Best of Decision-Making: Annie Duke (2018)

(upbeat music) On Ted Sides, and this is Capital Allicators. For the second year, our Summer Series will share some of the best episodes of the past, curated from our favorites and yours. You can pull down many of the great ones on our Spotify playlists. This series pushes them to your regular listening feed. Our 2026 Summer Series focuses on improving the investment process. Over the next six weeks, we'll share 10 gems from interdisciplinary skill sets that will help you level up your investing across decision making, interviewing, storytelling, negotiations, and habit formation. Our Summer Series kickoff is with one of the all-time grates, Annie Duke. The former world-class poker player has become a noted academic and practitioner in the art of decision making. Her bestseller, "Thinking in Bats" is a one-of-a-kind set of tools and tips to try, emphasis on try, to get past our embedded behavioral biases. And her follow-up works, how to decide, and quit full different threads in the decision making process. Since writing, "Thinking in Bats," Annie has consulted several investment organizations to apply her insights to investing, including becoming a special partner, focused on decision science, adventure firm, first-round capital. For the series, we've shared two of Annie's most popular appearances on the show, coinciding with the launch of "Thinking in Bats" in 2018, and "Quit" in 2022. Before we get going, we're hiring at capital allocators. Two roles that will shape our next chapter. They're two of the best jobs in the business, at least in my opinion, that'll help us bring together our community of allocators and managers to compound knowledge and relationships. And best of all, we get to serve this community without really selling them anything. Full descriptions of the role are available at capitalilocators.com. 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Randall introduced me to Alex, an AI leadership coaches team built on 40 years of proprietary research into what the best leaders actually do. For investment professionals, that means your entire team gets on-demand coaching, grounded in the behaviors that drive results, and build the kind of fowership that retains your top talent. We use Alex and our team at Capital allocators' swears by it. Try Alex for yourself at the link in our show notes, tryAlex.admiredleadership.com. Please enjoy these great conversations with Hany Duke. Hany, thanks so much for coming and joining me. I'm so happy to be here. Do you have this background? I like the way you say that. I'm Hany, an educated poker playing background. Why don't we just start with you taking a little bit of time to talk about your path to poker and then where we are today? Sure, so I started off doing my undergrad at Columbia, and there in my freshman year, I met a professor there named Barbara Landau, and she's amazing. She's now at Johns Hopkins, and she was studying first-language acquisition in children, and I ended up being her research assistant for four years while I was at Columbia. And at the time, I thought, oh, you know, I'm going to stay in New York because I really, really love New York. But she really pushed me to go and study with her advisor for graduate school. A woman named Lila Glightman, and her husband Henry Glightman, who were at Penn. So I applied to Penn. I got into Penn, I went and visited. I loved it. I loved Lila. I loved Henry. I loved the program there. So I ended up going to Philadelphia to, you know, get my PhD in cognitive psychology. And you almost got it. Yeah, so things take a little bit of a turn. I finished my coursework, got my masters, did my qualifying exam, I did my research, and I had all of my job talks lined up. So I was going to go out for my job talks. I actually got sick right before that and ended up in the hospital for two weeks. So in the academic world, it's a seasonal market. So if you kind of miss that one season, you have to wait a full year. You know, I just gotten married. My husband is now my ex-husband had a place in Montana, and we said, "Okay, we'll just go there." And, you know, I can recuperate. And then I'll finish the whole thing and I'll go back out the next season. But I discovered that when you leave school for that time off, that your fellowship doesn't follow you and I said, "Oh, no, I need money." And it was then that I started playing poker in a little tiny card room in Montana called the Crystal Lounge, which is everything that you could imagine from a little tiny bar in downtown Billings, Montana, with that name. It's kind of wild to come from, I guess you could call a card playing family. It wasn't this rare thing that one day you said, "Hey, I'll just go try poker." Yeah, it wasn't so out of the blue. I mean, we played a lot of cards when I was growing up, not poker per se, but my brother, he had gone off to go to college and he was really into chess. He was actually an amazing chess player. And so sort of through this chess world, he kind of fell into playing poker. So he had already been playing for quite a while before I ever started playing. I think actually he had really been playing for about 10 years. So by the time it got around to this thing that I did, he had already made the final table of the World Series, the poker. He was really already a great player. So it wasn't like completely out of the blue. I had watched him play quite a bit when I was in graduate school on my fellowship, which doesn't leave you a lot of room for vacation money. He actually would fly me out to Vegas once a year for vacations. He had given me a little money to play in some low stakes games. So I had some experience. And he said, I was just kind of talking about, like, I don't know what to do. Like, I don't know what I'm supposed to do to make money now. Well, I'm waiting to go back to academics. And he's the one who actually suggested, he said, you know, I think that you can play poker in Montana. Why don't you do that? And so I thought, that sounds like a good thing to do for the meantime. The meantime turned into 20 years, so there you go. Did you recognize at the time that you're training in psychology would be so relevant for the game itself? At the time, I would have to say definitely no. There's language acquisition over here, and then there's poker over here. And I didn't necessarily obviously see how those two things might relate to each other. Now, in retrospect, I can say it was certainly really helpful. But the first time that I actually thought about it in any kind of really explicit way, that there was this really strong relationship between the two things was in 2002, when I got asked to give my first talk, a friend of mine named Eric Cidal, who's an incredible poker player, absolutely one of the legends of the game, who actually met when I was 16 long before I was playing poker through Howard. Eric got asked by a friend of his to speak to a retreat of options traders for this friend's hedge fund. And Eric knew him, his name's Roger Lowe. Eric knew him because Eric used to trade on the floor. And so Eric had been involved in the world of finance as well. So his friend said, "Hey, will you come and talk about what poker might teach us?" And I think Eric had a tournament to play or something. and I was taking time off because I was super pregnant at the time. I think I was about two weeks away from having my fourth child. I wasn't traveling anywhere, and so he said, "No, I can't do it." But my friend Annie, you know, you should have her do it. I had to think about how am I going to explicitly talk about the relationship between these two things, and that was the first time that it really opened up to me at sort of top of mind, that there was actually an incredibly strong relationship between the two things, and that what I've been doing in graduate school actually had been incredibly helpful for me in poker, and could be helpful in general to understanding how do you make decisions, you know, particularly under conditions of uncertainty. So I started talking in 2002, but actually around that same time, I got an offer to go and become a trader, and I was very, very, very far down the path of saying yes to that when poker exploded all over television. I really, really, really love poker, but I never could play it quite as much as everybody else because I had poor children. So, you know, mom first, for sure, poker players second. So I had gotten offered this job, I thought, oh, you know, that would be really interesting, you know, to be a trader, and there seems like there'd be a good connection, and maybe this would be really good training for that. And the reason why I stepped back from it was that that was the year that the WSOP got televised with the whole card cameras for the first time the WPT started, and I took a step back, and I said to the company that was thinking about hiring me, you know, let me take a second, like I may come back to it, but it seems to me that there this might be kind of an interesting journey of its own, now that poker's on television. So I decided to continue down that road, and on that journey that poker was offering me, and it was incredible, but from that one talk in 2002, I was getting referred out, and what I was discovering, even from that first talk, it was really reigniting this fire that I had for teaching. When I was in graduate school, one of my favorite parts of it was actually teaching, and by the time you finish your masters, you actually get your own classes, you're not, you know, just a TA, and I loved it. That idea of, like, communicating to an audience, and having them not in agreement, and feeling this sort of thing about what poker is, the total not zero sumness of it all, was something that was really fulfilling something in me that I wasn't necessarily getting from other things. And so once I started getting referred out, I started really actually focusing on developing that business also in parallel, which I did. And what were those first set of lessons that you were imparting on traders? What I got asked to speak about by Roger was risk, and I didn't actually talk about it. I ended up talking about something else, which was tilt. So tilt for people who don't know the work, because it's a very poker-y term. Sounds like a pinball term. Well, it is a pinball term. Exactly. If you think about a pinball machine, what happens when you shake it? It shuts down and says tilt, and the mechanics kind of don't work. So borrowing from that analogy, you can think about when you're emotionally lit up, it's like your brain is shaking, and it shuts down the prefrontal cortex. It shuts down your ability to reason in the same way that a pinball machine just won't work anymore. So that's where the term comes from, actually. It is a pinball analogy. It's been brought into poker. So here's the thing. In poker, you have a really good thing happening that also can cause a really bad thing to happen. You have a chip exchange that's occurring. So you're essentially marking every single transaction, and you're following the P&L, right? Like you're seeing it in real time. It's like you're really watching that ticker. Now, there's something good that comes out of that, which is that it forces you to recognize that every single decision, even the little tiny executional ones on your way to sort of a larger goal, have upside and downside associated with them, that there's risk in every decision that we make, even the little tiny ones. And in poker, you don't need to wait so much to see those play out over time because there's this compressed timeframe. So that's the good thing, because you really, really focus on the execution in poker because of that. But the bad thing is, as anybody who's done any ticker watching in their life knows, is that that can really light your emotions up. And I mean, when you have those dance wings, you can get really emotional about it. And by the way, also when you have a big upswing, you can overreact to that as well. And when we get into the emotional part of our brain, we don't think well. So what I talked to them about was how do you manage this? So I was imparting some thought on how to sort of make sure that you're limiting how much tilt is affecting your decision making. Yeah, I want to come back to a lot of these pneumonic tools that you've created. When I think about a bet and I was looking at your book, thinking in bets, I think about poker, I think about sports gambling betting. How do you take that concept of a bet and then make it broadly applicable to decision making? So first of all, I say it's really easy because all decisions are actually bets. It's just a matter of making that explicit. So if we think about what a bet is, we're trying to make some decision about how to invest our resources that's informed by the beliefs that we have about what the possible future might look like. Obviously, when you're playing a game like poker, the thing that you're investing is money. But there's other things that we can invest like time. We can invest our happiness. We can invest our health. We have these limited resources that we can invest. So once you start thinking about that, that's what a bet really is. Well, gosh, that sounds like any decision that you make. If you are in a restaurant and you're trying to choose between ordering the chicken or the fish, if you order the chicken, you're foregoing the fish. So that's the limited resource. You have to choose between one or the other and you forego all other options when you choose the chicken. And you're betting that the future that results from having chosen the chicken is going to be better and have a higher rate of return for whatever it is. In this case, it might be health or happiness or enjoyment or whatever. Then the future that would result from ordering the fish, that's not any different than if I bet on a hand of poker. It's the exact same thing. The difference is that in poker, that is made explicit. And that's a really good thing because we're always betting on an uncertain future, whatever the decision we make. So embedded in that, you talked about a better decision being based on beliefs. And we met through Michael Mosin and talked a lot about Danny Connman's work. So there's a lot of hardwiring about beliefs system one and system two thinking that cause us to get things wrong. Yeah. I loved your description in the book of the science of the brain that prevents us from getting these things right. And then what are those problems issues that we have in making good decision? I think that a lot of people are really familiar with Dan Gilbert's work, stumbling on happiness. They might know him from the potential commercials as well. You know where the people like put up like how much of you say for retirement? Is it enough? I don't know. I'm a Harvard professor. So Dan Gilbert is very, very famous for stumbling on happiness. He's given a TED Talk on it. But people actually are less familiar with some really interesting work that he did on belief formation in the 90s. So here's the issue. If you think about the evolutionary history of the human species. So now we're talking about what is the machinery that we sort of come with in terms of our brains. For most of the evolutionary history of our species, the way that we form beliefs was through our perceptual system. I couldn't tell you something that happened in a remote part of the world that you had never experienced, right? There was no way to communicate that. So you're forming beliefs based on what you see. You see a tree. Now you have a belief about that tree. You touch something. So this is all happening to our senses. It's perceptual. If you think about perceptual belief formation, there's really no reason to vet the beliefs because we don't come across things like mirages or hallucinations very often. So if I see a tree, I can mark that as true. I believe that this tree is there. I've marked a true belief possibly. Like something could happen. Like if you happened to end up as a mirage or you saw something on the horizon that you thought was something and then you came up close to it, you might then change the belief. But mostly it's like you you see it. You believe it. And then that's it. That's the end of the process. Now as evolution does, and this is very beautifully described in a book called Cluj by Guy named Gary Marcus. Really highly recommend it. What evolution often does is create a Cluj. It's like let's McGiver it. We're going to take some toothpaste and a paper clip and a wire head. We're going to make a bomb. So we have this way that we form beliefs. And now we've got this new thing, which is that we can form abstract beliefs. I can communicate things to you about things that you've never experienced for yourself. So now you can form an abstract belief. Of course storytelling really. Exactly. So evolution as it will does not say, oh we're going to just build brand new machinery that processes information in a totally new way to handle this new stuff, which is abstract. Instead it says, let's just glom on to what's already there. We have this perceptual belief formation system. It's worked really well for us. It stopped us from getting eaten by all the lions on the savannah. So yay us. We'll just use that. And that's exactly what happened. So intuitively, if I were to say to you, how do you form your beliefs? I'm betting you would say, well, I hear something or I read it. And then I think about it. And I think about what I know about it. And if it's true or not. And then after I've done like a bunch of thinking about it, then I decide whether I'm going to lodge it is true or not. So you think it goes, hear it, vet it, a step two, and then lodge your belief true or false. Step three. So what Dan Gilbert showed in the 90s was no, no, no, no, no. So it's just like perceptual belief. You hear it, you lodge it as true, and then maybe later on you vet it. So now we believe what we hear. And what I point out in the book is that's not so much of a problem if you actually get to step three. So step three would be the vet it, check it, you know, check it against reality, see what the objective truth is, make sure that you're calibrating your beliefs, updating them all the time, so on and so forth. So if we knew that we were doing step three, the fact that you sort of defaulted to believe it's true first, yeah, not such a big deal. The problem is that there's all sorts of work that shows that you just don't do step three. And that's where we really get into trouble is that we hear it, we believe it, and then like maybe if we have the time or information later, we might do some vetting of it, but we vet it in a way to sort of confirm the belief that already got lodged for this reason that it wasn't even vetted in the first place and will work really, really, really hard. If we're confronted with information that disagrees with the belief that we've lodged in this really haphazard way, to make sure that we discredit the information that disagrees with this haphazard belief. So you can see how this news can cost you problems. A little bit. Just a few. You can't sink your way out of it, right? This is just hardwiring. Yeah, so there's really amazing work by a guy named Dan Cajon, he's at Yale. And what he's shown is people know a lot about confirmation bias. So confirmation bias is specifically your, you're kind of noticing information that confirms you and you kind of don't pay attention or you don't notice information that is disconfirming. So Dan Cajon has done a lot of work in this sort of larger process called motivated reasoning that not only do you have confirmation bias, but if I hand you information and force you to read it. So now you can't ignore it of something that disagrees with you. You will work incredibly hard to discredit it. So if I give you a scientific article that agrees with the belief you have, you'll go, yeah, it sounds good. And if I give you a scientific article that disagrees, you'll be like, well, here's all the problems with the methodology and their end was too small. You know, I think they might have been p-hacking and, you know, I mean, you will literally just come up with every reason why this isn't true. Okay. So that's really part of motivated reasoning is that our beliefs drive the way that we process the information, which then reinforces the belief. So it becomes this circular pattern. So what Dan Cahan showed is that being smart doesn't help, because I think intuitively we think, well, I'm a smart person and now you've told me about motivated reasoning. And I kind of know about these biases. So now I'm not going to do it anymore. Dan Cahan and also Keith Stanovitch actually has done some of this with blind spot bias, that the smarter you are, the sort of the bigger your blind spot biases. So Khan showed, did this work, which showed that if I test you for how good you are with statistics, we're just analyzing some sort of neutral statistic, like, does this skin cream work? I assume you don't have any very strong emotional opinions about this. Yeah. I can find you some people who do, but I'm guessing you don't. So if I hand you that, the results of some sort of study about skin cream, and now I just test how good are you at analyzing the data, I assume you'd be very good at it. And I take you compared to somebody who's maybe not so good at analyzing the data. So now I've got you divided into two groups. The statistically adept people and the statistically not so adept people. Now I give you literally the identical data, but it's about gun control. And what happens is that how biased your reading of those statistics is, they were perfectly fine with when it was skin cream, is actually correlated with how smart you are. And it's correlated in the bad way. So the smarter you are, the better you are at kind of slicing and dicing this data to support whatever your prior is. So if your prior is gun control is a good thing, you'll slice and dice the data to support that. If your prior is gun controls terrible, and it's horrible, then you'll slice and dice to support that. The people who are not so good with statistics while biased don't show as big a bias. So let's see, we're pretty hardwired to make some bad decisions. And the smarter we are, the worse it gets. And we don't even vet our beliefs, it's a lot of doom and gloom so far. It is. And so, as we've talked about, I'm in the world investing and it's easy to see how applicable it is. Is there anything we can do to fix the problem or at least to not screw it up as much? I see you're looking for good news. No, we're done. Okay. And we'll talk to you next week. So no, actually I have a lot of good news. Excellent. Yay. That's the good news. So let me just start with the title of the book, Thinking and Bats. So the first step is to understand and think about the information in this new way, where remember this advantage that poker players have that I talked about at the beginning is that it's very explicit that these kinds of decisions are bats and that your bats are informed by your beliefs. Now here's the thing about a bat is that who wins a bat? The person who proves their right in the confirmation bias kind of way, or the person who's developing the most accurate representation of the objective truth. It's clear that the second person is going to be the one winning bats. So if we start to think about things as bats, which makes the risk explicit, it forces step three. If we go back to Dan Gilbert's work, it forces that vetting step. It's very intuitive. Let's say that you say something that you think is 100% true. For example, you say, Citizen Kane won best picture and you just announced that was certainty. Let's say that you now say to me, do you want a bat? What happens to you? Hmm. Wait a minute. Let me think about that. Do I want a bat on Citizen Kane's best picture? So this thing that you literally said a second ago, as if you were just 100% sure that it was true, you now start to go through that third process. So what do I know? What does he know that I don't know? Let me think about that because he may have information that I don't have. So let me think about that. What other things could have won that year? You ask yourself, how sure am I am of that? Am I 100% sure? I'm I think it's realistic. It's making me really. Right. So it forces you to start thinking probabilistically. If force is you to start going through that step three process of seeking out information in a much more unbiased way, because you're trying to figure out what the objective truth is now, because now you're being forced to put something on the line. It's sort of a skin in the game question. So that frame through which we look at things is the first step to understanding how do we calibrate our beliefs and really, really, really wonderful things happen from that. What starts to happen is that you start to express yourself in a more probabilistic fashion because you don't want to get challenged if I announce things and then attach some sort of level of certainty to it. So I say, now if I speak to you and I say, well, citizen can one best picture, I'm going to say I'm 60% on that. I've done two really wonderful things. First of all, I've accurately represented what my state of knowledge is, which is always better, better decision makers. But I've also invited you to be my collaborator to help me vet this. And that is going to get us to much better decision making. It's going to get us to be less biased. I've invited you to check my bias for me. And there's two reasons why opening that door wide open with this expression of uncertainty is really helpful in getting you to help me. The first is that when I express things with total certainty, one thing you might do is not tell me what you know about it because you're embarrassed because I've said it with such assurance that maybe now you think you're wrong about this whole citizen can thing. So that's reason number one. But reason number two is even if you're pretty sure that citizen can't didn't win. You might not tell me you don't want to embarrass me. So we have all these social reasons why we might not do this. Once I say 60%, it's like there's none of that. I mean, I imagine it's true in the trading world and in the allocation world, people just state their case. And so that lesson is, hey, if you state your case with probabilities, you end up with a richer conversation. So not only do you end up with a richer conversation, but you're more believable as a communicator. So I think it's a little counterintuitive, but our intuition isn't always good. So my intuition is that when I hear something, I've had it before I said what I believe it. We know that that's not true. Intuitively, I think we think that as leaders, we need to express things with confidence. And we confuse confidence and certainty. So we think if I say I know it's going to be this way, I'm 100% sure this is true, that we're going to be more believable communicators. Well, first of all, that's not an accurate representation in the world because there's too much luck involved. So if I say to you like, oh, I know the future is going to be this way, if we make this decision, that's patently silly because there's too many things that can intervene. So I am just accurately representing the world that way when I speak that way, but I'm also more believable as a communicator because when I say to you, here are the possible ways I think it's going to turn out, and I'm going to make a stab at assigning probabilities to this variety of scenarios. Now you look at me and you say, wow, she's put a lot of thought into this. She's clearly informed. She's telling me what she knows and what she doesn't know. She's acknowledging where her knowledge gaps might be or where she needs help or any of those things. And that in itself makes me a more believable communicator. The other thing is that in particular, people who are leaders need to be very careful about the way they express things because anybody on a team who has a leader up at the front saying, here's the strategy, we're going to do this and, you know, I'm sure of it. The people on the team want to be eight team players and being a team player is not disagreeing with the boss. But the other thing is that if we go back to that work that we talked about with Dan Gilbert, how easy it is for me to infect you with my belief, you know, we hear it, we believe it. So just by expressing how you think things are going to turn out. turn out, you've now caused a virus, like you've infected everybody with your belief, and they're going to tend to reason toward your conclusion, because now they're going to be sort of like invited into the confirmation process with you as opposed to the exploration process with you. What a great device to just improve the way we can think, get into probabilistic thinking by just asking someone, "Hey, one of that," and I have to say, "I used this on my daughter last week." Oh, tell me. 12-year-old. I don't remember exactly what she said, but she threw something out there. And I just finished the book, and I said, "Hey, one of that," and she paused, and it works. Oh, my gosh, it's such a great story. And you could see it. You could see it in her head. She paused, whatever she had said to me. She completely understood. So that was great. I love getting that feedback of the application of the book. I mean, obviously, at this point, you're one of the first readers of the book, so hearing that application and sort of seeing it in action. It works. Thank you. Thank you for telling me this story. So let's talk about more. Yeah. What are some of the other devices that we can use to improve the way we make decisions? So we have this kind of general framework, which is this idea of thinking about things as bad. But we know, let's just be honest, that we're pretty biased, and let's assume we're smart, so it's even worse. So really, what one of that does is it gets you to think about what does it mean to win? So our default is winning would be a firming that our beliefs are already true, that bad things that happen on our fault, that good things that happen are toward credit, and that's sort of what nature has sort of defined winning as for us as with a fault. But that's a big one. So that concept right there of good things that happen, we take credit for. Yes. It's called self-serving bias. It seems like a good name for it. A good investment decision, whatever, is there something that doesn't work out? It's not our fault. It's a series of circumstances. It's really high-volved. You know? Oh, yeah. High-volved. Well, low-vol environment now. Right. Right. Right. Low-volved. So that's sort of like the programming. Okay. That's what it means to be right. It shifts your idea of what winning means. So winning is now actually having the most accurate representation in the world. And that really comes through the accountability that this idea of betting is, because when you challenge your daughter to a bet, you're holding her accountable to her beliefs in a way that normally we don't do. What that does is it makes it so that instead of viewing information that disagrees with us as an attack on our identity, it now changes that to helpful. It's now if you have information that might calibrate my belief while that's going to cause me to be a better, better, and I've now changed the rules of what the game is. But it's really hard to do on your own. That's the thing. So we're all just really biased. We default to these natural ways of thinking. It's kind of the way that our brain works. But here's the thing. And I'm sure that you've noticed this in your own life. Do you think you're better at sort of noticing your own baggage or other people's? When other people are running around taking credit for all sorts of stuff or just being like, oh, I lost because insert hard luck story or thing that was unpredictable or whatever they couldn't control. You spot it right away. You're like, come on. And what that tells us is that other people are actually pretty good at spotting our biases. So in the same way that you sort of naturally recruit people into the process with you when you express things probabilistically, why not do that intentionally and just purposely recruit people into the process with you so that you can form a really good group of people who have decided together that they have a commitment to accuracy that they're going to hold each other accountable to that commitment. And necessarily that they're going to be open-minded to diverse viewpoints and they're going to consider counterfactuals and they're going to look for information that disagrees with them and they're going to be all sorts of things like a really good credit giver, a really good mind-changer belief calibrator, all of these things and get people into that process with you because honestly, they're going to be better at sort of seeing your stuff than you are and now you can be really helpful to each other. And then the side benefit which is actually in some ways the primary benefit is that they're going to reinforce these new habits of mind. So if you're in a group which has this commitment and we all know, let's be honest, when someone else is doing really well and things aren't going so well for us, it's hard to give them credit. It doesn't feel that good, but if you've gotten some people together who have made this commitment together, now when you give credit they're going to go, that's amazing that you gave credit to that person because they know things aren't going so well for you. So good on you, that's so incredible. And the thing is that that kind of social approval can be like the biggest pellet for the rat, the biggest reinforcer. And now that's what's going to start to get you that good feeling as opposed to just sort of the immediacy of the swatting away of the bad thing. Now the idea that I'm really good at giving credit to people and these people have now reinforced that for me, that's going to start to get you to this place of being a much better decision maker. And it's all about how is the group sort of reinforcing these kind of commitment to being unbiased and open minded and all of these things through this accountability mechanism that the group is providing, which is something you naturally see at a poker table. We're going to take a quick break in the action to tell you about Ridge Line. Ridge Line makes your day unrecognizable. That's how refreshingly different it is from legacy investment management technology. With Ridge Line's front to back AI native platform, your typical tech pains disappear. No integration headaches, no data discrepancies, and no upgrade cycles. Instead, you get real time data flowing through everything from portfolio accounting to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridge Line gain a decided advantage. That's why customers call it miraculous, game changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at RidgeLine.ai. And now back to the show. So if there are rules, good rules for the group, so there is accountability to the truth, it sounds like some type of positive affirmation of the process. Are there other kind of rules that you would say if you want this type of feedback loop together. Here are the three or four things that you should establish as the way we're going to communicate together. Absolutely. I'm so glad that you asked that question. I think it's important to understanding what makes a good group. Why is this really important, this accountability piece? So when you form a decision group, and here is the wonderful news, you might be thinking to yourself, well, who am I going to recruit into this process with me? Like, how am I going to get a good group going? And the good news is that you don't need very many people. You actually only need three to borrow from Phil Tetlock, author of Super Four Castors. You need three because you need two to disagree and one to referee. So in the betting world, if we disagree, we have a sort of phantom third person, which is the bet itself, which is now going to sort of referee the situation for us. But obviously in the real world, we're not just throwing money down on the table. So you need a third person and they can act as the referee in a disagreement. So go find yourself a couple of people and then now really form a contract. So you have to agree to a few things. So you have to agree to this commitment to accuracy. You have to agree that you're going to be accountable to each other for the decisions. You have to agree to be open-minded to diverse viewpoints. And then how do you instantiate that, right? So how do you actually instantiate this commitment to exploratory thinking as opposed to confirmatory thinking? And it's through these ways of communicating to each other and these commitments to the types of conversation that you're having, that you can really actually borrow really nicely from science and from scientific norms of communication within that community. So there was a guy named Robert Merton, super famous guy in science. And he came up with these norms for scientific communication. They're called the Mertonian norms. You can Google them. But it's an acronym that you can remember. It's called Kudos. So the first is Communism, definitely not the political kind. Communism meaning that data are shared. So what does that mean? It means that in the scientific process, if I'm doing a study within my group, obviously my data belongs to me. But once I publish to the community, they have to be able to see the data in order to evaluate it properly. Right. Okay. So we can think about that in terms of how we're communicating with each other because smart people are really good at spinning the data and sort of presenting a case and highlighting certain things or leaving other things out in order to drive you toward their conclusion. So we don't want that to happen. So within your decision group, be as transparent with the data as possible. Now a couple of things. One is whenever you feel like you don't want to share a detail, those are the details you should share. That's a very good rule. Because it probably means that it's going to catch you in a bad light in some way. You in a bad light or you're belief in a bad light or maybe it's going to argue against the conclusion that you're trying to get across and that's where it's getting uncomfortable for you. So make sure you share those. But one of the ways to actually really make sure that that happens is to essentially create a template for the details that must be shared because then you're always forced to share the exact same things regardless of whether they support your conclusion or not. These things must always be shared. Otherwise I cannot give you any kind of advice that has fidelity if I do not know these details. So that's communism. Socialism is ideas have objective truth, regardless of who the person is who's communicating it. So the example I think. I think I give in the book is that it doesn't matter whether it's Mussolini or George Washington or your mother telling you that the earth is round. The earth is round regardless of whether you like the communicator or not. Now, obviously, if I'm talking to a PhD in economics and they're giving me an opinion about trade, their opinion is going to have more fidelity than somebody who I just met on the street who does not have a PhD in economics. So you obviously have to take those into account, but all things being equal, the truth is the truth. So one of the things that will happen is that we will change our opinion depending on who's delivering the message. So here's a really good thing you can do into group is when you are trying to talk about different viewpoints and get people's opinions on viewpoints, don't say who has the view. And I think that we can see this in our politics now. So an idea that had Obama said it might come out of Trump's mouth. All the people who would have been like, that's awesome, Obama, you're so great. It comes out of Trump's mouth and they're like, no, no, no, that's ridiculous. Or vice versa. Oh, that was ridiculous, Obama, oh, Trump, you're so smart. And it's literally, it's the same words. So why is that happening? And it's because people are not applying this norm of universalism. They're evaluating the message and light of the messenger. It's like, you know, don't shoot the messenger, so this is don't shoot the message. So as much as you can, when you are communicating these things, either try to leave the messenger out and just present the case as stated and vet it in absence of that. Or you can also imagine, like, let's say that you don't like the messenger. You could go through the process of saying, well, let's say that, for example, you say, what if Obama had said it, if you happen to be a never Trump or sort of try to think about the hypothetical, the counterfactual. So I think that that's a really good thing to do. So that's the you in Kudos. And then D is disinterestedness, which is we all have these conflicts of interest. And we tend to think about conflicts of interest in this very specific way, in this financial way. So you have, you know, disclosure forms for conflict of interest. Okay. That's interesting. It can cause a whole lot of problems. The real conflict of interest comes from this issue of motivated reasoning and confirmation bias. We're always trying to make sure our beliefs are true. Yeah, of course. There's going to be two things that are going to mock up your decision process within the group. You know, you know, you're trying to make sure that your beliefs, and two, if an outcome has already happened, because you're going to try to reason to make the outcome make sense. If I tell you, oh, I think the strategy is 100% true, you know, it's going to work. I'm sure of it. I've now infected you with my belief. And now the group is going to try to reason toward that. When you're trying to vet a decision, don't say what you're belief about what the correct answer is. Just leave it out in the financial world. Really deconstruct the trade before you get the result of it. So you've decided to put a position on deconstruct that decision process prior to say an option expiring. And the more you can do that, the better. But if it has expired, if you are pass the outcome, which of course happens in poker all the time, then when you're communicating to people who don't already know the outcome, do it exactly. Yeah, just don't tell them. Okay. So that's the D part. And then the OS part is objective skepticism. So approach the world, asking why things aren't true as opposed to why they are. Hardware to do the opposite. Completely hardware to do the opposite. We don't like thinking about counterfactuals. We don't like thinking about, well, what if it fails? So as I'm sitting there and I'm saying to you, well, what do you think? I want to make this particular investment. I should be asking you, tell me all the reason you think this is a really bad idea, because that's more valuable to me, because I already know why I think it's a great idea. So tell me, are you against it, please? So you can do that within your group as well, within your company. You can do that through really creating red teams. So you have red team blue team, that's one way to do it. And notice what's really wonderful about the red team thing in particular is remember I said we have this team player issue is that the game for the red team is to disagree. So you've actually now to be a good team player on the red team. It's all about disagreeing. So that's actually a really good way to sort of solve the team player problem. You can do that. You can have a descent channel, which is anonymous. So that's another good way to do it. There's a variety of ways you can sort of instantiate that organized skepticism. Can we talk about mental time travel? Yeah. Because when you're writing about Jerry Seinfeld and Marty McFly, I can't help but bring him up. Well, you know, I do get to learn Conrad from the hills on MTV earlier in the book. But yeah, sure. Absolutely. What do you want to know about mental time travel? Why don't you talk about how shifting your mindset? I just love those examples. Okay. So here's the thing. I like the back to the future movies. I think you do too. I think it's an uncontroversial opinion to say, you know what, particularly back to the future one. Like if I say number three, we'll have a discussion, but I'm not a huge fan of that one. But what do you hear from Doc Brown in that, you know, don't under any circumstances interact with yourself, the past version of yourself. What's going to happen? You know, well, the worst case scenario is the time space continuum is going to collapse on itself and the universe will be destroyed. So and you see that, right, you see Marty doing all of these kind of circuitous things to try to avoid himself because God forbid they ever collide, this is going to be horrible. But what you really learn when you start thinking about how do you become a really good decision maker is that the best thing that could happen is for past Marty to run into future Marty and have a little discussion, have a little, you know, chitchat about how things are going. Because our in the moment itself is pretty bad because we're temporal discounters. Here's the issue. When we think about this problem of this difference between sort of like reasoning to be right versus reasoning to be accurate, where is that reasoning to be right coming from? Because I assume that you would agree with me, I think, that if I were to tell you, if you're more accurate in your beliefs, you will have better results in the long run in your life. That seems fair, but if I'm reasoning to be right in the sense of just affirm what I already believe to be true, let's agree that that's the enemy of accuracy. So why do we do it? Because if I say to you, what's your goal in life? It's like, oh, I want to be happier and healthier and wealthier and more interesting and we've both agreed now that, well, okay, the better calibrated your beliefs are, the more likely you're going to get there and yet over and over and over and over and over and over again, you're reasoning in a way that's the enemy of accuracy. So why are you doing that? This is, and that gets to Jerry Seinfeld, Night Jerry. Exactly. So Jerry Seinfeld does a bit. You can actually find it on the clip on YouTube and he's like, oh, you know, Night Jerry's like, I want a party and I'm going to have another drink and I don't want to go to bed because I'm having fun. I'm Night Jerry. And then Morning Jerry's like, Kershield Night Jerry because Morning Jerry gets up, he's like tired and hung over and he's got to go to work and it's, you know, it's horrible for Morning Jerry. But Night Jerry isn't thinking about Morning Jerry. Night Jerry's thinking Night Jerry's having a fun time in the moment. And so this is the real problem of temporal discounting, like laid out in the most beautiful way by Jerry Seinfeld is that we have to get Night Jerry to think about Morning Jerry or put another way, we have to get Morning Jerry to tap Night Jerry on the shoulder and say, hey, Night Jerry, could you go to sleep because I'm going to exist. And we're actually the same person. So could you please not punish me? And that's really the problem of temporal discounting and it's the problem of this reasoning issue is that, you know, thinking fast and slow, it's really beautifully laid out that what we're all kind of trying to do is to generate this positive narrative of our life story. And within that positive narrative, having bad things happen because you were a bad decision maker, saying, well, that person's doing better than me because they actually deserve it because they're going to give them some credit. All of these things like, oh, that belief I had, that was really dumb. All those things like they don't in the moment contribute to your positive narrative. Now in the long run, they will, but there is no, you know, there's no long run, there's no Morning Jerry. So the question is how do we trigger this really good mental time travel that can get Morning Jerry to tap Night Jerry on the shoulder and say, hey, could you go to sleep or hey, could you change your belief because it's not accurate. God, really like you to be calibrating a little bit, even if it doesn't feel good right now. And that's really the question, you know, around mental time travel. I want to see how you might apply some of these tools to kind of the parallel with poker and investing. One of the things I'm always thinking about in that context is kind of the notion of bank role management on a poker table. If someone manages their bank role well, what does that mean? You recognize what your edge is. You know what the wall is, so you understand what your risk of ruin is. And you make sure that however much money you have at risk in any given session is essentially you're applying Kelly, you know, yeah, so I have to have enough money in my total bank role that given what my edge is, I can withstand the swings. Here's the problem is that we're really bad at that intuitively, we're bad at it. We're bad at it for a couple of reasons. One is that we generally overestimate our edge, let's be honest. We think we're better than we are. We also underestimate the wall, I mean, we tend to. So we generally think we need a lot less money than we do and then we're suddenly surprised that we're broke. But another thing that happens is that, and this is actually a bigger problem because I can kind of step back from the decision making and run a calculation when I'm in an unemotional state. I can say, well, I need this much money in this issue. is how much I'm going to risk each time. And so I can sort of get that kind of under control through brute force. The problem really comes with the in-the-moment decision making, right? So I'm sitting in a game, and I have two sort of broad decisions to make. But the big one is, if I've decided I'm going to risk a certain amount of money, what do I do if I run out of it? And that's where we get into really big problems. So necessarily, if I've run out of the money, it means I've been losing. So that means I'm on tilt. And so it means that I'm just sort of emotionally unhinged, right? And my limbic system is now lit up. And I'm going to be trying to swap that feeling away in the moment. And how am I going to swap the feeling away in the moment? I'm so unlucky. I can't believe how unlucky I am. These people are really bad. And I'm not losing because I'm not decision-fit right now, or because I'm not making good decisions. I'm losing because the cards are going against me. Now, when you get into that mindset, and now you're trying to make a decision about whether you should put more money on the table, you're very likely to put more money on the table. And that's really bad, because you don't know why you're winning or losing. And that's really what the problem is. So I'm in no way, shape or form, trying to say that it is purely rational to have a loss limit, because it's not. If you were a totally rational actor, you would invest when you have an edge-- again, depending on what your risk tolerance is-- and you would not when you don't. OK, that's if you're a purely rational actor. The problem is that you're assessing whether you have an edge or not. I sort of think about it as stacking a rationality. So I know it's irrational to have a loss limit. But that irrationality is a lot less damaging to me in the long run than allowing myself to make these irrational decisions about whether it's a luck or skill issue that's causing me to lose right now, so that I press my position in places where I never should. So that then, I lose so much money that I couldn't even reasonably win it back in the next day. So even the next day, I can't come in fresh, having reset with fresh decision-making, because I'm still emotionally unhinged from the day before trying to get my money back. And then that just cycles on until I'm broke. So I recognize that the consequences of that in the long run are a lot worse than applying this other irrational strategy, which is this is how much I'm allowed to lose, period. And assuming I have a really good group around me, I'm accountable to that. So at that moment, when I think, yeah, but this is an exception, I know how unlucky I am right now, then I'm going to have to go talk to Ted later. And Ted's going to be like, hey, I thought you were only going to lose this much. Why did you lose twice that? And I'm going to have to sit there and tell you, oh, well, you should have seen I was so unlucky, and I couldn't possibly predict it. But I was making really good decisions. And I've never played better. And you're just going to go, come on. So that's where the accountability comes in. A lot of the work that I do is interviewing people. And so one of the things I'm always envious about is this ability to read poker faces. So are there tricks? Obviously, this is sort of a long history of experience to get good at that. What works? Sure. Well, first of all, let me just give you a recommendation. You should go read anything by Joe Navarro. He is a former FBI guy. And he is incredible with body language stuff. He wrote a couple things that are specific to poker. But he's written a few that are more in the business space. He writes for psychology today on a regular basis. And he's just got a lot of really, really great things to say about body language. So that's number one. So number two is this. That I think that what you need to do is realize that you're kind of merging two things. One is, you've got these body language cues. But also, you have sort of the story that the person is kind of telling you. So the way that would work at the poker table is, as I gain more experience with you, I start to sort of narrow down the possibilities of what an individual bet from you means. Because I've seen you bet in the past. And I kind of know what your tendencies are. I have some idea of the frequency with which you're willing to enter a pot, for example, the frequency which you raise versus call versus fold. When I've seen you with particular categories of hands, I've sort of seen how you play. And so if I've never met you, I'm going to go from some sort of base rate of the category of the type of person that I think that you are. It's very Bayesian, right? And then I'm going to start updating immediately as I gather more data. That's actually the most informative stuff that you can get. It's just seeing how do people react to certain things? How do they-- I think they're going to react to this thing based on what I know from the past and be a really good listener to those stories. Not talking about their words and talking about their actions. The way they talk, when do they pull back? When do they lean in? When did they get excited? When do they not get excited? And those are some of those body language cues. This is just sort of their betting. How are they betting? Now, the body language cues have to do with signs-- you're generally looking at signs of being uncomfortable and signs of being comfortable. And those are the two things you're kind of looking for. So signs of being uncomfortable that have to do with stress are things like when blocking. They're something they don't come across, the arms crossed, or they'll sort of pile things in front of them. That kind of thing. They're not leaned in. But if someone's too leaned back if they're taking up too much space, generally, shouldn't believe a thing, their thing. Because people generally aren't like this. It's sort of like purposely trying to look relaxed. But then there's other things that they'll do. You'll get hooding where before they deliver something, they sort of close their eyes and then open them again. That's usually not a good sign for what's about to come out of their mouth. When they're uncomfortable, you'll see lip person. You'll see people on biting the inside of their cheek or sort of taking their tongue and rubbing the inside of their-- then there's these sort of self soothing things that you do. You might rub your hand, or that would be sort of the licking the inside of your lip. Things that are sort of supposed to calm you down. It's really up versus down, right? So when their body language is going up, that means they're excited, they're happy when it's going down, not so much. So what's good to do is sort of take these kind of physical cues and merge them with the story that they've kind of told you in the past as you've gotten a feel for how they behave in different situations. And that now you can merge together to make some sort of prediction. So you need to understand what your base rate is. And I only know that by well, watching you and coming in with some sort of prior, but then, as I see, you always updating that so that I've always got a fresh assessment. So I want to leave a little time to ask my normal closing questions. But before that, I know you were on the celebrity apprentice. And I don't really want to talk about the president. However, I thought it might be interesting to ask if you were hired in your business consulting seat to consult president Trump about how he could improve his decision-making process. What advice would you give him? So honestly, it would be the same advice that I would give to anybody. And I think that you can see that here's one is be curious. Be curious about what other people's opinions are and be open-minded to them. I think that that always makes you into a better decision maker. That's true for anybody. Don't express things with such certainty. I just don't think that that's good for anybody. I don't think it's good for your listeners. And I don't think it's good for you specifically seek out dissent. And that's something really important. Be open-minded to dissent. Don't swat it away. Listen to it. And I think that this is one of the most important things that you can do in order to be a good decision-maker. Sounds good. OK, here we go. What was your favorite sports moment? Either as a participant or a fan. And we're going to debate whether poker is sport. That's a problem, is poker is sport. I don't know. I don't know. What will that chance or have you like? OK, if poker is a sport-- and I'm specifically talking about something that I was participating in in poker is a sport-- then it would have to be the NBC National Heads Up Championship, where I got the chance to play against Eric Sidel in the final. Now, understand, I said before I'd known Eric Sidel since I was 16, he was an incredibly important mentor to me. And so to be able to face him in a final, that was such a culmination of this big history of my life. And that was really, really amazing. But I guess I have to say, if poker's not a sport, and it's just me, to be fair, I live in Philadelphia. So we just have to go with, wow, the Eagles really crushed it against the Vikings on Sunday. I have about that. I don't know what's going to happen on February 4th, but-- Yeah, I think this might come out right after, unfortunately. Oh, yeah. That's so-- well, I don't know right now what will happen, but we'll know the result by the time this comes out. But that was a pretty great moment for them to make the NSC championship. And I believe that the last time that they made the Super Bowl was also against the Patriots, if I'm not mistaken. So first of all, that's cool. Second of all, my brother's a humongous Patriots fan. And you may wonder, why am I feeling he's Patriots? Because we both grew up together in the same household. Because I did not watch football when I was growing up. I started watching it when I was in graduate school at Penn. And I used to go to the Eagles game all the time, and I watched it every Sunday. And so I ended up being an Eagles fan. He was a Patriots fan. Now, for the second time-- They're going head-to-head. They're going head-to-head, so it's a really fun-- And the best will be flying. No, I just like what I'd like to watch it. I don't have enough of an opinion about football to be able to get enough better at football. What teaching from your parents is most stayed with you? This is going to be one from my father. I was probably like a teenager, late teen, something like that. And he said to me, if you have one really, really, really good friend in your life, you're doing a lot better than most people. And I think that that's always really stuck with me as a way to sort of move through the world. What information do you read? that you get a lot out of, that other people might not know about. - I am a huge evolution junkie. The greatest show on earth, why evolution is true. I mean, those books, I think, are so amazing. To really understand how you think through a problem, what evidence means, how do you interpret evidence, what does it mean to have different disciplines line up to get you the same answer that concilience and convergence, and how important those are in trying to figure out what the objective truth is? It creates this framework for a rigor around thinking about the world that I think I'm not sure you get so well from anything else, and I will just consume a huge book length thing on evolution. - What life's lesson have you learned that you wish you knew a lot earlier in your life? - So I would say that this comes from parenting that getting mad, any kind of yelling, 'cause all parents yell, it doesn't do anything for you, it's kind of useless. - Kind of when you're on tilt. - Yeah, exactly. My youngest got in trouble for something, and I know it's something that she's 15, and it's something that, with my first, I would have been not over. What are you doing just the whole nine yards, and instead I just said, okay, so I think you did this thing, lying's gonna make it worse, so just please tell me the truth, and she did, and I said, okay, here's your consequence, and then we just went on with our day, and it was so much more pleasant, and I got a better result out of it, like she got the consequence, she knows she wasn't allowed to do it, she understands why, there was no reason for me to get in a bluster about it, which wasn't gonna create any good for anybody, not for my emotional state for sure. And I say all the time, like, gosh, I wish I had really figured that one out earlier. I think as a parent, and as a communicator, you feel like if someone does something wrong, you feel like they need to know how important it is, and you need to let them know that this is wrong, and that it's caused, and that's so much more about your own ego, and wanting to be right, and wanting them to know that you're right, it doesn't get you anywhere. - All right, last one, we're a few decades from now, you are in your rocking chair counting your poker chips. - Not so fast, buddy. (laughing) - You know, what advice would you give yourself today? - Don't sweat everything so much. Like, don't be so anxious about every little thing. Relax a little, it all works out. You don't need to be moving all the time. Yeah, for sure. I don't know how well I'll be at taking that advice, but maybe if I do some good mental time travel, and I start getting old decrepit rocking chair Annie to talk to Annie today, then I can get it a little better. (laughing) - Annie, thank you so much for taking the time. - Thank you for having me. This is such a fun discussion. - Thanks for listening to the show. If you like what you heard, hop on our website at capitalilocators.com, where you can access past shows, join our mailing list, and sign up for premium content. Have a good one, and see you next time. - All opinions expressed by Ted and podcast guests are solely their own opinions, and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions and securities discussed on this podcast.