Good Decisions or Good Results? Part 1

Good Decisions or Good Results? Part 1: Experience is Not a Zero-Sum Game

A friend of mine and investor at CryptoBull, Seth Levine, recently recommended that I check out Annie Duke. (For background, Annie is an ex-poker player who’s pivoted into becoming an expert on the science of making profitable decisions.) 

So I picked up her latest book called “Thinking in Bets” where she explores how life is a game of incomplete information and probabilities, much more similar to poker than to chess.

See, in chess, the best decision always equals the best outcome. In poker (and life), not so much. Life doesn't operate in black and white, instead, it is an amalgamation of probabilities that allows for randomness. (Even the best hand in poker (AA) has only an 85% chance of winning.)

To put it another way, nothing in life is guaranteed. You can make the best decision possible and still suffer a loss.

It's All in the Definition

But how do you determine what the “best decision” is? 

According to experts (like Annie), the best decision is defined as: The decision with the highest probability of success. (per our last newsletter, EV)

Sounds intuitive...right?

Well, you may be surprised to find that scientific research indicates it is not. You see, instead of statistics and probabilities, humans are instinctively wired to lean into and depend on short-term anecdotal evidence to determine what the “right” decision is.

To our primordial brain, if a rustling in a brush was once a lion, it's always going to be a lion. This is because the consequences of assuming it isn't (and being wrong) are simply too great. For survival, false positives are often much easier to deal with than false negatives. 

It turns out we rely on the ends to justify the means significantly more often than we realize.

This reliance on the outcome of a decision to determine the quality of a decision is called “resulting”.

To illustrate resulting, think about a “great” decision you recently made. Without knowing anything about you, I’d almost guarantee that decision had a very positive outcome. Now, think about one of the “worst” decisions you've recently made. I’m fairly confident that it had a painful result.

The truth is you’ve made a lot of great decisions that haven't worked out in your favor and you’ve made plenty of bad decisions that you were unjustifiably rewarded for.

If you got in an accident on the way to work, wouldn’t you wish you had taken the day off? If you watched an interview with Mark Zuckerberg discussing how dropping out of Harvard allowed him to build Facebook, does that mean you should do the same?

Except you can’t take off from work every day. It would make building a career impossible.

And although every college dropout that built a billion-dollar company would say that dropping out of school to pursue their dream was the best decision they ever made:

• Only 16% of billionaires are college dropouts

• Only 10% of start-ups are successful

• The average age of a successful start-up founder is 45

“Always Tell Me the Odds”

If 90% of start-ups fail, why would any rational person ever start a company?

Risk and Reward

Sometimes, the reward is worth the risk.

90% of startups may fail, but very successful ones can yield big returns (home-run startups can earn a 50x return on investment). 

To quote Jeff Bezos "Given a 10% chance of a 100 times payoff, you should take that bet every time."

Experience is Not a Zero-Sum Game

Short-term results are heavily dependent on luck, however, long-term positive results are much more skewed toward one’s ability to make high-quality decisions over time (or, to put it another way, skill). 

You earn your skills.

Starting a company and failing may lead to a zero return on the capital invested, but those founders have earned skills and acquired experience that will decrease their likelihood of failure in the future.

As shown below from this study by Harvard Business Review, the probability of successfully launching a company increases almost 3x from the ages of 25 to 55. 

Such is the power of experience. We get to try again, but with increasingly better odds. 

Part 2: Coming soon…

In our next newsletter, we’ll discuss how to apply the above principles to investing.