Annie Duke on Better Investing and the Danger of Grit
49:27 Share

As a long-term investor, you need long-term insights. Use AssetCamp to look past speculative market hype and understand past performance, current trends, and model expected returns for stock and bond indexes. Markets move in cycles. Don't miss what's next. Get a seven-day free trial at AssetCamp.com. That's A-S-S-E-T-C-A-M-P dot com.

Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. I'm here with my son, Camden, and we have a special episode, episode 406, where we interview and have a discussion with Annie Duke on investing, including when to sell investments, and on quitting, as well as just decision-making in general. And Camden, why don't you go ahead and introduce Annie Duke in terms of her background and bio.

I'm really excited for the special interview episode that we have today. Annie Duke is an author, speaker, and consultant in the decision-making space, as well as special partner focused on decision science at First Round Capital Partners, a seed stage venture fund. Annie's latest book, Quit, The Power of Knowing When to Walk Away, was released on October 4th, 2022.

Her previous book, Thinking and Bets, is a national bestseller and is highly influential on the investing philosophy of money for the rest of us. As a former professional poker player, she has won more than $4 million in tournament poker, 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. She retired from the game in 2012.

Prior to becoming a professional poker player, Annie was awarded a National Science Foundation Fellowship to study cognitive psychology at the University of Pennsylvania.

These days, Annie loves to dive deep into decision-making under uncertainty. As can be seen from her new book, her latest obsession is quitting. In particular, she's on a mission to rehabilitate the term and get people to be proud of walking away from things. As David mentioned, we had an opportunity to sit down with Annie to discuss, among other things, quitting, how it can be better at investing and know when to sell, and what to consider when making financial goals. So let's go ahead and jump in.

Thank you so much for being here with us today. We're really excited to have you. Your work in your first book, Thinking in Bets, was really influential to a lot of what David had set up initially on money for the rest of us.

And we also know that you are one of the people that were one of the earlier readers of the Money for the Rest of Us book. We have that blurb on there from you. And so we're really excited to actually have this opportunity to talk with you on the podcast and to have this conversation. Well, I'm so excited to be here. This is going to be a fun conversation, I'm sure.

Now, having read the book and we've spent a lot of time on our show contrasting decision-making under risk versus decision-making under uncertainty. In the first part of the book, you talk about this expected value analysis.

where we're outlining a range of possible outcomes and then assigning probabilities to them. In my mind, a red flag went off. I was an investment advisor, institutional money manager for 15 years, looking at quitting and was trying to do that at one point. I remember being on a plane doing this decision tree, assigning probabilities.

It didn't work very well because when I think of uncertainties, I think of we don't know what the possible outcomes are. If we can't assign probabilities to that, how do we do an expected value analysis when we just don't know? So David, I love this question. This is, I think, a common pushback that I get. And in particular, I get this pushback when people talk about things like marriage. How could I possibly do that? It's like a one-off thing.

I can't possibly know what the probability of success is. This is a weird one-time decision for most of them. For me, it was a two-time decision, but it's rare. So first of all, let me just say risk is uncertainty. It's just a different type of uncertainty that just has to do with, as you're thinking about what's your exposure to the downside, right? And we don't really have a lot of control over when we experience the downside. But as far as the expected value question, I'm not saying that you can do it exactly.

And I think that this is where people get tripped up, right? I'm not saying that you can write out some sort of equation that looks like two plus two equals four. But the fact is that for any decision you make, you are making these forecasts. Kind of definitionally speaking, you're trying to make some guess at this implicitly. So even though I can't write it down perfectly, it's simply put, like if I choose to take one route to work instead of another, implied in that is I think the expected value is higher for the route that I'm choosing for whatever the things are that I value.

And for something like marriage, yeah, okay, it's hard, but you're doing it implicitly. And the reason why I know you're doing it implicitly is because you don't walk onto the street and marry a random person. Because if expected value didn't make any sense to apply to situations in which you were uncertain of what the expected value exactly was, then you would marry a random person and expect it to work out just as well as if you actually thought about it or had someone set you up or if there were some thought that went into it.

So the thing I think we need to get away from is that just because you can't come up with an exact answer doesn't mean that we shouldn't be trying to make these forecasts. Because when we do try to make these forecasts, what we realize is that it's not that we know nothing, right? We know some things and we need to bring those things to the table. And when we try to make these forecasts, it also makes us think about what information could I go discover that might help me make this forecast, right?

And then we need to realize that we're going to have some amount of confidence around the forecast. So what you're describing to me as you're trying to do that is, oh, I can't come up with an exact answer. It just means your confidence intervals were somewhat wide. But the thing is, they weren't so wide that you were going from zero to infinity, right? And any narrowing down we can do, the better off we are. So let me try to make this clear. So I'm sitting on a chair, right?

Give me a point estimate for how much this chair weighs. 25 pounds. Okay. So why didn't you guess 1,000 pounds? Because steel is really expensive right now. Yeah. And chairs don't weigh that much, right? That's not logical. You know a lot about chairs. And why didn't you guess one pound?

Because it would collapse under my weight. Well, maybe. It would be an engineering feat if it didn't collapse under my weight, weighing only one pound. I'd be like sitting on feathers. So here's a good example. Is 25 pounds exactly right? Probably not. I haven't weighed the chair.

Right. So 25 pounds is probably not the weight of the chair, but man, it's going to be pretty close to the weight of the chair compared to all the possibilities that there are. And that's where we have to realize there's value in that. So once you say these things really are expected value calculations, it's just that I know that I can't calculate it exactly.

But the more that I can get into the zone, the more that I'm sort of thinking about it that way, probably the better off I'm going to be. That's going to be really helpful. And when you start thinking about how do you deal with risk? Well, we know risk is related to expected value, right? So what I'm really comparing is what's the expected value, but also what's my exposure to the downside. And I need to actually have both of those pieces of information in order to make a reasonable decision about, say, what I want to invest in or how I want to manage my money, for example, right?

So I just think that just because we can't get an exact answer doesn't mean that we shouldn't try. And in fact, there's a tremendous amount of value in the trying and the framework. I hope that makes sense. No, that makes sense. I assume you didn't marry someone random on the street. Yeah, not the first time. No, I didn't. No, I didn't. No. Yeah, I got lucky. We've been married 32 years. You dated them for a while. Yeah. I mean, that's a good point because...

I actually made a list at one point, like, should I marry the pro or should I like, what are the, so you're right. We do it. And maybe do you think this type of probabilistic expected value analysis helps us control our emotions? I think I recall something in thinking and bets where by doing probabilities, we avoid extremes because it's sort of, we don't blame ourselves as much when we don't make, when we make a mistake or it didn't work out like we thought if we do the probability analysis.

Well, yeah, I mean, I think that we just we just have this, you know, and we have this resulting problem, right? If we get a bad outcome, we think we've made a mistake because the outcome feels, well, it feels inevitable. So therefore, we should have known, you know, we get a good outcome, we think we're a genius. You're trying to decide between two things on a menu, the fish or the chicken, and you order the chicken, and it's bad. And you think, oh, I'm so stupid, I should have ordered the fish. What a mistake. It's like, well, that's ridiculous. Yeah.

Right. So if you actually think about it this way, like if you're really having trouble deciding between the chicken and the fish, that means that it's like equally likely that you're going to like or hate either one. That's what it means to be a close call. Right. So that's a situation where you would assign a 50 percent probability to each of it being a good outcome.

So then whatever you order the chicken, it's a close call and it doesn't work out. Well, you kind of knew it wasn't that it wasn't going to work out. And by the way, it wasn't going to work out the exact same amount of time as the fish wasn't going to work out in your estimation, which is really all you can do. But once you've gained the new information, it's not about going back and blaming yourself for it and saying, could I use this information going forward? And the answer here would be yes. If I go back to this restaurant, I should know that I don't like the chicken here.

So that's what matters, right, is how am I incorporating this into my decision making going forward, not how am I sort of misinterpreting or getting emotional about it. And then also kind of just to your point, when you even the process of thinking about this way reduces how much emotion goes into the decision, right?

And it also can really help you to sort of overcome the biases that are coming from your own perspective. Because when you start to think about, well, what's the probability of things occurring? One of the really big questions that you should ask in there is how often does this occur in a situation similar to the one that I'm considering?

So if we think about investing, right, and I'm going to index the market, one of the things that I can do in terms of answering these types of questions for myself is ask, on average, year over year, what's the probability that if I index the market, I'll be up at the end of the year? And I believe the answer to that is 70-ish percent. It's in that zone, right? So now I know that

You know, and we if we think about two years ago, well, right before COVID, we would have been really anchored to it goes up every year, which would be the wrong expectation to have. Right. If we're anchored, I suppose, to today, we'd be like, oh, it's just going to go down. Right. Because things have not been going well recently. So we can get really anchored by our recent experience, our own experience, right.

So the way that we know this is something that Michael Movison put so well, the way we normally go into a decision is we get some information and then we sort of put our perspective on it. And by thinking about these probabilities and asking what the base rate is, what normally happens, we have an in-between step that helps us to sort of get our own biases out of it.

and start to see things a little bit more objectively. So, you know, if you asked me, you know, you're going to invest in something next year, what's the chances by the end of the year that the stock market goes up? I could just look at the base rate and say, well, I suppose it's 70%. Or I could say, well, maybe there's more information. I could look at what has happened in the past when inflation has been this high, right, in the year after.

And that could create a base rate for me as well that might be a little bit more precise in this case, but it helps to set my expectations appropriately and then I can make better decisions around it.

Yeah, that makes sense. And that's a lot like how we teach investing is like, what is the temperature? What's the market temperatures? What, you know, put it into historical perspective, not because we know what's going to happen, but at least we can put some parameters around that. And set expectations appropriately and then make your decisions. And then obviously you're going to have new information discovery.

Right. So if you had invested in tech stocks last year, things would have gone well for a little bit and then they would have gone really badly. And you can set a plan in place in advance, which says, what are the things that I could see that would cause me to rebalance or to reinvest or to quit and sit out this market for a while or, you know, whatever it is that you're thinking about, you can sort of anticipate in advance. And it's better if you anticipate in advance because those decisions are

about, you know, sort of changing course are incredibly hard for us. So this type of thinking helps us also sort of think in advance about how could that temperature change that would then make me change what I'm doing, you know, and like a very simple example of that is just a stop loss. That's a really simple example of that type of strategy. Usually you want it to be a little bit more nuanced than that, but a stop loss is one of, you know, a simple example of it.

Which is interesting, though, because when I've used stop losses before, what I found, particularly for more volatile asset classes, it seems like the price comes near to that stop loss, or maybe it triggers it and then goes back up. And then I feel like even worse, because

It was there, but it wasn't there for very long. Yeah. I mean, that's why I said it's usually good to have something that's a little bit more nuanced than that. But for a retail investor, a stop loss is just a really good tool because a retail investor is not going to be a particularly good judge of why the stock went down.

Right. An expert investor is going to be a much better judge of that. So a stop loss for an expert investor doesn't make so much sense except for from a risk perspective. Right. How much risk do you want to have on at any given time? But not from the decision making perspective about is the stock worth holding?

So those are two separate questions. But a retail investor isn't going to be able to answer that question as well. So just having a stop out is generally going to make them do better than if you sort of left that decision to their own devices. Right. Regret or not, we know mathematically that retail investors will do better if they have stop losses in place.

They'll also do better if they don't pick individual stocks, which is something. That's the key. Which would take a lot of the emotion out and a lot of the information. That's really key. But you know their uncle's going to recommend a stock to them. So what are you going to do? Put a stop loss on it. There you go. Well, you're right. That's fair. And we all have to kind of go through that. I mean, we don't discourage people from trying out investing in stocks. Just calculate your performance to make sure you know how well or poorly it did.

So let's turn a little bit to investing. You reference a pretty fascinating paper, an academic paper in your book, Selling Fast and Buying Slow, where the co-authors, they looked at 783 institutional portfolios. Average value was about $570 million. So it's probably enough to actually add value.

What I found surprising is they were actually successful at buying stocks. They were 120 bps better than the benchmark, I believe. Right. So just great. They were great. But then then they lost most of it, if not all of it when they sold. Why was selling or why is selling so difficult even for professionals?

Yeah. So, okay. So let me set the stage. So, so look, this book that I wrote is about why quitting is really hard for us to do, like that we're bad at it, even though it's an incredibly important option to have in your hand, right? So you make a decision, you find out new stuff after the fact, the option to quit is what lets you react to that. So you can get out of it.

But then we don't, we're actually really bad at exercising that option. So on the retail trader side, when they have these stop losses, they actually cancel them and let it ride. So that's a particular mistake with quitting that non-institutional investors will make, just like everyday people. And it's because like, but if I sell now, I can't get my money back. That's sort of in a nutshell what's going on there. Institutional investors do not make that mistake.

So they don't just keep the losers riding. Instead, what happens is on the buy side, they're doing 120 bps better than the market. On the sell side, they're doing about 70 bps worse than a benchmark. And the benchmark that Alex Ima set up, which I think is amazing, is what if we threw darts at your portfolio to free that capital up?

So that's a good benchmark. We just randomly free capital up across the portfolio because the situations that he's specifically looking at are an institutional investor that's fully committed. They now have a new thesis that they want to trade. So what do they have to do? They have to go free capital up from their existing portfolio in order to be able to trade this new thing. So that's the question that we're asking.

So obviously 70 bips worse than the market is terrible, particularly for people who are clearly really good investors. We know that from their buy side behavior. So when he looked into it, what he found was that the investors were using a heuristic, which was to only look at the extremes, the tails.

When they freed up the capital, they would be freeing it up from either the extreme winners or the extreme losers in the portfolio that they were currently holding. In other words, they weren't looking at the whole portfolio to think about something like expected value. Like what's the lowest expected value thing that I have sitting in my portfolio, which may be, you know, the thing that hasn't moved at all in a really long time, for example, right? That's just like super low volatility, but it's not really going to make anything, whatever. They're not looking at anything except for the tails, right?

First of all, that's bad, right? So they're using a rule of thumb that isn't actually about what is my best thing going forward, which of course is what they're doing on the buy side, right? When they're choosing to buy, they're doing all sorts of quant analysis and what should I, you know, what's the highest expected value and how much risk can I take on and so on and so forth. And that's actually why they're so good. But on the sell side, they just dump all of that.

They're not thinking like, if I were to look at my whole portfolio, what's the one thing I wouldn't buy today? Because that's really the question that you should ask. Like, where's the stuff that I wouldn't buy today? And apply the same rigor to that decision. Instead, they're just going, well, this one's winning a lot or this one's losing a lot. Just that rule of thumb. So it's the ones that have the greatest emotion then. Exactly. It could capture the gain and feel great about it or get rid of the pain. Or get rid of the pain of carrying that loss in my books, right? Right.

One thing that Alex points out, which I think is so insightful, is that they're using this rule of thumb. And then unlike on the buy side, there's a feedback problem for them to know that the rule of thumb isn't any good. So when you buy something, you track it. I mean, it's as simple as that. It's in your portfolio. You can see the tick up and tick down every day, right? You're looking at the PL&L. But when you buy it, it's done. It's off the books.

So it's like nobody's creating sort of going through the work that that Imus went through actually to be able to understand this, which is to say, well, let's compare it to the benchmark over time and actually bothering to create the benchmark and then compare. People aren't doing that because once you sell it, it's gone. We can only get better by closing those feedback loops, but they're not getting the feedback to be able to close. So they're not even aware that they're losing so much to these sell side decisions.

This really brings up a problem, not just for investors, but for all of us with our quitting decisions is that when we quit something, we're kind of left with a vague counterfactual, right? Like of wondering what if I had married the one that got away?

Right. Like what if I had done this other thing that we have abandoned? And that's just sort of stories we're telling in our head. And that brings up the shame of what's happening with the institutional investors, because unlike us who have to make up the stories, because there's no way for us to know we can't live the alternative universe. They actually have a way to explore the alternative universe, but they're not doing it.

Right. And we should. And I wonder if it seems like maybe retail investors are better at doing that because like like I sold an ETF PFI X a month or so ago, and this was a ETF that protects against rising interest rates. So it done very well. It's a 35 percent. And then I sold it.

And it's not, you know, it's 0.2% of my net worth. But it still feels bad because interest rates continue to go up. And so you still have that emotion. So I wonder if retail investors tend to remember having sold something that they didn't want or that didn't work out. My hope is that they don't remember that.

So here's the, because again, that's sort of like the one example, right? Then you get into like, we should all be like Steve Jobs because Steve Jobs was successful. So we should all be exactly that kind of leader, right? But that's just survivorship bias. Here's the tendency that we have. We have a twofold problem with buying and selling, with quitting, with sticking. We really like to sell things when we're in the gains. So when we have a gain on paper, we want to sell it.

There's sort of a pattern to these quitting and sticking decisions and where we get them wrong. So essentially this, we love to quit when we're in the gains and we hate to sell when we're in the losses.

So just simply put, if you have a stock that's trading $10 higher than you bought it at, you're going to have a tendency to want to sell it because you want to take those gains that are on paper and you want to turn them into realized gains. You can kind of think about it this way. As long as I hold it, then I could lose the money that I've won.

And I don't want to do that. So we want to take the sure win. And the only time that the win is sure is after we quit, right? We have to sell it in order to lock it up. So we like to do that. And in fact, it's other work by Imas that he actually looked at retail traders. And what he found was that they were canceling their take gains before they ever reached the benchmark that the take gain was telling them to sell at.

So they buy it at 50, the take gain is 65. At 58, they're done. You know, they're just selling it. Okay, so that's on the one side of the equation. On the other side of the equation is that we don't like to sell things that are in the losses. Why? Well, kind of for the same reason, right? Like the moment that you sell is when you go from on paper to realized. So that's when you're sure.

And just as we love to take unrealized gains and turn them into realized gains, we do not like to take unrealized losses and turn them into realized losses. We just do not like that moment. It's called sure loss aversion. This is a concept, an idea that comes from Daniel Kahneman, Nobel laureate.

What you see with stop loss orders is the reverse of take gain orders. They also cancel their stop loss orders, but that's to let it ride. They want to keep going with it. Because again, if you bought it at 50 and it's now trading at 40, you haven't really lost the $10 until you sell.

You haven't though. And that's the thing. A loss is a lot. If it's down, it's a loss. Yeah. Even if it's unrealized. I don't know why our brains work that way that as an institutional investor, when our portfolio was down, I felt awful whether we sold the investment or not. I guess not everyone sees it. Which by the way, maybe you shouldn't because that's just vol. I think one of the insights here comes from Richard Thaler, also a Nobel laureate. I like to pay attention to Nobel laureates. I figure they have something good to say.

And he talks about this quirk of our mental accounting. So you talked about your portfolio, right? But that's not the way that most people think. Most people think about an individual stock. Our mental accounting works such that when we start something, we open up a mental account for it. Okay, so think about this cognitive ledger that we carry around with us, right? When we're in the losses, we don't want to close that account in the losses. In other words, we don't want to exit in the losses, right?

So, of course, this is silly, right? Because we have limited time, attention, money, so on and so forth. And at any given point in time, we want to be directing those resources into the place that has the highest ROI. It shouldn't matter if that one account is in the losses because you assume that there are other things that you could be doing where if you closed it, you'd be able to now move your resources into something that would perform better.

Right. I mean, that that should be like if you were logical, you would think of it all as fungible.

one across the other, and we should be counting across all of the decisions we make or all of the investments we hold or across the whole portfolio. It's just not the way that our brains work. We think about things kind of one at a time, and that's not just true for investing. We have to realize any time that you're spending, say, training for a marathon is time that you can't spend on other things. If you're in a job, that's time that you can't spend in another job because you're not two people. You're a

And if you're in a job that you hate, not switching is costing you a lot because it's not letting you switch to an opportunity that would be better. In the same sense as if I'm staying in a stock in an investment that's a losing investment in the real sense of a losing investing, meaning it's negative expected value just because I happen to have lost money in it already.

That's preventing me from moving that money, maybe that $40, right, into something that is positive expected value. And this is what this quirk of our mental accounting makes us do, is it causes us to be like super sticky in situations where we're in the losses and probably not sticky enough when we're in the gains. When our portfolio is down, we aren't thinking very rationally about, well, if I were coming to this decision fresh, right?

Is this what my portfolio would look like? Because that's the question that we should be asking ourselves. But instead, we come to the portfolio that's down and we're much more likely to answer that question yes, because we don't want to actually change things around and have to realize some of those losses.

So it's just, you know, it's bad. So if I understand this by sort of zooming out as opposed to being focused on that one position, whether it's a gain or loss, zooming out helps us to sort of both in investing, you know, look at the portfolio or even in life. I think in your book, you talk about diversity of skills.

or talents. And I know this is something that Cam done with our kids. When they quit, we say it's okay because you've gotten more inventory that you can use in the future. Which most parents do. Most parents say my child's not a quitter, you're not going to quit, which prevents them from developing a diverse set of skills, which helps you sort of have a better, obviously have a better life later on. I completely agree. I mean, there's one tactic you can do, which is like

You can say to yourself, let's say you're in a job or something. If I weren't in this job, what could I be doing with all of this time? What other jobs are available to me? Like you can try to refocus yourself over to the opportunity costs as opposed to the fear of failing at the thing that you're doing. Imagine if I sold this portfolio, what would I do with all this money? And that starts to get you focused on the opportunity costs.

It's hard to do, though, because the force of these sunk cost problems are really strong. There's two really good ways to deal with it. One is to get a quitting coach, which would be like a financial advisor could act as that person. Somebody who has experience, who's going to see this situation more clearly than you, who's not going to be in it with you.

Who's not going to be experiencing the pain of those losses with you and get them to help you with these decisions. Right. And I think that's the real value of outside advisors is they can they have a perspective that's going to be clearer than yours. And it's not going to be it's going to be unfettered from your own biases, which is going to be really helpful.

And the other thing you can do is advance planning and actually follow through on it. So for a retail investor, stop losses and take gains are really good as long as you follow them. But for a more sophisticated investor, it's like when you decide to invest in something, you create your portfolio, you have a thesis. You have some idea of what the fundamentals are going to look like. For example, when you had your investment on that was a hedge against that was going to do well when interest rates rose, I assume that was somewhat acting as a hedge.

No, it was, right. And there was a thesis that when inflation appeared to be peaking, which it was, get out, right? Because it was inflation based. But we've seen rates go up, but it feels bad. I mean, it's still, I don't think there's any way to get around to feeling bad when you get out and it keeps going up.

Well, but there is if you sort of write it down in advance. And let me explain what I mean. When you decide, okay, I think it's appropriate to put this hedge on, you know, or maybe it's not even a hedge. Maybe you're just betting on interest rates going up.

And you have a thesis as to why that is that has to do with, say, the macro environment. There are certain fundamentals that you're looking at that are signaling that, you know, obviously monetary policy, so on and so forth, that you're predicting are going to drive inflation. At the time that you do it, don't just figure out what your thesis is and then buy and assume inflation.

That when the world is telling you that you ought to quit, that you will, that you ought to sell, that you will instead in advance say, if this is my thesis, then when I see certain fundamentals or the macro environment moving in a particular way, that is when I should take risk off.

If I see these other things happening, that's when I should put risk on. And it feels like a distinction without a difference, right? Like, well, I had my thesis. So obviously if the world's moving against my thesis or toward my thesis, I'm clearly going to pay attention to that and act rationally.

But the problem is you're not going to because by that time you've already started to accumulate gains or losses, which distorts our ability to be able to actually read those signals appropriately. So you just need to take an extra step when you work out what your thesis is and what your rationale is, right?

At that time, say, what could I be seeing in the fundamentals or the macro environment, so on and so forth, that would tell me that I should take risk off or put risk on. Right. And do that work in advance. Now, when you've done that and you sell and the world goes one way or the other, it's a lot easier to say, no, like I had a thesis and I thought about this and I made money on it. And that's just luck. It becomes much easier to do that. Before we continue, let me pause and share some words from this week's sponsors.

As many of you know, I used to be an institutional investment advisor. I advised clients like the Texas A&M University System, the Sierra Club Foundation, and others strategizing investments across billions of dollars. To help, I had access to top-tier tools and information, which was crucial for making smart investment decisions.

Since starting this podcast, however, I've been frustrated that the same tools I relied on aren't available to you, even though personal investing requires just as much thought and trust as institutional investing, maybe even more since it's your own money. That's why I created AssetCamp. AssetCamp's tools and insights puts you at the forefront of investing, allowing you to make informed decisions using stock and bond data that was once only available to institutional insiders for tens of thousands of dollars per year.

AssetCamp is not a stock picking tool. It's

asset-focused research built on the same methods used to grow and manage leading endowments and investment funds worldwide. AssetCamp helps you easily understand what drove past returns for the stock and bond markets, laying the foundation for your next move. With AssetCamp's powerful charts and tables, you can easily identify potential opportunities and risks. You can also confidently navigate the future by modeling expected stock and bond market returns and stress testing all your decisions.

AssetCamp also teaches you expert investing tactics in a monthly user webinar, including an open Q&A portion where I answer your investing questions. I invite you to try AssetCamp free for seven days at AssetCamp.com. That's seven days free access to the world's only asset-focused research tool built specifically for individuals like us. Try it free at AssetCamp.com.

And now, a next-level moment from AT&T Business. Say you've sent out a gigantic shipment of pillows, and they need to be there in time for International Sleep Day. You've got AT&T 5G, so you're fully confident. But the vendor isn't responding, and International Sleep Day is tomorrow. Luckily, AT&T 5G lets you deal with any issues with ease, so the pillows will get delivered and everyone can sleep soundly, especially you. AT&T 5G requires a compatible plan and device. 5G is not available everywhere. See att.com slash 5G for you for details. ♪

On our website, one of the things that helps us is for our premium members, I share the investment decisions I make. And so everybody knows when I bought it and the thesis at the time, and they know why I sold it and the thesis at the time. And that in some ways helps me from like not making trades because I know I have to write it up and explain it. Did you find when you were playing poker professionally that

How you made decisions change if it was a very well televised event or you knew more people were watching every move versus if you were just playing online? That's interesting. I don't think so. I mean, they probably changed a little bit for the worse because I think it can cause you to be a little more risk averse, which is bad. Actually, to your point, I think that my decision making in poker really improved when I was teaching poker seminars.

Because when I was trying to teach them particular concepts, if I couldn't explain it to them in a way that they could understand, I sort of realized this is stupid. I've somehow like convinced myself that this is the right thing to do at the table. And yet I literally am incapable of explaining to someone else why it's correct. I found that incredibly helpful. I think for similar reasons that you find what you do helpful.

So when I'm in the moment of making a decision, audience or not, there's probably only going to be bad things that are going to be occurring from people looking in on me. But when I'm teaching, I'm not like in the middle of a hand and I can kind of step back and see the situation more clearly. And then when I realized I have no way to describe this and teach somebody the concept, it changed a lot about my game and it

really, really wonderful way. I think it made me a lot better player to be able to actually have to do that. And I think one of the best ways to figure out like what you know is to actually try to teach it to somebody else. It can be a very humbling experience. Oh yeah. And in fact, in my book, that was sort of one of the rules. If you can't explain an investment to somebody else, don't invest. Don't do it. Because we don't know. We think we know, but as soon as you're right, as soon as we try explaining it, realize, well, maybe we don't know it as well as we thought.

Right, exactly. I've really appreciated being able to listen to all of this. Obviously, I have a little bit less life experience and, you know, just I'm not a poker player. I haven't been doing investments in the same way or talking to Nobel laureates. But it's always really fascinating to be able to listen to this from kind of a different perspective. And for me, one of the things that was really powerful is sort of towards the end of the book, you talk about goal myopia. Yeah.

You have kind of referred to a lot of the elements around it where we like to be, you know, we like to quit when we're in the gains.

and, you know, and kind of get out then. We don't like to quit when we're in the losses. And this idea that goals are this thing that we make that are so black and white. They're kind of this, it's a finish line. You either win or you lose. And we're not very good at taking in new information that allows us to alter the goal. Or it becomes, I think you phrased it, I found this really powerful, that it becomes this stand-in for the

the desire that you originally had. We become focused on the goal rather than the improvement or the kind of the journey that the goal originally represented. And as somebody who's sort of becoming much more aware of some of their perfectionist tendencies, I was like, wow, that really, I think that really resonated.

And so I'd love to just take a moment to talk about how that affects our ideas of quitting, because that to me, I think really captured both ends of sort of the positives and the negatives of like, there's so many, there's good things about goals, but negative things about goals. The one twist that I kind of want to add into it is when we're talking about goals and these quitting decisions and these wins and these losses, we're

To me, it feels like when you have something that involves money, whether that's poker bets or investments, because it's something that's so easily quantifiable, it's not nearly as abstract as some vague idea of the future. It's like, oh, it went up by so many numbers or down by so many numbers. It seems to me like the emotion of those goals would be more complicated for us. Money decisions tend to be more complicated than money goals are.

But I'd love to hear kind of just some more of like where your thinking came around that and this idea of cool myopia. Yeah. Okay. So first of all, for all listeners, I'd like to know that I now I'm very aware that Camden has actually read the whole book because he's talking to me about chapter 11, which is the last chapter of the book. So way to go. I love that.

Yeah. Okay. So, so here's the problem. We think about goals as kind of universally good things, right? And there's lots of research that says if you set very clear specific goals,

That will help you to achieve them. Where the problem really lies is a couple of things. One is, as you just said, like goals are graded as pass fail. You either you either hit them or you don't. Right. So I can get 300 feet from the summit of Everest. And if I don't go the extra 300 feet, those that last 300 feet, I fail. Right. Never mind that I climbed like twenty nine thousand feet in the air. It's a failure.

So that can be motivating, right? That sort of pass fail nature, because it gets you to keep going after the goal. But the problem is that it also stops us from quitting paths that aren't worth our time. So, you know, in chapter 11, I open with this story of Siobhan O'Keefe, who on mile eight of the London Marathon in 2019 breaks her leg, like literally snaps her fibula bone and she finishes the race.

Okay, and let's all be honest. We're all a little bit like, ooh, I kind of admire her for that grit. No, don't, no. She was risking a compound fracture and permanent injury that was never going to let her run again, which I assume was her actual goal was to run marathons.

So that particular marathon though, she did not quit, putting in danger her ability to ever run a marathon again. Why? Because there was a finish line. Here's the problem is that when we talk about this mental accounting that we do, like this cognitive ledger that we carry around with us, we need to understand that being in gains or being in the losses isn't a thing that's just objectively true. It's a cognitive phenomenon of the way that we're interpreting the situation.

So if I run eight miles of a marathon, objectively, I've gained eight miles.

That's my objective state. I'm eight miles farther along than I was before. But cognitively, I'm in the losses. I'm short. So I'm short 18.2 miles. What that means is that we don't want to walk away for the same reason that we don't want to sell a stock at 40 that we bought at 50. Because then we have to realize that loss, in this case, the loss of 18.2 miles. So that's really a problem for us.

And as you said, when we originally set a goal, it's like some sort of stand-in for a cost-benefit. It becomes the proxy for a cost-benefit analysis, but then the goal itself becomes the object. And then there's the myopia problem, which is once you're sort of

running that particular marathon, you don't see all the other opportunities, which you can see with Siobhan O'Keefe, right? She keeps running because she can't see the other races that she might also run. So you don't actually even see the other alternatives.

Now, the question about whether this is worse when it comes to money. Well, money can, you know, that target can be a clearer goal. So I think in that sense, it's worse, worse, but I'm not sure that it's necessarily more emotionally challenging for us than like, are you completing a project for your work, which also has a target. I think it has to do with clear targets.

One of the clearest examples of this problem actually comes from a study done by Colin Kammerer, along with a few colleagues, including Richard Thaler, where they just looked at trip sheets from cab drivers in the 1980s. So this was before Uber and cab drivers would rent the medallion. So the medallion is just the license for the cab. So they'd be renting the cab for 12 hour shifts. Obviously, they're not driving the whole 12 hours. So what they wanted to know is like, how are they using this time?

They're choosing to drive some hours, not all 12 on any given day. And are they good at optimizing how much they earn, which you assume is their goal? And what they found was something really weird, which was when there were fares of plenty, they were quitting really soon. And when the fares were few and far between, they were driving really long.

So this is the opposite behavior of what would be rational when there's lots of fares, keep driving when there's no fares, don't drive. But they were doing the opposite so much. So it was so opposite that had they actually driven when the fares were good and stopped when the fares were bad, they would have made 15 percent more than they actually were earning.

OK, so so the question is, and by the way, they would have done 8 percent better if they were just random. I'll drive six hours a day. They would have made 8 percent more money, you know, and we assume they're incentivized to make money. So what's going on? And this kind of comes to your point about like, you know, that monetary targets can be so specific that it's really going to recruit this problem. They had an earnings goal for the day.

That's what they discovered because they asked the drivers. So let's say they want to earn $300 in a day. Well, so what's going to happen? Well, when there's lots of fares around, they're going to get to $300 really fast. And as soon as they hit it, they're done.

But if there aren't any fares around, they're not going to get to the $300, which means they're going to be short of the finish line, which means they are going to keep driving under conditions where the driving is not good. And think about the opportunity costs there, right? Like you're driving around in your cab and there's no one to pick up. You could be doing a gazillion other things with your time, which would be more worthwhile. Maybe even other things that would make money. But there you are in your cab. You're not budging.

I think that that's a good example of like, it's not just people running marathons with broken legs, right? It's like cab drivers were staying in their cabs when there were no fares to be had because they just had a goal. And that's what we really need to be careful of. No, I think that makes a lot of sense. And there's so many different areas in my life that I feel like that applies to. And this idea of just focusing on like, well,

What is that new information that comes in and allowing that flexibility in our decision making? But then also, you know, taking that, I think you also mentioned, you know, redefining failure is, you know, if you've run, if you've trained for your marathon, you're on mile 10 and you have to quit. Sure.

Sure, you didn't finish the race. But, you know, I think you mentioned like, how much healthier are you? Like, you still ran 10 miles, you know that you can run a marathon. You know, for me, it's it's I spend a good amount of my time studying languages. You know, there's all sorts of proficiency tests that I can take to to certify me at certain levels. And even if I miss that mark, you know, that can feel bad. But

but how much better at my language have i gotten how much more experience have i had in meeting new people and talking things there's so many other elements to take into account yeah i love that you know i i say there's a thought experiment that i offer to people which is like imagine that you you it never occurred to you that you wanted to run a marathon so you're just like hanging out on the couch whatever right and then imagine that you do commit to run a marathon you train

And you get 16 miles into the race and you have to quit, which feels worse. Like it's obvious, like running 16 miles of the marathon feels worse, except that to your point, but you not only ran 16 miles, you ran all the miles that you were training. You're clearly in a much healthier position than the person who never decided to do it at all.

but we prefer than didn't even try to the tried and didn't get to the finish line. That's true. Like if you're taking a proficiency test in a, in a language, it's like, nevermind that you speak it way better than most other people do. And you've learned a lot and so on and so forth. It's like, no, I, you know, I missed the goal. And so therefore I'm sad. And I wish I had never tried in the first place, which is man, that's sad. Right. And I think just kind of closing it out, there's this thought that,

And I'm sure that David can attest to this as well, is if you've never, if you, if you never played poker and lost money, or if you never invested in lost money, sure, you didn't ever lose that money, but you never gained that experience in actually becoming a

a better investor because whenever David tells me stories of mistakes that he made or times it felt really bad, clearly those have stuck with him for 10, 15 years and still inform the ways that he makes better decisions or makes these better analysis of value and goals.

It is kind of towards the end of the book there, but that felt like a really powerful way to kind of wrap up a lot of those thoughts. And hopefully it wasn't too much of a spoiler for people who are going to read the book, but I think it's a really beautiful kind of motivator to get through it because I do think that that's a really important thing to remember when we're talking about questions.

quitting versus continuing and kind of that over commitment on grit is that there needs to sort of be that flexibility and in some ways that that humility to recognize that new information comes in. And that just really spoke to me. So. Oh, well, thank you. I don't mind spoilers. I feel spoilers get people to read the book. Annie, thanks for your time. We appreciate you spending another 50 minutes or so with us. Incredibly helpful. Everyone read the book because it's an excellent, excellent book.

Well, thank you so much for your time. I really enjoyed the convo. Really enjoyed our opportunity speaking with Annie Duke and having the conversation that we had. David, was there anything that stuck out to you? I know that there were several things that were very interesting to me from the conversation, but what stuck out to you over the course of what we talked about?

Yeah, the three things that stood out to me was first, this idea of mental accounting, and particularly when it comes to investing, that we tend to have myopia and we focus on this bad thing and this particular investment that's underwater or this particular activity that didn't go well, we felt like it was a mistake. But the ability to zoom out and look at it as a portfolio can

can help us make more systematic decisions. So we don't just focus on one, what happened, the extreme outcomes, what is done very well, what is done very poorly. And just from an emotional standpoint, when the lock and the gain or get rid of the losses, but taking a broader portfolio perspective. And by doing so, not getting so emotionally involved with the extremes. Stepping back allows us to see a broader array and a broader array of choices.

The other thing that really stood out was at the very end when she talked about the taxi drivers, the fact that they continued to work when there wasn't the fair opportunities and quit whenever they met their goal. From an investing standpoint, what we can learn from that is the market's going to give what it's going to give. So if interest rates are low or valuations are really high and the market is just not doing well, sometimes we just step away, step

Step away from just focusing on it because we can't demand returns. The market is what it is and we don't want a financial goal. It'd be a net worth goal. And let's say it's not going as well this year, for example, to achieve whatever net worth target it is. We don't want to take additional risk because we're falling behind our goal. So don't let the goal dictate financial decisions.

if those will lead to additional risk that we might not want to take. Finally, the third thing is just the whole idea which she talked about when she's teaching about poker or other things and putting it into words that people can understand, that actually helped her become a better poker player.

And when we're explaining investments or we're teaching anything, that helps us internalize what we truly believe, but it helps us do better at investing or any other skill, just the action of trying to explain it and teach somebody else.

I think that last one really stuck out to me a lot, too, especially just as I learn about new things, as I've read these types of books, as I've really tried to see concepts that sink in when I talk about them with you or with friends. I realize, you know, if I can't explain it very well, I'm like, I should probably go back and read it and kind of reassess so that I can have that sink in even more. Because if I can't explain it, clearly I have an amount of understanding, but it's maybe not clear enough.

And I thought that was really good as well. And I also really enjoyed the anecdote about the taxi cabs, just because I think that that really highlighted that idea of grit or the downsides of grit or this idea that sometimes we just have when we just have a goal that just working, just working towards the goal without accepting new information, without zooming out, like you said, can really change.

we'll lose that bigger picture and can keep us committed when it's really just not worth our time. That in many ways, that's a bigger failure than not meeting the goal would be to lose out on the opportunities that we're missing because we're just so focused on this one thing rather than continuing to take those opportunities to kind of reassess. That goals are our powerful motivator, but when she talked about climbing Everest,

If those last 300 feet are going to kill you, it's probably okay to say I made it almost there and turn back around, right? And I think that was another example that she had in her book was of hikers that had turned around and then said that wasn't good enough. And then the next time they go, they kind of reach that similar point, but they keep pushing forward and there were disastrous results. Yeah.

We climbed Mount St. Helens. We turned around once it started snowing in June. And I don't spend a whole lot of time worrying about what if we hadn't quit, but perhaps because I wasn't as vested in summiting a word I hadn't even heard of until I started climbing Mount St. Helens. That's an official term, summiting whatever mountain you're climbing. Anything else, Camden, that you were impressed with? No, I think that she just did a really good job of kind of summing up

all of those different elements. I really enjoyed reading the book, especially after having read

Thinking in Bets so recently and just having that opportunity to talk about it because I know that it continues to inform a lot of what I'm thinking about these days. And so I recommend that people check out both books, really. Sounds great. I have enjoyed teaching about investing on this podcast for over eight years now. But I also love to write. There's a benefit to writing over podcasting. And that's why I write a weekly email newsletter called The Insider's Guide.

In that newsletter, I can share charts, graphs, and other materials that can help you better understand investing. It's some of the best writing I do each week. I spend a couple of hours on that newsletter each week trying to make it helpful to you. If you're not on that list, please subscribe. Go to moneyfortherestofus.com to subscribe to the free Insider's Guide weekly newsletter.