Introduction
Annie Duke is a Special Partner focused on Decision Science at First Round Capital Partners, a seed stage venture fund.
Annie is a prolific author in the decision making space having written "Thinking in Bets" - a national bestseller, "How to decide: Simple tools for making better choices” and the latest book “Quit - the power of knowing when to walk away”.
As a former professional poker player, she has won more than 4 million dollars, won a World Series of Poker bracelet and is the only woman to have won the World Series of Poker Tournament of Champions and the NBC National Poker Heads-Up Championship.
During this episode we discuss about the difference between decision quality and outcome quality, some frameworks she advises entrepreneurs to use when making decisions and the power of mental time travel.
Enjoy!
Conversation
Chapter 1: Introduction
Narrator: Hello D. Darlings, welcome to a new episode of the Venture podcast. Our guest today is Annie Duke, special partner focused on decision science at First Round Capital Partners, a seed-stage venture fund. Annie is a prolific author in the decision-making space, having written Thinking in Bets, a national bestseller, How to Decide, Simple Tools for Making Better Choices, and the latest book Quit: The Power of Knowing When to Walk Away. As a former professional poker player, she has won more than $4 million, won a World Series of Poker Bracelet and is the only woman to have won the World Series of Poker Tournament of Champions and the NBC National Poker Heads Up Championship. During this episode, we discuss, you guessed, about decision-making and also about the differences between decision quality and outcome quality, some frameworks she advises entrepreneurs to use when making decisions, and the power of mental time travel. Enjoy.
Chapter 2: Annie's Background
Interviewer: Congratulations. And does it come from also a curiosity like do you have systems in your head you would like to learn more about it and writing also helps you clarify or learn more about it or is the opposite you already think that or you already have all the knowledge?
Annie Duke: I don't have all the knowledge about anything. So it's definitely not the latter. So the so the poker book in particular Decide to Play Great Poker was very much informed by the former. I started teaching poker somewhere around like doing poker seminars and whatnot. I think somewhere around like 2004 might have been the first one I did and then started doing them like regularly starting in 2005. And what I found was it was making me so much of a better poker player. And the reason was that when you have to teach something, you're really testing your assumptions because you're saying them explicitly and out loud. And there's a big difference between sort of thinking you know it and then do I actually know know it well enough to explain it to somebody and if so does it make any sense and what I found was that a lot of the things that I was doing at the table that I sort of have been doing for a long time that I thought were effective and thought were correct when I was trying to teach them to this group of you know intermediate poker players I realized that these things I'm doing kind of make no sense so it started to transform my game when I was teaching which was really exciting and it was mainly because I found out that a lot of the stuff that I was doing was just stupid and I ought to stop doing that so I I did and so then obviously writing a book is even more so because you can't like wing it right people can go back and look and and that kind of stuff so you know I found that that really helped me to understand this you know the problem that I had been really approaching as a career for a long time in terms of the books that I've written in cognitive science they're teaching me maybe more than they're teaching my audience just in terms of like gathering my thoughts trying to figure out how to explain things coherently and whatnot.1
Chapter 3: What Poker Taught Annie about Decision-Making
Interviewer: I I was in LA late last uh year for the all-in summit and also there it was a person teaching poker to women and then they said how important poker is in decision-making and managing risk and thinking about career. So you were a professional poker player winning over $4 million during your career. What did poker teach you about decision-making?
Annie Duke: What didn't it teach me, that would be a shorter answer here? Here's the essential problem that we have in making almost any decision that we make in our lives. So our decisions are influenced by two forms of uncertainty. The first we can feel all the time, which is luck. This is the technical term if people want to know what it is is aliatory uncertainty. So it's just look when I make a decision right, so I lock in a choice there's different outcomes that are associated with that choice. None of those outcomes are determined right, so there's some set of outcomes that are associated with the choice. Each of those outcomes has some probability of occurring and the outcome that I actually end up observing uh just determined by luck and it's probabilistic. So, so you can think about like if you're if you're driving in a car and you go through a green light, there's a variety of outcomes that can occur. The one that is the most common is that you go through the intersection and everything's fine. But then there's a set of outcomes that have somebody running the red light and hitting you or you blowing a tire or all those things. They're rare. But there's a probability of those things occurring. So, and whether those occur, right? Like when you go through that traffic light, you don't have control of what's happening, the person coming from the other direction, and they may run the red light, and it's just not in your control. And and you're going to observe that outcome some amount of the time. In poker, that's really obvious. So, I know that any card, the probability of any single card getting turned over on the next deal is right around 1.8 1.9ish%. So you tend to in your head just round up to two because it's easier to multiply that. So I know for example that if I'm drawing for a flush and I believe that all nine, you know, I have four hearts and there's nine other hearts that on the next card about 18% of the time heart will appear and the rest of the time it's going to be not a heart. That it could be other cards that help me and I can calculate what those are. But that tells me the probability of we could broadly say my hand getting help or my hand not getting help. Right? So, and I know that I don't have any control over that, right? I just know that 18% of the time I'll get help and my hand will turn into a flush. If I have two cards to come, it's even better because then I get two tries at it. I'm over 30% then, right? But on with one card to come, I would be around 18%. So, I just know it's it's not that I have any control over what the next card is going to be. I just know that 18% of the time I'm going to observe this help happen to my hand. So, in poker, it really teaches you that what that luck element really is, right? Because it's very hard in poker to make this mistake. I should have known it was going to be a heart or I should have known it wasn't going to be a heart. It seems so nonsensical in poker to say that because you know that there's this random deal on the cards. But in life, we do that all the time. We buy a stock, it goes down. I should have known that. As if that was the only result that could have occurred. We sort of forget that there's some probability it's going to go up and some probability it's going to go down and sometimes we're going to observe it going down and sometimes we're going to observe it going up and on that one time it doesn't actually really tell us whether it was a positive expected value bet to bet on that stock right but in poker like you really learn this idea the other form of uncertainty that's influencing our decisions is what we would call epistemic uncertainty which just simply means I know very little in comparison to all there is to be known and this obviously as you can imagine like really hampers our decision making because if we were omniscient and we knew every fact there was to know it would make decision-making a lot easier but we're not and so so you can feel this in poker really deeply because I can see my card I cannot see anybody else's card so everybody else's cards are hidden from me and so you're just living very deeply in this idea that you have to start to sort of make these educated guesses at like what are the other people holding and you get pretty comfortable with the idea that that you can't know for sure, right? That you've got to sort of do your best in that environment.
Chapter 4: Decision Quality vs Outcome Quality
Interviewer: I coach a lot of entrepreneurs and I definitely see a bias or an overlap between decision quality and outcome quality absolutely right if they took a decision and then the outcome is good to your point their self-image I'm so smart but whereas like for an entrepreneur and just so many ups and downs how do you think we should look at it and not have our self-image affected knowing that the decision quality was good regardless if the outcome was not good?3
Annie Duke: So I think there's a couple of things that you can do. So let me just say 100% outcomes are completely determined by decision quality in the long run for any game that has skill involved. So I mean if you're playing the lottery it doesn't matter in the long run you're just going to you're going to lose like what whatever like that there it's a that's a game of pure luck but assuming assuming that there's skill in a game if you have a large enough end the outcome will actually map back on to the quality of the decisions that you made over some period of time I want to be clear about that like we're talking about a short-term problem here so this is a big problem for not just poker players but entrepreneurs as well so I I think there's a few things that you can do one is that you can become completely obsessed with process so this is one of the things I did as a player is I was so obsessed with what's the quality of the decision, what was my bet sizing, did I play the right hand, like should I even been in the hand, did I maximize in terms of the amount of money I could get from my opponent?3
Chapter 5: Gathering Information
Interviewer: So if you if we look at the decision quality and then we should be aware that then the outcome has some luck and some things that actually we didn't know. How much information do you think is enough? Like how do you decide the amount of information from let's say buying an apartment? You know that the price might go up or down. You still try to do your research. What's the price per square meter? What would you like to pay? Or if you're a founder you want to hire like let's say an executive you get all the information let's say some referrals you read their CVs you have the interviews but you still note that you did everything in your process to guarantee the decision quality is high and you know that you have no control on the outcome but then how much information do you think is enough to gather in the equation of luck and the things that you know and things that you don't know.4
Annie Duke: The answer is it's not one size fits all. It depends on the decision. So let me just give you two big concepts that tell you what the answer to this is.5
Chapter 6: The Role of Intuition
Interviewer: What is your take on intuition in decision-making? Famously Jeff Bezos says that you have to take the decision with 60 70% of the data because if you wait until you have all the data then it's too late. How do you think intuition plays into it given that we're irrational actors?6
Annie Duke: So here here's the thing about intuition is sometimes it's good and then a lot of times it's bad. So when Jeff Basos is saying you just have to make the decision with 70% of the information, he's not saying you're going with your intuition. He's saying you got to 70% certainty. By the way, he's 100% right. Like don't go beyond that cuz That's an illusion because you can't even get to you you might think you can get to 90% but you can't and at some point you got to decide right but on the intuition side again like sometimes sometimes your intuition is pretty good and and sometimes it's really bad. The problem is that if we sort of leave the decision with our gut there's no way for us to know if it's really good or if it's really bad because we know it can be both.6
Chapter 7: Frameworks for Founders
Interviewer: Do you also work with founders? What are like two or three frameworks that you teach them? I know that probably we covered some of them
Annie Duke: Well, that we have I would say that the two frameworks that I think are probably the most valuable. The first one is called Monkeys and Pedestals and the second Mental time travel
Chapter 8: Mental Time Travel
Interviewer: Love that. And also like I think this this kind of ties a little bit and it's easier to make the decision before you are into the meadow of decision.
Annie Duke: Yeah. So one of the one of the really big things that's I think like I find it very fascinating about decision-making is that it feels like there should literally be no difference between seeing a signal that you ought to stop at the time that it shows up and deciding or imagining that signal occurring sometime in the future writing it down and committing to do something when you see it like why are those two things different but they are they're really different and I think that that's just a really important thing to understand about decision-making is the more that you can engage in mental time travel and kind of plan in advance and that's also true for what are you going to do when you see good stuff happen as well and then you know make these sort of pre-commitments to what you're going to do under those circumstances the better off you're going to be for sure.