ReSolve Riffs with Annie Duke on Biases and Optimal Decision Making in Markets and Life
Jun 16, 2021
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Annie Duke, a former World Series of Poker champion and author, dives into the complex world of decision-making. She shares her academic journey in cognitive science, drawing parallels between poker strategies and investment decisions. The conversation highlights biases like the Dunning-Kruger effect and the sunk cost fallacy, while exploring the importance of cognitive flexibility and diverse perspectives. Annie also reflects on the value of knowing when to quit, reshaping how we perceive success and failure.
Annie Duke highlights the importance of structured decision-making tools to navigate uncertainties in both poker and investment contexts.
The discussion emphasizes cognitive biases like loss aversion and the sunk cost fallacy, which hinder effective decision-making.
Duke advocates for recognizing quitting as a vital skill, allowing individuals and organizations to adapt and reallocate resources effectively.
The conversation stresses the value of cognitive diversity within teams, promoting better outcomes through structured discussions and inclusion of varied perspectives.
The episode discusses Horizon's Resolve Adaptive Asset Allocation ETF, designated by the ticker symbol HRAA, which aims for long-term capital appreciation by investing across various global asset classes. These include equity and fixed income indices, interest rates, commodities, and currencies, utilizing derivative instruments like futures contracts and securities. The ETF emphasizes leveraging a maximum of three times in asset classes to optimize investment strategies. It incorporates three distinct styles: an actively managed global risk parity portfolio, a systematic global macro process for short-term profits, and a dynamic tail protection overlay for volatility markets.
Expert Insights from Annie Duke
Annie Duke, renowned for her background in poker and cognitive science, shares insights from her varied career and the common themes across her writings. Originally aiming to be a professor, her journey took a turn when she explored poker, which connected back to her studies in decision-making under uncertainty. This transition allowed her to integrate her academic knowledge with practical experiences. She highlights the essence of translating complex cognitive theories into real-world decision-making frameworks, emphasizing the importance of structured thinking in diverse contexts.
The Nature of Decision-Making
The discussion reveals the inherent complexities of decision-making, particularly under conditions of uncertainty. It’s emphasized that people often struggle to differentiate between losing propositions and potential winners, leading to significant cognitive biases. Duke illustrates this with personal anecdotes from her poker career, showcasing how the lessons learned inform her current work in consulting and writing. By examining past decisions and extracting lessons from outcomes, individuals can enhance their approach to future challenges.
Understanding the Role of Risk in Decision-Making
The episode dives into the multifaceted nature of risk-taking in both poker and investment contexts. Duke explains how those in high-stakes environments often blur the lines between calculated risks and reckless gambles. The podcast emphasizes the necessity of developing structured decision-making tools that can aid individuals and organizations in navigating complex scenarios. By fostering an understanding of cognitive biases such as loss aversion and sunk cost fallacy, better decision-making outcomes can be achieved.
Implementing Better Quitting Strategies
A significant theme in the conversation is the importance of knowing when to quit. Duke passionately argues that quitting should not be viewed negatively; rather, it’s an essential skill in decision-making. She underscores that successful individuals often excel at recognizing unproductive commitments and reallocation of resources. By normalizing the concept of quitting, organizations can cultivate more resilient teams capable of adapting to changing circumstances and pursuing more fruitful opportunities.
Facilitating Effective Team Discussions
The podcast highlights the critical role of facilitation in team discussions, particularly in larger groups where diverse opinions must be managed. Proper facilitation ensures that every team member has an opportunity to voice their views without interruptions, promoting a culture of respect and open-mindedness. Duke suggests using structured frameworks for discussions that include independent feedback and rationale sharing before delving into group consensus. This method not only reduces cognitive bias but also enriches the decision-making process by allowing varied perspectives to inform the final outcome.
Navigating Cognitive Diversity in Organizations
Duke emphasizes the value of cognitive diversity within teams and the potential pitfalls of a homogeneous thinking style. The episode encourages organizations to recognize and appreciate different cognitive approaches and to foster an environment that allows for healthy debate and disagreement. By creating structured decision-making processes, organizations can prevent dominant personalities from overshadowing quieter voices. This inclusion promotes better decision-making and empowers all team members to contribute their unique perspectives.
Future Endeavors and Decision Education
Duke mentions her commitment to advancing decision education through the Alliance for Decision Education, a nonprofit organization she co-founded. The initiative aims to integrate decision-making skills into educational curriculums, bridging the gap between theoretical knowledge and practical application. By teaching students how to navigate uncertainty and make informed choices, the organization seeks to enhance overall decision-making literacy in future generations. The episode concludes with a call to action for listeners to support and engage with decision education initiatives.
This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day, hosted by Adam Butler, Mike Philbrick and Rodrigo Gordillo of ReSolve Global*.
“Life – and investing – are more like poker than chess”. This week we had the honor to speak to none other than Annie Duke, former World Series of Poker champion, author of “Thinking in Bets” and “How to Decide”, and thought leader in the field of decision-making. Co-hosted by our good friend Brian Portnoy (founder of Shaping Wealth), the conversation covered:
How planning for a life in academia led her into a successful poker career
Applying her background in cognitive science to advance her game – Annie’s “Aha! moment"
Not all poker is created equal – tournaments, cash games, iterations, and strategic differences
Nature vs nurture – cognitive flexibility and turning a hedgehog into a fox
Cognitive Reflection Tests and why they may indicate a larger appetite for conspiracy theories
The Dunning-Kruger effect, overconfidence and naïve realism
The pervasive influence of the sunk cost fallacy and how we might keep it in check
Group think, cognitive laziness and why most people tend to anchor to the first response they hear
We also explored the illusion of explanatory depth (and why often the answer lies within the question), the effects of tight feedback loops, and multiple applications for life and investment decisions. Towards the end we caught on to the fact that Annie had actually been incepting us with ideas from her new book all along. We had been looking forward to this conversation for some time and it exceeded our expectations.
Thank you for watching and listening. See you next week.
*ReSolve Global refers to ReSolve Asset Management SEZC (Cayman) which is registered with the Commodity Futures Trading Commission as a commodity trading advisor and commodity pool operator. This registration is administered through the National Futures Association (“NFA”). Further, ReSolve Global is a registered person with the Cayman Islands Monetary Authority.
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