Thinking in Bets
For this Must Read book recommendation episode, this book was offered to me by one of my good friends and past guest on the podcast, Rod! Rod, you are right, author Annie Duke truly is a gem! I read this book a couple times through actually. So, let me tell you the best and most powerful concepts from this Wall Street Journal best seller! The book is: Thinking in Bets by Annie Duke.
As a whole, this book explores how decision-making in uncertain conditions can be improved by thinking like a poker player. Drawing on her experience as a professional poker champion, Duke argues that good decisions don’t always lead to good outcomes, and vice versa, because of the role of luck and incomplete information. She introduces the concept of "resulting"—the common mistake of judging decisions based solely on outcomes—and explains why this leads to flawed thinking. Goodness, how many times do we do that as traders? Judging a trade as good or bad based on whether or not it made money. But, that assessment is not always complete or correct! Instead, she advocates for framing decisions as bets, which forces us to assess probabilities and acknowledge the uncertainty.
Duke emphasizes the importance of developing a strong decision-making process, one that includes seeking diverse perspectives and avoiding cognitive biases. If you are a trader, you know viscerally how dangerous biases can be! She highlights how separating outcome quality from decision quality can help individuals learn more effectively. And you know I love a book with actual actionable strategies! This book does just that by offering practical tools for improving judgment, such as forming decision pods and using accountability strategies - both of which are highly applicable to the world of trading. Through a mix of personal anecdotes, psychology research, and poker analogies, Duke makes a compelling case for embracing uncertainty and becoming more rational thinkers. Ultimately, Thinking in Bets teaches readers to be less results-oriented and more focused on Let me get into some specifics so you can see what I mean!
The author Annie Duke is a world class poker player. How did she get there? By using her experiences and her peers to learn and refine her strategies over years and millions of hands of poker with real stakes on the table. One over arching quote from Duke that can start us off reads: “Decisions are bets on the future and they aren’t right or wrong based on whether they turn out well or any particular iteration. An unwanted result doesn’t make our decision wrong if we thought about the alternatives and probabilities in advance and allocated our resources accordingly.” It is a very true outcome as a trader that many trades will have been smart and intentional setups from within our studied and practiced system and they will still fail. Failure is a part of trading. That is why risk management is so critical - so that we can keep our losses small and our wins can outweigh over time. Just because a trade is stopped out, that doesn’t automatically make it a poor choice. If we kept our position size appropriate for our account size and managed the risk correctly per our system, it is just a result. And we live to take another trade when another setup from within our edge presents. And that is good trading. A 100% win rate is not required to still be a strong, profitable trader!
“Poker players have to make multiple decisions with significant financial consequences in a compressed timeframe. And do it in a way that lassos their reflexive minds to align with their long-term goals.” Oh my goodness if this isn’t just like trading!
I imagine many of you have heard this next statistic. But for those of you who haven’t, Duke informs readers of how research reveals that losing feels twice as bad as winning feels. She goes on to clarify this by saying: “That means we need 2 favorable results with one unfavorable result just to breakeven emotionally. Why not live a smoother existence without the swings, especially when the losses affect us more intensely than the wins.” For her point here, she advises that we aim for more neutrality when we are engaging in an activity with emotional responses to the decisions we make, which would most definitely include day trading! Because to bounce back from a loss just is harder than staying content after one win, if we can just accept them all as just a day in the life of a trader, then we can mitigate the risk of a potential deep depression if we ever experience a run of hard times.
Sure, celebrating a sick win feels amazing. But, the inverse of that can be very painful. I have definitely experienced both, so if you have too, this will make a lot of sense to you as well. The painful, tear or rage filled periods after big losses can really pull you down. And that just isn’t fair. Crap days are a part of learning. Before you truly dial in your process and system as a settled trader. And you deserve to not feel like garbage because you are pushing yourself to learn something very hard! I truly believe that we need to give ourselves grace while growing as traders, and this is a related scientific point that the losses are twice as painful as the wins are enjoyable. So, I love the idea of aiming for neutrality after each trade.
Check out the full discussion in the podcast below, including more of my favorite quotes and how I’ve adapted the advice into my own trading and entrepreneur journey and life.
Duke wrote about the concept of truth seeking, qualifying it as: “the desire to know the truth regardless of whether the truth aligns with the beliefs we currently hold is not naturally supported by the way we process information. We might think of ourselves as open minded and capable of updating our beliefs based on new information, but the research conclusively shows otherwise. Instead of altering our beliefs to fit new information, we do the opposite. Altering our interpretation of that information to fit our beliefs.” Holy Moly, how much have I done this in trading?!?! Trading a bias vs the data! Literally I am at risk of this in every trade, I would say. And that is trading. A bias is essentially, ideally, made based upon our trading system, data, fundamentals, chart patterns, and our written trade plan. We see a chart that makes long trades the higher likelihood direction for a successful trade. So, our bias for this immediate session is bullish.
BUT! The key here is to stay current with the data that prints as the session progresses. Because this may need to change. And to be an effective long term trader, it is so important to be flexible with your day, your trade plan, and your bias! Patiently flux as the candles print so you are always making decisions for the right reasons. And not solely based upon a premarket plan before this day truly started unfolding. Man, such an important concept, right?
Ok, the nuance of this next quote is just amazing. First, the quote! “While experience is necessary to becoming an expert, it’s not sufficient. Experience can be an effective teacher but clearly only SOME students listen to their teachers. The people who LEARN from experience and improve: advance, and with a little bit of luck, become experts and leaders in their field.” Did you catch the difference? Every trade provides experience. But not all experience is learned from! Learning is a choice. We can take a trade, celebrate or mourn depending on the outcome, and then move on. OR. We can take the trade, journal it, and think critically on it, despite whether it won or lost. What did we do well, what did we forget to check, what was in support of the trade and what was the risk against it? If we can also run it by a peer or mentor and dissect it further into its lessons, then the learning is further compounded. When we write out all this information in our trading journal, it can even more so solidify the lessons of the trade. In these ways, it is easy to see how one trade can be forgotten, or can provide the trader several lessons!
Now to zoom out some on the big picture after we decide to intentionally learn from every trade we experience, I love this next point. Duke wrote: “Ideally, as we learn from experience, we get better at assessing the likelihood of a particular outcome given any decision, making our predictions about the future more accurate.” This was such a solid concept around utilizing outcomes to improve decision making moving forward. But, the caveat is that we have to be open to learn from all the data available. Take the lessons from every angle so that it doesn’t create a bias by looking at the thing too narrowly, but rather just fuels a larger view of similar situations for when we see them again. This idea is amazing for trading because the goal is to become a consistently profitable trader who is confident to slowly trade larger and larger size as our skill and knowledge grows. So then making each trade strengthen our foundation makes so much sense to that aim! Future predictions would indeed become more accurate more quickly by spending the time now on each trading session post-analysis.
“Instead of feeling bad when we have to admit a mistake, what if the bad feeling came from the thought that we might be missing a learning opportunity just to avoid blame? Or that we might be basking in the credit of a good result instead of recognizing where we could have done better?” This was Annie again reminding us that ideally we can transform the unhelpful habit loops into something productive. She uses the term a lot, that we need to leverage truth seeking for our best long term goals over self serving habits. And that accurate self critique can spur further improvement. Such as with the best athletes reviewing tape after every game, even if their skills were on point! To be the best, there are lessons everywhere if we seek them out. And, I know I am trying to be the best trader I possibly can. So this advice definitely resonated with me!
If you are new to admitting your failed trades to a mentor or community, you should hear this next part. “Identifying a negative outcome doesn’t have the same personal sting if you turn it into a positive by finding things to learn from it. You don’t have to be on the defensive side of every negative outcome because you can recognize in addition to things you can improve, things you did well and things outside your control. You realize that not knowing is ok.” This is so good for developing traders because it encourages them to talk about every trade with a peer or ideally a mentor without shame or fear or judgement. For one, if you are around judgmental people, you should consider seeking a new community. But, assuming you have good humans around you, the vibe should definitely be learning together from every trade discussion! From my experience, a strong peer group is really helpful as an improving trader!
So now, for those of you that have mentors already, on fully owning being open to feedback and an alternative viewpoint, author Annie says: “As a rule of thumb, if we have an urge to leave out a detail because it makes us uncomfortable or requires even more clarification to explain away, those are exactly the details we must share! The mere fact of our hesitation and discomfort is a signal that such information may be critical to providing a complete and balanced account.” This is so stinking true in trading too. If we leave out little bits of information on a trade we were confused about or frustrated over, this is a lost opportunity! If it is a hard trade that you know you don’t fully understand, then these are the ones especially that we should pour it all out over because you never know what key details someone on the outside looking in could pick up that could be the gem that we really were missing! I loved that advice so much. There should be no shame in learning authentically. Plus, I say be the bold one! By admitting openly how you struggled, maybe someone quietly also struggled there and you could really be doing them a kindness by opening the conversation for them too and normalizing the difficulty some days. Win Win.
Alright, this is too long already and I trimmed quite a bit from what is in the complete episode for length here. So, you are going to want to click the link above and watch the whole conversation for all the great tips!! I will close here with this last quote that I love from author Annie Duke from the end of the book. She wrote: “Life, like poker, is one long game. And there are going to be a lot of losses, even after making the best possible bets. We are going to do better and be happier if we start by recognizing that we’ll never be sure of the future. That changes our task from trying to be right every time, an impossible job, to navigating our way through the uncertainty.”
Thank you all so much for sticking with me to the end! I did cover my favorite points today, but I most certainly recommend you read the full book yourselves too! It was a quick but poignant read! The link to order a copy is here: https://amzn.to/4m36kEX! And if you have any must read book recommendations for me, please email me @ contactus@market-mamas.com!
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