buckets. So, I just think about this is like the intern versus CEO problem or the dating versus marrying problem. Right. Right. So, if you're hiring an intern and they don't work out, it's probably not going to have a really big impact on your um on your business in the long run. It might feel bad in the short run, but we don't care about short-term us, right? We care about long-term us. Um cuz that creates a lot better short-term us's in the future. You know, it's not going to be a big deal if it doesn't work out. So, how much effort should you put into that? Probably not very much. Right? You should uh have a couple of boxes that you tick. Um you know, reasonable references, you know, whatever. Uh and go ahead and hire them. You might end up with like 20 people that are perfectly good. But CEO, mm. Better put a lot of time into that.

47:29 Dating, if you have a bad date, whatever. Right? Marrying, well, all right. So, we can sort of think about those things in those categories, right? So, so basically what you want to ask yourself is two questions, right? Um the first one is just if I you know, if I sort of imagine this not turning out well in the future, how big of a deal is that? And if it's a small deal, don't spend a lot of time. If it's a big deal, you should be creating a pretty strong record of why you're deciding what you're doing, right? You should be doing these forecasts, you should be thinking about the outcomes, you should be comparing options, you should be getting other people's input, like all of these things. Like with my clients, we create decision rubrics, right? And then we're creating a record and we're quantifying their qualitative opinions and we're doing a whole bunch of stuff. But these

48:16 are for really big decisions where they're slinging millions of dollars into companies. For little decisions, I would tell them not to do that. Like please don't do that for small decisions. And then the other one is, you know, sort of how quitable is it? So I'm going to urge people to sort of lose that one-way door, two-way door analogy. The reason why I don't like it is it suggested it's binary. You can either quit or you can't. It's not true. You can quit anything. Just some things are a higher cost to quit than others. So it's a very low cost to let go of an intern, um because letting go of someone is quitting, right? So a very low car cost to let go of an intern. It's very low cost to not go on another date with a person or even walk out in the middle of it. Um not a big deal. But it's very high cost to lose a CEO. It's a very

49:04 high cost to end a marriage, right? We can sort of think about it along that range, okay? So now that kind of brings us back to this problem of like, so how do we get someone to actually quit their job? Right? Like instead of being loss averse. Um and it goes into this zone, right? So what we want to start doing is notice that what what I'm asking you to do in that situation is to say, "What does the future look like for this decision? Is it going to be a big deal? Is it going to be a big cost to reverse the decision?" You want to step back and start being explicitly probabilistic in your thinking when you're thinking about should I stay in this job or go to a new one as well? Like it's sort of a very similar idea of how do we actually make these things probabilistic and how do we

49:49 get into the future? So you want to combine those two things and basically all sort of good decision hygiene. I actually did this with someone who really hated their job and they had a new job and they were talking to me for advice about whether they should go to the new job. They were an ER doctor and there was a whole bunch of things that were going on which where they were just had been unhappy for many years and they now had an opportunity to go work for an insurance company help them evaluate claims, right? So, they described to me what was going on in the job that they were in and honestly got super confused. They said I was like you've hated it for years. Like why aren't you I don't I'm I don't get it. So, I said to them well, what's the issue? Like why don't you want to go take this new job and they said that sentence. What if I hate that one, too? I wanted to take this person who obviously under the hood the probability

50:35 is occurring. Under the hood they're Bayesian, right? So, let's make it explicit and I said, "Okay, let's imagine a year from now and you're in the job you're in. What are the chances that you're happy?" Right? So, I'm just moving them into that kind of think about future you and let's think about that probabilistically. And they said uh zero. >> [laughter] >> They had like years worth of evidence, right? I said, "All right, so imagine you take the new job and I I understand that you're worried it might not work out. Okay, but imagine you take the new job and it's a year from now and what are the chances that you're happy?" And they said, "That's hard for me to guess cuz I haven't taken it before." I go, "Okay, just give me your best guess." They said 50/50. You know, which is an answer you often

51:20 get, right? And I said, "Oh, is 50% greater than zero?" >> [laughter] >> And she said yes. And she actually literally quit the next day. >> Wow. >> She had been like agonizing over this decision for really years. I mean, she this was a new job offer, but she had been thinking about leaving for a very long time. And when I just put it in those terms, it was like it just >> It It really is funny how the the loss aversion and the emotions that are wrapped up in it. And of course, you get stuff like identity and you know, fear of change and all this stuff. Like it all gets wrapped up in it and it it muddies that under the hood kind of unconscious Bayesian thinking. It's funny, I remember back when I was thinking about trying to start my first business and it was middle of the 2008

52:06 crisis. Job market was in the total gutter. Yeah, it was like total total dog job market. >> This >> And I was struggling I was getting by with like some odd jobs here and there. I just finally landed like the first real job of my life and I hated it. And I remember sitting there and and I struggled with it for weeks. I remember you know, sitting down and kind of writing out best case scenario, worst case scenario, you know, if I do it, if I don't, all that all those sorts of things. And I remember coming to the realization that the worst case scenario, if I quit if I quit this try to start my own business, it doesn't work and I go broke and then I got to go get go go back and get another job in 2 years. I realized I would that in terms of the job market an unemployed 23-year-old and an

52:52 unemployed 24-year-old are with both with zero job experience, it there's like no difference between the two. Like I'm literally losing nothing by taking another year and trying to do this thing. And not only that, but the job market will likely be better when I come back in a year. And and I remember as soon as I realized that I felt so stupid because I was like I'm actually in a better position if I try this and it fails, you know, for a year because then it's I'm probably going to come back to a better situation and I I will have learned all sorts of things in the process. >> So, here here's the interesting thing about loss aversion and this is what you were sort of feeling in there is that it's it's asymmetric. When we're thinking about starting something, we're very loss averse. We're thinking about the bad things that could happen. We sort of we want we kind of want like a

53:38 guarantee that it's going to work out well, otherwise we don't want to do it, right? Um but we're not loss averse to the option that we're already exercising, right? So like you weren't really thinking about like uh well, what if the thing I'm doing right now turns out really badly, right? You're worried about what if the thing that I'm doing in the future works out badly. Okay, so what that means is that we're not we're not thinking about the status quo as an option, right? So when I'm saying like think about the option that you're considering and like what are the possible outcomes? What are the probabilities of those occurring and then to your point, what would I do if I saw those? Like what would I do in reaction to that? What would the world look like? What would if I did that thing, what do I think would occur after that, right? Like so we're we're

54:24 thinking about, you know, I'm asking you to think about this, but you have to do that for the status quo, too, because you have to have a comparison. >> Right. >> Right? Because what you're trying to decide is should I stay in the job I'm in? >> Yeah. >> Or should I switch? And what happened with my doctor friend is that she was only thinking about the switch and and she was only worried about the bad outcomes that were associated with it and she wasn't even thinking about the option that she was currently you know, exercising, the job that she was already in as something where she should apply the exact same thinking and the same process. So that's kind of number one is that we have to realize that we always have to be comparing to something. And when you're thinking about doing something new, you have to remember to include the status quo in that process

55:09 because the question is is the thing I'm doing good for me and helping to advance me to my goals in comparison to the new thing that I'm thinking about. Then to get out of the loss aversion problem, you have to think about the whole probability distribution and the whole outcome distribution together. And then you have to think, well, okay, but like what's the cost to quit? Meaning if I do this thing and it doesn't work out, like what's the cost for me to stop doing it? And then how bad is that anyway? Like what are the other things that I could do in response? So, the decision no longer becomes like last and final, which is the way that we sort of think about things, which is really funny cuz like if you look backwards, you know that decisions aren't last and final, but we think about forward decisions as last

55:55 and final. You aren't as worried about a bad outcome because you've already planned for it. And if you get an outcome that you don't like, you you're less likely to think about it as a failure. Because it was already included in the mix and you already had a plan for it. So, this kind of goes back to this core idea of luck, right? Which is when you're thinking about an option and should I do this thing? Should I go start my own company? What you're thinking about is there's some distribution of things that could occur. I could end up on on sort of like luck could influence me toward outcomes that are undesirable. It could give me outcomes that are desirable. If I get those undesirable outcomes, which is what makes us afraid to start things, let me kind of live in that and imagine what that looks like. And then I can do two things. I can think, well, okay, if

56:41 I end up there, can I come back? Right? Can I come back to where I am now? Or is there something better that I could go to? Or whatever. Like sort of plan for that. And then you can go beyond that and say, well, let's imagine that I sort of ended up in that world, looking back, what would be the signals that that was how things were unfolding? What would I do if I see those signals? Right? And now you've sort of metabolized those the possibility of those things occurring in advance and it you you sort of get out of this resulting problem because it it's it's just in there. >> It's funny because hearing you describe

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