Undercover Economist

Is life a bet, or an experiment?

Since the official Brexit policy of the UK government now seems to be “accidents happen”, it is a nourishing age for those who dine on uncertainty. Most of us, however, started feeling queasy long ago. If you’re looking for guidance as to how to digest the unpredictabilities of life, why not turn to a poker player for advice?

Annie Duke, author of Thinking In Bets (UK) (US), says that “wrapping our arms around uncertainty and giving it a big hug will help us become better decision makers”. Fair enough. If we’re going to have to eat our uncertainty broccoli anyway, it may be best to swallow it down before it goes cold and limp.

As the winner of several million dollars as a professional poker player, Ms Duke has some credibility on this point. But is she right?

One quibble is that games have a more tightly-defined spectrum of uncertainty than reality does. Edward Thorp, a mathematician who achieved considerable success at blackjack and as a hedge fund manager, found (UK) (US) that the true risks he faced in the casinos were not an unlucky turn of the card, but crooked dealers and poisoned coffee. Not for nothing does Nassim Taleb, author of The Black Swan (UK) (US) warn of the “ludic fallacy” — treating the unknown risks of life as though they were the known risks of a game of chance.

Still, poker is a more instructive game than many others. John von Neumann, the brilliant mathematician who laid down the foundations of game theory in the late 1920s, was a poker player. Poker was no mere computational problem like chess, he said: “Real life consists of bluffing, of little tactics of deception, of asking yourself what is the other man going to think I mean to do, and that is what games are about in my theory.”

So what does poker teach us about “wrapping our arms around uncertainty”? Ms Duke offers us several lessons.

One is that, since luck matters as well as skill, bad decisions can have good outcomes, and vice versa. If you drive drunk, you will probably get home without killing anyone, but that would not make drunk driving a good decision.

A second lesson is that we should always be willing to ask ourselves, “do I want to bet on that?” — it’s easy to be overconfident if there are no obvious consequences for being wrong. A bet forces us to think about the odds and the possibility that someone else may know better.

So there is much to be said for thinking in bets. Yet we should not overlook an alternative approach to uncertainty: thinking in experiments. An experimental thinker views the uncertainties of the world as something to be resolved through tentative trial and error. Try something modest or reversible; an experiment doesn’t need to be a double-blind, randomised controlled trial to yield useful information. If it works, do more of it.

Some decisions are by their nature irreversible. Each big poker hand is a one-shot proposition that does not offer much scope for experiment. The same could be said of some investments: if you think shares in Tesla are cheap, there is little to be said for buying just one share and watching it to find out what happens to its price. An experiment cannot help; instead you must figure out whether the odds are in your favour, and take the plunge.

But other decisions are more experimental. In these cases, the choices can be made in stages, with each step designed to reveal some information. From Marvel’s decision to publish the Spider-Man comics (that went well) to Google’s launch of the G+ social network (that didn’t) a company can see what works and then either redouble its efforts or abandon the project. For an individual, anything from a new hobby to a new career can be treated as an experiment.

Many of the decisions we make are reversible. Only our stubbornness makes them permanent. Thinking in bets forces a commitment, which is sometimes helpful but sometimes not. Thinking in experiments allows us to learn.

I thought of all this when reading of poker professional John Hennigan’s $30,000 bet that he could move to Des Moines, Iowa, and live there, just for a few weeks. As Ms Duke tells the story, Mr Hennigan was bored out of his mind within days, and paid $15,000 to buy himself out of the bet and move back to Las Vegas. That’s thinking in bets at its worst: an idle thought (“should I move to Des Moines?”) became a high-stakes zero-sum game. Fun — if you like that kind of thing.

A few years ago, my family were agonising over a similar question (“Should we move to Oxford?”). We vacillated and made lists of pros and cons. What resolved the uncertainty was realising the decision could be an experiment: rather than selling up, we could rent a place in the city for a year to see how things worked out. Running this experiment created some additional costs, but we have never regretted doing it.

Thinking in bets is a rigorous and admirable habit, but not everything has to be a high-stakes poker hand. If you can make it work, thinking in experiments is less painful.

 

 

Written for and first published in the Financial Times on 15 Feb 2019.

My book “Fifty Things That Made the Modern Economy” (UK) / “Fifty Inventions That Shaped The Modern Economy” (US) is out now in paperback – feel free to order online or through your local bookshop.

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