Today’s Chapter is based on the book “Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts” by Annie Duke.
Annie Duke is a former professional poker champion who has became an author, speaker, and consultant focused on decision-making under uncertainty. She has won over $4 million in tournament poker and now writes bestselling books like “Thinking in Bets,” “How to Decide,” and “Quit” on applying cognitive psychology and poker-informed thinking to better decisions in business and life.
Here’s what I learned:
Think in Bets
“If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest.”
— Charlie Munger
One key lesson we can learn from Annie Duke is the principle of reframing how we think about decisions. While we tend to view choices as either right or wrong based on their outcomes, Duke argues that it is a dangerous oversimplification that ignores the role of uncertainty and luck in the results of each decisions we take.
As such, Duke believes that every decision we make is essentially a bet on an uncertain future. She writes, “Over time, those world-class poker players taught me to understand what a bet really is: a decision about an uncertain future. The implications of treating decisions as bets made it possible for me to find learning opportunities in uncertain environments. Treating decisions as bets, I discovered, helped me avoid common decision traps, learn from results in a more rational way, and keep emotions out of the process as much as possible.”
When we recognize that every choice commits us to a particular path while foreclosing others, we begin to appreciate the true nature of decision-making. Whether we are choosing a career, investing money, or deciding how to parent, we are, in a way, betting our resources such as our time, money, reputation and happiness, on one possible future over others. Duke explains that “Choosing to go to the movies means that we are choosing to not do all the other things with our time that we might do during that two hours. If we accept a job offer, we are also choosing to foreclose all other alternatives: we aren’t sticking with our current job, or negotiating to get a better deal in our current job, or getting or taking other offers, or changing careers, or taking some time away from work. There is always opportunity cost in choosing one path over others.”
“We routinely decide among alternatives, put resources at risk, assess the likelihood of different outcomes, and consider what it is that we value. Every decision commits us to some course of action that, by definition, eliminates acting on other alternatives. Not placing a bet on something is, itself, a bet.”
— Annie Duke
This perspective, as we will see later, helps us to identify good decisions from bad results and poor decisions that produced a favorable outcome. This ability is important as the quality of our lives isn’t determined by any single result but by the cumulative quality of our decision-making processes over time. By treating decisions as bets, we become more thoughtful about probabilities and we embrace uncertainties and their importance in each decisions that we take.
In fact, Annie Duke mentions that we need to recognize that “here are exactly two things that determine how our lives turn out: the quality of our decisions and luck. Learning to recognize the difference between the two is what thinking in bets is all about.” But more importantly, the big difference between decision-making in life compared to in poker is that “In most of our decisions, we are not betting against another person. Rather, we are betting against all the future versions of ourselves that we are not choosing. We are constantly deciding among alternative futures: one where we go to the movies, one where we go bowling, one where we stay home.”
With this in mind, how can we improve our bets? How can we make better decisions? Duke argues that our bets will only be as good as our beliefs. However, this is good news. She mentions that “part of the skill in life comes from learning to be a better belief calibrator, using experience and information to more objectively update our beliefs to more accurately represent the world. The more accurate our beliefs, the better the foundation of the bets we make.”
This reminds me of Charlie Munger, who once said, “Opportunity cost is a superpower, to be used by all people who have any hope of getting the right answer.” As a matter of fact, in investing, the biggest mistake usually isn’t what you choose to invest in, but what you did not invest in as a trade-off. The principle of “opportunity cost” is well explained in Gregory Mankiw’s textbook “Principles of Economics”. Here’s what he said:
“Making decisions requires trading off one goal against another.
Consider a student who must decide how to allocate her most valuable resource—her time. She can spend all of her time studying economics, spend all of it studying psychology, or divide it between the two fields. For every hour she studies one subject, she gives up an hour she could have used studying the other. And for every hour she spends studying, she gives up an hour that she could have spent napping, bike riding, watching TV, or working at her part-time job for some extra spending money.
Or consider parents deciding how to spend their family income. They can buy food, clothing, or a family vacation. Or they can save some of the family income for retirement or for children’s college education. When they choose to spend an extra dollar on one of these goods, they have one less dollar to spend on some other good.”
— Gregory Mankiw
Avoid Resulting
“The more one emphasizes winning, the less he or she is able to concentrate on what actually causes success.”
— Nick Saban
Annie Duke mentions that one of the best way to improve our decision-making process is to go over our past decisions and to learn from them. Similar to a feedback loop, we can refine our thought process based on the outputs we receive from our past decisions. However, Duke warns us against the cognitive trap of “resulting”, meaning that we have a tendency to equate a decision quality with the outcome. This leads to poor learning because we ignore the role of luck.
A perfect example of the resulting fallacy is described in Duke’s book as Pete Carroll infamous decision to pass the football only a yard from the goal line during Super Bowl 49 which led his team to lose the game. Duke explains that “Carroll got unlucky. He had control over the quality of the play-call decision, but not over how it turned out. It was exactly because he didn’t get a favorable result that he took the heat. He called a play that had a high percentage of ending in a game-winning touchdown or an incomplete pass (which would have allowed two more plays for the Seahawks to hand off the ball to Marshawn Lynch). He made a good-quality decision that got a bad result.“
Duke mentions that resulting comes from the fact that our brains aren’t built for rationality. As a matter of fact, our brains have this tendency for quick pattern recognition which helped us survive danger in the wilderness. However, in today’s day and age, it often obstructs us from making great decisions due to human biases. Duke writes, that “When our ancestors heard rustling on the savanna and a lion jumped out, making a connection between “rustling” and “lions” could save their lives on later occasions. Finding predictable connections is, literally, how our species survived.”
Outside of resulting, Duke also lists out other human biases that affects our decision-making:
Hindsight Bias:
“Hindsight bias is the tendency, after an outcome is known, to see the outcome as having been inevitable. When we say, “I should have known that would happen,” or, “I should have seen it coming,” we are succumbing to hindsight bias. Those beliefs develop from an overly tight connection between outcomes and decisions. That is typical of how we evaluate our past decisions.“
— Annie Duke
Self-serving bias:
“Self-serving bias has immediate and obvious consequences for our ability to learn from experience. Blaming the bulk of our bad outcomes on luck means we miss opportunities to examine our decisions to see where we can do better. Taking credit for the good stuff means we will often reinforce decisions that shouldn’t be reinforced and miss opportunities to see where we could have done better.”
— Annie Duke
To combat resulting and other human biases, Duke mentions that we must evaluate decisions based on the information available at the time they were made, not with the benefit of hindsight. A decision is “good” if it was the best choice given what we knew (or could reasonably have known) and the probabilities we assessed, regardless of how it turned out on any particular occasion. This shift in perspective allows us to learn from outcomes without being misled by them.
Once again, Charlie Munger was an avid believer in the importance of understanding human psychology in decision making. This is, in my opinion, a perfect moment to review Charlie Munger’s legendary speech on the psychology of human misjudgment:
Saying ‘I Don’t Know’
“I know that I know nothing.”
— Socrates
Annie Duke mentions that it is very challenging for some to admit uncertainty. As a matter of fact, we are trained from childhood that saying “I don’t know” is a sign of failure and we are often trained to project confidence even when we are unsure. Duke writes, “We are trained in school that saying “I don’t know” is a bad thing. Not knowing in school is considered a failure of learning. Write “I don’t know” as an answer on a test and your answer will be marked wrong.”
However, she argues that this is precisely backwards as we should be acknowledging uncertainty. She explains that while, “We are discouraged from saying ‘I don’t know’ or ‘I’m not sure.’ We regard those expressions as vague, unhelpful, and even evasive. But getting comfortable with ‘I’m not sure’ is a vital step to being a better decision-maker.”
Since we cannot eliminate uncertainty, as it would be impossible to only make decisions when we have all information at hand, we should strive to calibrate our decisions based on what we have. This approach requires us to think in probabilities rather than certainties. Instead of asking “Will this work?”, we ask ourselves, “What’s the probability this will work, and what are the factors that could change that probability?”
“What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur. The accuracy of those guesses will depend on how much information they have and how experienced they are at making such guesses. This is part of the basis of all bets.”
— Annie Duke
As such, it is important to calibrate ourselves to understand that “What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of “I’m not sure.”
It is only by doing so that we can accept uncertainty in the results of our decisions and to not be bothered when things don’t go our way. Duke writes, “When we move away from a world where there are only two opposing and discrete boxes that decisions can be put in—right or wrong—we start living in the continuum between the extremes. Making better decisions stops being about wrong or right but about calibrating among all the shades of grey.”
This reminds me of the importance of focusing on the process over the results as we have learned from Bill Walsh. He understood that focusing solely on winning can create undue pressure and lead to suboptimal performance. Instead, Walsh advocated for a concentration on the processes that drive success. Especially at the beginning of his reign as the coach of the San Francisco 49ers, Walsh insisted “to channel the concentration of the 49ers toward improving performance on the field and throughout the organization.”
As a matter of fact, he believed that when teams obsess over their execution and the quality of their thinking, success will inevitably follow. He once said, “I directed our focus less to the prize of victory than to the process of improving—obsessing, perhaps, about the quality of our execution and the content of our thinking.” This approach allows for a sustainable path to achievement, where improved performance becomes the primary goal rather than fleeting victories.
Walsh admits that this is difficult to execute especially due to external pressures, such as media scrutiny or fan expectations which can distract from this focus. Instead, Walsh prioritize the development of skills and fostering a growth mindset; he cultivated an atmosphere where individuals could thrive without the paralyzing fear of failure. His philosophy encourages leaders to cultivate patience and persistence by emphasizing that that the true measure of success lies in continuous improvement rather than immediate results. He believed that when individuals are committed to their processes, the outcomes—both on and off the field—will take care of themselves.
“Consequently, the score wasn’t the crushing issue that overrode everything else; the record didn’t mean as much as the season progressed, because we were immersed in building the inventory of skills, both attitudinal and physical, that would lead to improved execution. That was the key.”
— Bill Walsh
This mentality of focusing on the process rather than the outcome allowed the 49ers to weather temporary setbacks and maintain a long-term perspective. Walsh knew that even in defeat, there were valuable lessons to be learned and opportunities for growth. He mentions the fact that “a resolute and resourceful leader understands that there are a multitude of means to increase the probability of success. And that’s what it all comes down to, namely, intelligently and relentlessly seeking solutions that will increase your chance of prevailing in a competitive environment. When you do that, the score will take care of itself.”
In fact, according to Bill Walsh, failure is not merely a setback but a critical component of success. He mentions that *“When the inevitable setback, loss, failure, or defeat comes crashing down on you—allow yourself the ‘grieving time,’ but then recognize that the road to recovery and victory lies in having the strength to get up off the mat and start planning your next move.”*Ultimately, the capacity to learn and adapt defines a champion’s journey. The lessons learned from failure foster a unique strength.
“When you stand and overcome a significant setback, you’ll find an increasing inner confidence and self-assurance that has been created by conquering defeat.”
— Bill Walsh
Beyond the Book
Read "Tradeoffs: The Currency of Decision Making" by Farnam Street
Listen to "#37 Annie Duke: Getting Better by Being Wrong" by The Knowledge Project
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