Seeking Alpha

What Investors Can Learn From Reading Annie Duke's 'Thinking In Bets'

by: Oddmund Grotte

Life is a perpetual state of learning, and learning compounds over time.

You learn the most by having a skin in the game via betting. Ask yourself: How much do I want to bet on this outcome?

Be truthful to yourself and find knowledgeable people that sometimes disagree with you. If you are wrong, it means you go to bed wiser.

Charlie Munger recommends inverse thinking, Annie Duke recommends something similar by looking back from the future via backcasting and premortem.

Being agnostic, adaptive, open, truthful and a student for life should compound both knowledge and wealth.

Introduction and summary

I just finished reading Annie Duke's Thinking in Bets, a book strongly recommended to me by several investor colleagues. Investing, and just as well everyday life, involves a lot of decisions with a highly uncertain future. When you think of it, life is a continuous marathon of decision making, from romance to finance to politics. Duke is a professional poker player, but poker applies strategies and decisions that are equally applicable to business and investing.

I'm always open to read things that improve my knowledge and skills. I have gained a lot of knowledge of my own cognitive biases by reading other books about decision making: Thinking, Fast and Slow and Predictably Irrational come first to mind. I have operated in the stock market for 18 years and I believe I'm fully aware of my own biases, but at the end of the day I need to change my mindset to eliminate them in order to get the best return. Annie Duke also touches upon our biases, but she goes a bit further than the mentioned books: how to make better and rational decisions to minimize those cognitive errors.

Unfortunately, investing involves decisions that take years to pan out. Because we have a limited time until retirement (or death!) it makes a lot of sense to make sure you are investing within a solid and rational framework, both in terms of compounding and how to efficiently withdraw your capital when you need it.

Put short: the book is very good. The only negative is that the book sometimes is a bit repetitive and could be cut a little shorter.

Below you find my personal lessons from the book. Furthermore, in some of the lessons I digress a little by adding some details from other books. I emphasize that this is my very personal viewpoints. Others might disagree and have other takeaways. The lessons are not necessarily ranked in order of importance.

Lesson one: Learning Compounds Over Time

Already in the introduction Annie Duke starts off with what I believe is the best advice of the book (my highlight in bold):

Mistakes, emotions, losing - those things are all inevitable because we are human. The approach of thinking in bets moved me toward objectivity, accuracy, and open-mindedness. That movement compounds over time to create significant changes in our lives.

This is a brilliant statement. The benefits of recognizing just a tiny more knowledge and skill gradually compounds over time. To read, exchange ideas with others, ask questions, be curious and open for opposite/contracting arguments are all contributing to compounding. A boat sailing one degree off-course will over short distances hardly be noticeable, but over long distances the mistake compounds and the boat misses its destination completely.

The benefit is not immediate, but gradual. Duke says correctly that life is a perpetual state of learning and we must expect to change our opinions often, and learning means modifying opinions and ideas that previously was held for granted. As an example she brings forward Samuel Arbesman's The Half-Life of Facts, a book that discusses that most facts we've ever known have been subject to revision as mankind gained more knowledge.

Lesson Two: Seek People You Disagree With

If we're going to improve our beliefs, we'll be better off if we include people and information sources we're likely to disagree with. Who better to raise the possibility that we're wrong, and the reasons?

To compound knowledge, we need to refrain from confirmation bias. It's all too easy to seek a group of people who share the same views as you, be it in investing or politics. Our views need to be challenged and destroyed from time to time to remove our biases. It's hard to learn from history, experience and knowledge if you don't get challenged. Therefore, be skeptical of information that agrees with your viewpoint. Empirical evidence suggests that we are biased to accept conforming evidence (confirmation bias) more easily than conflicting evidence. Unfortunately, being intelligent just compounds the confirmation bias, according to Duke. It turns out the better you are with numbers, the better you are at spinning those numbers to conform to and support your beliefs.

Most investors have biases which lead to "wrong" allocations and thus less total returns: confirmation bias, anchoring, a rigid mindset, not willing to have an open mind or inflexible for other ideas to name a few. I believe the reasons behind the success of Warren Buffett and Charlie Munger are their common sense, rational decisions, ability to change and the removal of errors. Both have the remarkable ability to change their minds when they realize they are wrong, and they have the personality to overcome the biases that haunt most investors. They don't have any biases toward any particular investments or capital allocations, as long as they are within their circle of competence and the allocation makes sense. They don't walk into the office in the morning to just focus on one type of asset or strategy. Both gentlemen realized early in their investing careers that the easiest way to obtain above market returns is to work at their mental biases.

Lesson Number Three: Focus On The Quality Of The Decision, Not The Outcome

It's easy to dismiss a bad outcome as bad luck, and a good one as skill. Usually our thinking gravitates toward the outcome, but the outcome can be completely disconnected from the quality of the decision. Someone who correctly predicts the next recession is hailed as a genius. Likewise, someone who loses money in a bad investment is a bad investor. But how do we know? The only thing to tell is the quality and the process of the decisions. For these exact reasons, I write articles on Seeking Alpha. I can later go back, without using any hindsight bias, to read my thinking at the time. All my arguments are there to see in public, for good or worse. Because I have an audience that often knows more than me, it makes me think harder and longer before I publish. Furthermore, I learn by discussing in the comments section, often with someone conflicting my arguments. All this has been a very fruitful experience for me. Unless you study your decision process, it's very hard to learn from your thinking and logic.

Duke suggests both "backcasting" and "premortem": to look back from the future. When we forecast the future, we risk only imagining the present and the immediate future. Anything further away is not in our focus. Because of this, Duke suggests trying to think backward by backcasting and how you managed to reach a positive outcome. Where do you see yourself as an 80-year old? I assume you want to be healthy and still be active. How did you accomplish that? Clearly, you need to visualize how to eat healthy and exercise regularly. This avoids focus on details, linear thinking and over-planning. Duke refers to several sources of research that confirm the benefits of this method.

Of course, no one is able to achieve only good outcomes. That's where premortems, the opposite of a postmortem done in forensic crime dramas, come handy. A premortem is an investigation into why you didn't reach your goal.

One other method that Duke suggests, among else, is to practice by analyzing the decision before the outcome is known. If you are buying for example IBM, you can go back and look at your rationale a couple of weeks later, a long time before you see the result.

Lesson Number Four: Avoiding Failure Trumps Success?

If we stretch it a bit, a premortem is a bit similar to Charlie Munger's "inverse thinking".

While Munger turns the question on its head, he touches upon a very important aspect: how to avoid mistakes. Why does inverse thinking help? Munger says this avoids stumbling into trouble, mostly by doing less things wrong instead of focusing on doing more things right. Simply avoid or subtract things that do not work. Relevant inverse questions might be:

  • How do I become a terrible investor?
  • How do we make this company less innovative?
  • What makes our products not valuable for the customers?
  • How do I distract my work habits?
  • How do I ruin my finances?

Asking questions like this is of course a bit counterintuitive. Most investors focus on how to win, but perhaps it's more fruitful to learn how to avoid mistakes. As Victor Niederhoffer wrote in The Education of A Speculator:

There are so many ways to lose, but so few ways to win. Perhaps the best way to achieve victory is to master all the rules for disaster and then concentrate on avoiding them.

Lesson Number Five: Truthseeking - Be Objective And Agnostic

We form beliefs in a haphazard way, believing all sorts of things based just on what we hear out in the world but haven't researched ourselves… 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.

Hearing is (usually) believing, according to Duke. We are quick to form opinions by what we read in the news, hear from friends or read on Seeking Alpha. But we should strive for truthseeking. Annie Duke defines this as the following:

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.

How do we find the truth? It's partially already touched upon earlier in the article:

  • Look at the quality of your decision.
  • Be agnostic, i.e. open for other ideas. Warren Buffett once said he considered himself an "investment agnostic".
  • Accuracy is more important than confirmation.

Duke recommends bouncing ideas back and forth within a group that shares your goals. This is how counterintuitive arguments are made and you should be happy for someone playing the devil's advocate.

Lesson Number Six: Betting Forces You To Think - Skin In The Game

Imagine yourself participating in a discussion with a friend of yours. You think we're heading for a recession and banks will fall off the cliff. Suddenly your friend asks: How sure are you? Wanna bet? This usually gives you a lot of reasons to stop and think. Why? Because when you risk something you have a skin in the game and have something to lose. This is why I'm skeptical to all commentators with little or no skin in the game. If they won't put their money where their mouth is, why should you trust their advice? The risk is asymmetric. In addition, betting stops you from forming opinions when you better keep your mouth shut.

If your business is struggling and you call in help from a high priced consultant, don't expect much sympathy if it turns out nothing helped. A lot of businesses are built around "helping" others without having anything at stake. If you have read Nassim Taleb's Skin In The Game, this is of course no surprise to you, a brilliant book.

Duke quotes an experiment done by experts. The normal scientific method is to have a peer review: a peer is a fellow colleague and expert on the topic, and review means that experts are giving an assessment on the scientific work in question. This is a standard way in most scientific work. However, none of the peer reviewers have a skin in the game. Perhaps this would change if they made bets instead of just a standard review? Duke quotes a test performed on exactly this (page 149-150): It turns out the expert opinion expressed as a bet was more accurate than expert opinion expressed through peer review.

Lesson Number Seven: Hindsight Bias

Hindsight bias is much more prevalent in your conclusions than you are aware of. Again, as mentioned earlier, if you write down your reasoning before you make a decision, you can gain knowledge and experience from the decision instead of saying things like this: "I knew it", "I should have known", "it was inevitable" etc. The GFC of 2008/09 seems very inevitable looking backwards, but there are very few articles online from 2007 predicting both the timing and the magnitude of the turmoil. Philip Tetlock's work on experts and their decisions is a great reminder why we understand a lot less than we imagine, and hindsight bias is not much of help unless you are honest to yourself. Decisions that looked prudent and wise before you made it might seem reckless and risky after you know the bad outcome and vice versa.

Lesson Number Eight: Don't Spend Time Figuring Out The Impossible - Figure Out Yourself

This is one of the subtle lessons I learned. Why spend time on trying to predict unknowable or too complex investments? The world is extremely complex and prone to black swans.

We better spend time on understanding ourself - our own behavior and biases.

  • It's pointless to predict the markets. This is close to impossible because of random events and unlimited input of factors.
  • A lot of investments require figuring out a lot of uncertainties. However, the more uncertainties, the more likely you will be wrong.

In other words, go for the simple ideas, not the complex ones, and avoid making too many decisions and investments. In this video Jeff Bezos explains why he only aims for three decisions per day. His belief is that more decisions lead to fatigue and subsequently counterproductive decisions.

Better be patient and focus on the quality of the decisions. In the long run, the correlation should increase. You don't need many ideas per year to invest successfully.

Lesson Number Nine: Experience Is An Effective Teacher

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 think most people hate being wrong. That is of course the wrong attitude: if you are wrong, and willing to learn from it, you go to bed wiser than when you woke up. Wise people keep an open mind and are not afraid of changing their opinion when they are confronted with the facts.

Lesson Number Ten: Take Notice Of The Bibliography

The first lesson from the book was that increased knowledge compounds over time, just like time spent in the stock market (usually) compounds your wealth. The book ends with a very detailed and impressive list of notes, but just as impressive are her 14 pages of recommendations for further reading. I promptly ordered three books from the list, and will probably order more later. Remember, knowledge compounds!


My takeaway can be summarized in two sentences:

Be agnostic, adaptive, open, truthful to yourself and a student for life. This should compound both knowledge and wealth.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion - they are not suggestions to buy or sell any securities.