Thinking in Bets by Annie Duke. Sometimes the stock market has been referred to as a “casino”. As investors, then, who better to learn from than a champion poker player like Ms. Duke? Truthfully she has written a very well-researched book on the role of skill and chance in determining any outcome. A career at the poker table taught her that we all make decisions in gambling and life with incomplete information. Sometimes the outcomes are in our favor and sometimes not, but we need to recognize the difference between good results based on luck and bad results that can occur for even the most skilled practitioners.
In my favorite section of the book, Duke discusses how we often fall into the trap of being 100% certain that something is either right or wrong, when frequently the odds are somewhere in the middle. When there is nothing on the line, being that certain about anything has no consequences. If, on the other hand, someone challenges our opinion with “Wanna bet?”, suddenly we are compelled to decide how much we are willing to wager on our beliefs. This is very relevant to investing because with each decision we are deciding how much of our capital we are willing to commit with certainty to an outcome. If we are honest with ourselves, we know that our skill in predication is always limited by the role of chance. Duke contends that thinking in bets forces us to consider our biases, appreciate what we know and what we don’t, and make better decisions.
Take it from someone whose palms sweat during penny poker, this is a book for thinkers and investors, the gambling is incidental.