‘How to Decide’ author, Annie Duke joins ‘Influencers with Andy Serwer’ to discuss human behavior and how it can affect decision making in business.
ANDY SERWER: So what are some mistakes that people make, either in investing or in business decision-making, that sort of relate to some of the things that you’re interested in?
ANNIE DUKE: Oh, my gosh. OK, so let we think, because there are so many. For anybody who’s read “Thinking, Fast and Slow” from Daniel Kahneman, they know that mostly, we make a lot of mistakes. So let me just– let me think about what sort of the most devastating are. And I think I’m gonna think about two.
The first one which we can talk about is called resulting. And this is actually a really huge problem that people should recognize this one pretty quickly. It’s basically looking at the result of something– say, a trade– seeing whether it won or lost, and then using that to determine whether the trade was actually good or bad. So I’ll give you an example outside of finance that I think should help people to understand why this is problematic.
So just in the simplest sense, obviously, whether you won or lost on one iteration, if you think about it, doesn’t actually tell you very much about the quality of the decision. You know, this is actually a little bit of poker versus chess problem, right? Because as soon as you introduce luck into a system, and also, like, information that would be unavailable to you that might have been important for you to know, we can get it– we essentially discorrelate decision quality from outcome quality in the short run, something that doesn’t happen in chess.
So in chess, because you don’t have that element of luck, if you lose, it’s because you made bad moves in comparison to me. But that’s not necessarily true in poker. In poker, you can lose because you get bad cards. You can go through a green light and get in an accident, even so. So just the fact you got in an accident shouldn’t actually tell you much.
But the human brain doesn’t really work that way, and it ties this connection. So the example that I open “Thinking in Bets” with is actually the 2015 Super Bowl with Pete Carroll and the Seattle Seahawks. And they’re there on the 1-yard line of the New England Patriots. People really know this play. They’re down by 4. There’s 26 seconds left in the game, and Pete Carroll has one timeout.
And so obviously, they’re down by 4. They have to score a touchdown here. And it’s pretty clear, if they score a touchdown, that the Patriots aren’t going to have enough time to come back down the field. So this will be the game-winning play, if they can do it. Everybody has an expectation that Pete Carroll is going to hand the ball off to Marshawn Lynch who’s going to run it through to the goal line. I mean, I guess running through the pile of Patriots is an obvious thing that someone would be able to do. I would argue against that.
But anyway, he doesn’t do that. He chooses to have Russell Wilson pass the ball. And we know that that ball was very famously intercepted. And when you look at the headlines there, they’re just incredibly brutal. I mean, they’re mostly– you know, most people are declaring that this is the worst play in Super Bowl history. “USA Today” actually said it was the worst play in all of NFL history. That was pretty strong.
ANDY SERWER: Wow.
ANNIE DUKE: Yeah. But I’ll do the thought experiment with you really quickly, Andy. So let’s imagine that Pete Carroll passes the ball. Well, he doesn’t personally. Russell Wilson does, but he calls for the pass play. And the ball is caught for the game-winning touchdown. What do the headlines look like the next day?
ANDY SERWER: Brilliant play-calling by Pete Carroll.
ANNIE DUKE: Yeah. This is why he’s going to the Hall of Fame. He out-Belichicked Belichick. So this is where we can see resulting, you know, at work, is that when that is caught for a touchdown, it’s a brilliant play. It’s one of the most– it would be the most brilliant play in NFL history, according to “USA Today.” And when it’s intercepted, it’s the worst play in NFL history.
And when you look at these analyses, none of these talk about process. None of them talk about, what’s the probability of the ball getting intercepted, or incomplete, or it being a touchdown pass? How does that compare to the probability that Marshawn Lynch is actually going to score? And of course, those are all the things that you need to know in order to know whether it was a good decision, not just the result of the play.
For that analysis, people can go look at Thinking in Bets and see that. The short story is, it was actually quite a brilliant play. The chances of an interception there are going to happen less than 2% of the time. And it actually buys you an option for a third play. It would happen to be second down. So if you hand it off to Marshawn Lynch twice, you only get two plays. If you pass somewhere in there, you get three. So you know, again, there’s more detail.
But regardless, it makes no sense to look at whether it was intercepted, or incomplete, or a touchdown pass on that one time. But we do this all the time. And you can see this in finance, right? And we know this, for example, just in terms of, like, capital allocation, that people will re-up with managers who have won in the last year, and they will not allocate to managers who have lost. And we know that that’s actually a losing strategy, that you do worse that way because of regression to the mean, and you’re not taking luck into account, and you’re just thinking about short-term results, in terms of as opposed to process.
Certainly true and– you don’t want to do this in options trading, as well. Whether you’re up or down in a particular moment should matter very little. But it’s a real mistake that we make and it’s a weakness of human decision-making.