Annie Duke knows a thing or two about risk and how to manage it.
As a former World Series of Poker champion, with total tournament winnings of over $4 million, Duke draws from her experiences at the card table to share methods for embracing uncertainty and making better decisions in her book Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.
For example, Duke contends that we, as humans, are bad at separating luck from skill. We are uncomfortable knowing that results can be beyond our control. And we often create a strong connection between results and the quality of decisions preceding them.
One of my favorite stories about the quality of decision making is told within the first few pages. Duke highlights events of the final seconds of Super Bowl XLIX in 2015. The Seattle Seahawks, with twenty-six seconds remaining and trailing by four points, had the ball on second down at the New England Patriots’ one yard line.
The Seahawks had three chances to walk the ball over the goal line, and a touchdown would likely have sealed the victory. But the Seahawks coach, Pete Carroll called for a pass. The Patriots intercepted and won the game.
Carroll was vilified by the press the next day. The Seattle Times opined that it was “the worst call in Super Bowl history.”
But considering clock management and end of game considerations, Carrol’s call was defensible.
Also, empirical evidence supported the call. In the previous fifteen seasons, the interception rate in that situation was about 2%. The bottom line was that it was a good decision with a bad result.
Duke tells us that Pete Carroll was a victim of our tendency to equate the quality of a decision with the quality of its outcome. Poker players call this “resulting”. It is a routine thinking pattern that trips up most of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day.
As a Pats fan, I was certainly pleased with the outcome of that game.
More importantly, though, the lessons Duke teaches throughout her book are useful for developing a better understanding of the behavioral aspects of decision making and can be directly applied to investing and risk management.
-RK