Why Life is Poker, Not Chess
The tagline for Principles Personal Finance is 'making better decisions' and what are 'better decisions' is something that I think about all the time and it's the core message behind the project. Not because it's a straight answer or a simple rule, more a journey that we are all (myself included) on. The weight of this is something that is always at the forefront of my mind as at the end of the day, as a planner you are are supporting, guiding and advising clients on potentially life changing decisions.
The deep dive into this process has left me with various books and research papers which address this topic. The books which have been most formative in my approach to this.
Nobel Laureate Daniel Kahneman's - Thinking Fast and Slow
Annie Duke's - Thinking in Bets - Making Smarter Decisions When You Don't Have All The Facts
Principles - Ray Dalio (a bit of an influence)
One consistent theme that has come out in all of this is often in life we jump to conclusions based on the outcome, not the decision. Annie Duke calls this 'resulting' where we judge the quality of the decision based on the outcome as opposed to decision making process which led us to this point. The media is full of this and sports offer great examples and what I like to call 'The Fernando Torres Problem' -
Torres signed for Chelsea from Liverpool in 2011 for around £50m. This isn't that much now but in 2011 it was a hefty signing fee and made him at the time the most expensive Spanish player in history. For whatever reason, he failed to deliver on the expectations. The player who had lit up the Premier League for Liverpool, scoring 65 goals in 102 appearances just seemed to have lost his spark. For Chelsea he chalked up 20 goals in 110 appearances but failed to make the impression that the transfer value implied. Missing that open net at Old Trafford early on probably didn't help...
The thing is, Torres was a great player and had all the attributes of a great striker. He was proven in the Premier League and had shown consistency at Liverpool. On paper it should have been a great move based on the information available at the time. The outcome however differed from the expectation.
We have to recognise is that the a level of uncertainty implied in almost all of life's decisions. It makes me think about the amount of amazing businesses which sadly may go under due to the pandemic in 2020. I'm a sure there are lots of great businesses which had every probability of success which were just on the wrong risk of the risk spectrum at the wrong time. Did their owners make a bad decision to start a business, or where they just hugely unfortunate for timing? Should that experience be a reflection on their decision making? Having a framework to access our decisions and be fair to them in hindsight is crucial to our development as individuals and as a society.
Daniel Kahneman writes in 'Thinking Fast and Slow' we have 2 systems which control our brain and decisions. The first system is our 'fast response' system. This is the most powerful system for speed and it's what kept us alive during our evolution. It's basically our 'quick or dead' answers. In our evolution we had to make fast decisions to survive. For our ancestors, the pursuit of an objective perspective wasn't a priority and our brains have adapted to this. If there was a movement in the bushes, it was better for our survival to make a quick decision than to spend time weighing up the pros and cons on whether it was the wind or a lion.
SYSTEM 1 - QUICK, REFLEX DECISIONS WHICH BY THEIR NATURE CAN JUMP TO CONCLUSIONS
SYSTEM 2 - CONTROLLED, LOGICAL, THOUGHTFUL BUT MORE MENTALLY TAXING
If we are pressured or put under stress, System 1 generally will take over. If I discussed something with you calmly it is likely I would engage System 2, if I screamed it at you, System 1 would likely be the primary driver. That's why stress literally has been shown to reduce our cognitive ability. It's why generally you shouldn't make big life changing decisions at times of stress unless absolutely necessary.
The problem with this is that it feeds into all sorts of our life. System 1 and 2 work together in our every day decisions and can lead to some results which can be inaccurate. This below is the 'Muller-Lyer illusion.'
The lines are actually he same length but the context of the arrows creates the illusion. That is System 1 creating the impression of different lengths. The problem is not all illusions our visual and we are equally open to cognitive illusions in our decision making process. We can jump to conclusions and take mental shortcuts which can cause issues for our decision making process. Our mind also has a habit of changing our memory with the context of hindsight. It's the age old 'I knew that was going to happen' trap which we all can fall into.
To understand the type of outcomes that are in front of us, we need to understand what game we are playing first. Annie Duke makes the below distinction in her book ‘Thinking in Bets’ which to disappoint any poker players reading has absolutely nothing to do with gambling and is all about structural decision making.
CHESS
Chess as a game contains no real hidden information. The pieces are all laid out in front of you, there are a finite number of possible moves and possible outcomes. There is not randomness that occurs like pieces appearing on the board for no reason or a dice involved which changes the nature of the game. If one chess player is better than another, it highly likely they will win. On the rare occasion a lower skilled chess player wins it tends to be due to a mistake made by the other player. You can work backwards on a game and find out the cause of a win or loss and for all its strategic complexity. There is clear skill but little chance beyond the human element of decision making involved.
If our lives reflected a chess board then life would be expected to be a true meritocracy. The best would rise to the top and it would be clear and obvious why that has happened on all occasions. Planning would actually be very easy and likely already would have been entirely controlled by an algorithm. (Gulp!)
POKER
However life as a game would more accurately be like poker. There is true chance and randomness that cannot be accurately factored in. It is a game of incomplete information as valuable information remains hidden. You could make the best possible decision at every point and still lose down to sheer luck. If you reviewed the details in hindsight, separating the elements of skill from luck would be quick difficult. While better players generally do win over time (in the same way that generally more skilled individuals do better at the area they are skilled at all things being equal, in life) it is less certain at the point of making a decision which outcome
You could have a novice who had just learnt the rules of poker beat a champion down to sheer luck. That just wouldn't happen in chess.
A game of 'incomplete information' is a better reflection on life. 2020 has been a great example of this. There have been cards dealt to us all that we didn't even know to factor in. We've had to adapt in ways that we couldn't have realistically considered a year earlier.
WHAT CAN WE TAKE FROM THIS?
If we want to improve in life as much as we want to improve at a game. We have to be able to learn from the results of our decisions. We could think about this very broadly as this:
QUALITY OF OUR LIFE = SUM OF OUR DECISIONS + OR - LUCK
The problem is the 'luck' factor in the above has no weighting. Do our decisions control for 10% of the outcome of 90%?...... Well, that we cannot decipher. However I actually think understanding this should be immensely liberating. In our society there is often an unfair weighting put on the outcome as opposed to the strength of the decision at the time. Going back to the business owner who began in 2020. I would argue all things being equal it's important to distinguish the element of luck in the outcome as opposed to thinking of labelling anything as a success or failure.
This works both ways, the reality is every successful person is a byproduct of an element of luck. Of course I am not saying that skill, determination and hard work aren't crucial factors as they are. It is analogous to playing against a great poker player. They probably will win as they have higher skill. However, even the best poker player will need to be on the right side of luck to have a winning hand.
Rather than trying to assume we can control the outcome we should try and control for the probability. Making better decisions starts from the place of understanding the impact of uncertainty on our ability to understand what is true and what is true of ourselves.
So with all this mind, how can we create a framework which helps us going forward?
Also, how do we navigate all the uncertainty without losing conviction in our beliefs?
Thankfully there are ways we can do this and I'll be going over it in my video about 'Making Better Decisions' in the next few weeks...
The information provided in this blog post has been compiled from sources believed to be reliable and current, but accuracy should be placed in the context of the underlying assumptions.
All videos are being provided for informational purposes only and should not be considered to be investment or tax advice. No investment decisions should be made solely based on the information in any of these videos or blog posts.
