Thinking in Bets about FIRE

Annie Duke was always one of my favorite poker players. Like everyone else who watched Rounders in the late nineties, I was immediately hooked on Texas Hold'em and the new ESPN shows devoted to the game. 

Unlike many of the personalities being promoted in WSOP tournaments, Duke wasn't brash or petty or argumentative. Her game was calmly, ruthlessly aggressive: no need to ham it up for the cameras. Duke finished in tenth place (out of 512 players) at the 2000 World Series Championship, while nine months pregnant. 

In the first year of the World Series of Poker Tournament of Champions, an invitation only event where ten of the world's top players competed for $2M, she faced the best, including her brother, Howard Lederer, and beat them all. Take a look at the final segment of the tournament, where she schools Phil Helmuth heads up. After she beats him, he spends the rest of his time on camera complaining what a long shot she was to even be in the tournament. He can't believe he lost to a woman.

Three times in a row, he mutters to himself. 

"I see it but I don't fucking believe it. I just don't believe it. I just can't believe it."

So when I heard she came out with a book last year, Thinking in Bets, I did like any other personal finance blogger would: I put in a request for the only copy at the library and patiently waited a few months until it became available.

It's easily one of my favorite books of the past year. And as I tend to do, I found myself relating its key messages back to financial independence and early retirement.

One of the ongoing debates that I find myself having in personal finance twitter centers on the idea of meritocracy. That whatever situation people find themselves in, it's more or less the result of their effort and skill. If someone is wealthy, it's because they had some skill that was rare or simply out-hustled other people. If someone is poor, it's because they didn't study in school or weren't willing to put in the effort.

As it relates to financial independence, the meritocracy argument states that the math is the math: the shockingly simple math of early retirement is the same for everyone. Sure, some people are in high cost of living areas and some other people might have lower incomes, but the math works for anyone who wants to try. We can all reach financial independence; the only reason there are so few who do is that the idea of FIRE is new, or that most people won't give up their new cars or dinners out.

Of course, an argument for pure meritocracy is pure nonsense. And readers of this blog already know that I posit that financial independence and early retirement are clearly not possible for everyone.

But Duke presents some of the problems with the meritocracy worldview in a far better way than I could.

In poker terms, the meritocracy argument is an example of resulting: of judging the quality of our decisions based on the results of those decisions. If you get a good result, you made a good decision. If you get a bad result, you made a bad decision.

Except that life doesn't work out that way. Individuals can make decisions that give them the best chance of success (e.g. - investing a lump sum all at once beats dollar cost averaging 60% of the time when CAPE is north of 32), but still get a bad result. (In fact, in this example this bad result will happen to four out of every ten people.) If you're one of those unlucky people in the 40%, does that bad result mean you made a bad decision?

Similarly, individuals can make poor decisions that end up having good results. Say a future personal finance blogger who will write about leaving the workforce by forty decides to drop out of college at the ripe old age of nineteen, despite having a scholarship, to follow a girl across the country to San Diego, with no money and no idea whatsoever on how or if he will finish college. It ended up working out just fine for him.

Does that good result necessarily have much to do with the quality of his decision?

This is resulting in action, and one of the main flaws with the worldview of meritocracy. People who end up with good results didn't necessarily achieve them due to making good decisions. People who suffer bad results might have gotten that outcome because of bad decisions, or they might not have.

The quality of our decisions play a factor, and luck plays a factor. Always.

The problem is that we humans, we predictably irrational humans, often will make 'fielding errors' when deciding whether our (or someone else's) outcomes are the result of luck, or the result of the decisions we make.

From Thinking in Bets:

"When we have a good outcome, it cues the routine of crediting the result to our awesome decision-making, delivering the reward of a positive update to our self-narrative. A bad outcome cues the routine of off-loading responsibility for the result, delivering the reward of avoiding a negative self-narrative update. With the same cues, we flip the routine for the outcomes of peers but the reward is the same -- feeling good about ourselves."

And indeed, the binary view of luck and skill is itself, a bit of a lie.

"Once we start actively training ourselves in testing alternative hypotheses and perspective taking, it becomes clear that outcomes are rarely 100% luck or 100% skill. This means that when new information comes in, we have options beyond unquestioned confirmation or reversal. We can modify our beliefs along a spectrum because we know it is a spectrum, not a choice between opposites without middle ground."

Duke notes that many people think that if life were a game, it would be something like chess. There is no luck in chess. The outcome of the game is completely the result of your skill and your decisions. If you lost, it is because you made inferior moves or a poor decision.

And because there is no hidden information in chess, no advantages for one player or another other than who is white and goes first (metaphor intended!), the outcomes are completely fair. If you won the game, you deserved it. If you lost, you deserved it, too.

Duke posits that life is not actually much like chess, with its perfect information and lack of luck, but more like poker. In a game of Texas Hold'em, you'll start with different cards than your opponent: often cards that are much, much worse than those of whomever you're playing.

And unlike chess, players have to make decisions without all the facts. You have to place bets without knowing if you're ahead in the hand or not: whether the odds are in favor of you putting money at risk or waiting for another time.

Skill is undeniably important in poker, as any amateur who's sat down at a card room at a casino can attest. But it's not the only factor. A professional can play a hand perfectly, force their opponent to go all-in with the worst hand, and still lose when one of the two cards their opponent needed comes up on the river. You can play it right, and still lose.

Similarly, you can play a hand terribly, and still win.

Skill and luck are always at play.

I think this metaphor of poker much more accurately describes the environment that we make our financial decisions in, rather than thinking of modern life as chess.

When we see that someone retired in their thirties, do we stop to ask what cards they were dealt?

We certainly get lots of blog posts and articles about the way they played their hand. What were their tactics and strategies? Were they aggressive or conservative? What sort of bets did they make?

But we rarely think about whether they just got good cards to start with. We don't often ponder if the right cards just happened to come up for them on the turn and the river.


*Photo is from waldo843 at Flickr Creative Commons.