Thinking In Bets by Annie Duke is a pretty recent publication and in my opinion, a must-read. I have added some of my thoughts like analogies between what she has written and Scott Adams best-selling books namely: How to Fail at Almost Everything and Still Win Big: Kind of the Story of My Life, Win Bigly: Persuasion in a World Where Facts Don't Matter and LOSERTHINK

Introduction

When we make a bet we are deciding on an uncertain future. As such thinking of decisions as bets helps us to avoid decision traps. By keeping our emotions out of the decision-making process, we can learn from the results in a rational manner. Thinking in Bets improves the quality of our decisions. 

Winning and losing are loose signals of decision quality. We need to separate decision quality from outcome quality. Two things determine how our lives turn out; one is the quality of our decisions and the second thing is luck. Thinking in bets helps us to learn the difference between the two.

Almost all of us tend to equate the quality of a decision with the quality of its outcome. In Poker it's called 'resulting'. Resulting is a routine thinking pattern that bedevils all of us. When we are asked about the best decisions that we have made in our lives, our answers invariably veer towards ranking our results and not our decisions. What we miss is that a good decision may deliver a bad or undesirable outcome; the bad outcome in and of itself does not or should not be used for judging the quality of the decision. In other words, we can't judge decisions as good or bad depending upon what their outcome is. Once we engage in 'resulting' we also tend to engage in hindsight bias (which is the tendency, after an outcome is known to view the outcome as inevitable). There are many occasions in our life when we make decisions and they result in good outcomes; at all such times, we don't try and assess the quality of the decision that we make. We link results with decisions even though it is so easy to point out that the two are not perfectly correlated. For example, we may drive our car a long distance and reach safely, even though the outcome was good, was that such a good decision?

The question is - why do we behave in the way we do? The reason is that humans are inherently irrational creatures. We recognise the existence of luck but we do not want to accept the fact that luck has played in our lives. We do not want to accept randomness for what it is and try and create order even when there is none. That is the way we have evolved. 

When our ancestors heard rustling on the savanna and a lion jumped out, they made a connection between 'rustling' and 'lions'. We survive by trying to find predictable correlations, in the process making many such correlations that were doubtful or false. Incorrectly interpreting rustling from the wind as an oncoming lion is called a 'Type 1' error, a false positive. The consequences from such an error are less grave than those of a 'Type 2' error which is a false negative. In this case, a false negative - interpreting all rustling sounds like the wind. We seek certainty and it can wreak havoc on our decision-making in an uncertain world. 

Since we seek certainty, we work backwards from the outcomes to figure out how things happened. In the process, we are susceptible to a variety of cognitive traps, like assuming causation when there is only correlation or cherry-picking data to confirm the narrative we prefer. We pound square pegs into round holes to maintain the illusion of a tight relationship between our outcomes and our decisions. 

Kahneman categorised the thinking process as an interaction of system 1 and system 2. System 1 is the fast, unconscious and automatic process and system 2 is the slow, deliberative and judicious one. System 1 is the relive mind and system 2 is the deliberative mind. Both of these minds are necessary for our survival and advancement. The challenge is to be aware of our irrational behaviour; only then can we change the way our brains operate. We have to embrace practical workarounds. In other words, our goal is to get our reflexive minds to execute on our deliberative minds best intentions to achieve our long-term goals. If we don't attempt to change, we are destined to struggle at executing our best intentions.

John Van Neumann was the father of game theory. Game theory is defined as the study of mathematical models of conflict and cooperation between intelligent rational decision-makers. Game theory is the basis for the study of the bulk of our decision-making.

In our real life, we make multiple decisions like saving, spending, health care, lifestyle choice, raising children and nurturing relationships among many others. Life involves bluffing, deception, uncertainty, risk and forming opinions of what the other person is going to do or about how he or she is going to react. Life is not like chess wherein there is a pre-defined form of computation. Chess contains zero hidden information and very little luck. Chess pieces cannot randomly disappear from the board or get moved by chance. Losing a game of chess means there were better moves that one didn't know or didn't see. Chess is not a model for making decisions in our lives. Because our lives revolve around a lot of hidden information and spades of luck. Life is a game of incomplete information and involves decision-making under uncertainty over time, unlike chess. Yet, we treat life decisions as if they were chess decisions. 

In life unlike chess, once the game is over or the decision has been made, separating the quality of our decisions from the influence of luck is difficult. In chess, outcomes correlate more completely with decision quality. In life, we get lucky and win or get unlucky and lose, not so in chess. Because information is incomplete it becomes difficult to learn from past decisions (the sample size is small and the information is incomplete). We have to learn from the outcomes of our decisions. The quality of our lives is the total of decision quality plus luck. Resulting as a strategy can be used in Chess, not in life. The reason is that the world doesn't always reveal the objective truth. And uncertainty can wreck a lot of mischief in our lives and it does. The problem is that we get only one flip of the coin, just one attempt at decision-making; that means that we have to be pretty certain before acting. 

We must learn to say 'I don't know or 'I'm not sure'. A great decision is the result of a good process, not because it has a great outcome. We must acknowledge uncertainty and do so is nothing to be ashamed of. Good decision-makers are comfortable with the fact that the world is an uncertain and unpredictable place. They embrace the uncertainty and they try and figure out how unsure they are. 

We have to stop thinking in black and white terms and remember that there are shades of grey in between. We must accept that we don't perceive the world objectively, but our goal should be to try. 

We have to redefine the concept of being wrong. Of two outcomes, if we chose the one with the higher probability of success and failure, it doesn't mean that we were wrong. It just means that the one with the lower probability worked. And that can happen more often than one imagines. Decisions are bets on the future and they aren't 'right' or 'wrong' based on whether they turn out well on any iteration. When we think in a probabilistic manner, we are less likely to see adverse results as proof alone tag the made a decision error. Redefining wrong means calibrating our decisions between two extreme continuums, in the shades of grey, if you will. 

The world is a very random place and we need to change our mindsets. If we measure ourselves by outcomes, we are going to feel bad more often than not. And Kahneman has shown us that being wrong feels twice as bad as being right makes us feel good (Loss Aversion and Prospect Theory). 

Every decision we take has risks attached to it. Any choice that we forego when taking a decision has an opportunity cost attached to it. 

When you are betting you have to back up your beliefs by putting a price on it; you have to put your money where your mouth is. Once you treat your decision as a bet, we instantly realise that we are deciding on alternate futures, each of which comes with a different set of benefits and risks. At the same time, we realise that there are no simple answers to any of these questions. Since many things are unknown or even unknowable, expressing our decisions as bets helps in being more rational than we otherwise would be. 

A bet is defined as a 'choice made by thinking what will probably happen'. There are five key elements in any bet, these are choice, probability, risk, decision and belief. And the important thing is that betting doesn't have to take place in a casino or against somebody else - when we make a decision, we are placing a bet on an expected outcome. In that sense, all our decisions are bets. Not placing a bet on something is in and of itself a bet! Even when we make a parenting choice, our philosophy is that the choice that we have made for our children will help them achieve the future we want or they want. Similarly, decisions about jobs, relocation, sales negotiations, contracts, buying a house, ordering chicken instead of mutton are all bets. 

Our bets are only as good as our beliefs; our beliefs are based on our interpretations of reality. And like Scott Adams has said, each of us has a different version of reality and our versions evolve as we age. And our beliefs drive the bets we make. One of the skills that we need to acquire is the capacity to calibrate our beliefs to more accurately represent the world. The more accurate our beliefs, the better the foundation of the bets we make. We need strategies on how to improve our thinking process. These would involve ways in which to be more open-minded, more objective, more rational and more accurate. 

Since our beliefs form the basis for our decision-making, we need to closely look at how we form our beliefs. And the reality is that our beliefs are formed haphazardly -  we believe all sorts of things based on what we have heard but haven't researched for ourselves. The process can be described as, we hear something, we think about it and come to an opinion about it being true or false, and then we proceed to form a belief. But the above is what we think we are doing. In reality, we do something else - we hear something, we believe it to be true and only sometimes and at a later date if we have the time and the inclination and the need. Do we think about it and vet it to determine whether it is true or false. The reality is that we are credulous creatures who find it very easy to believe and very difficult to doubt. Our default setting is to believe that what we hear and read is true. 

How we form our beliefs has been influenced by our evolution and our irrationality and the process is influenced by our push towards efficiency rather than accuracy. Humans form beliefs abstractly and for us 'seeing is believing’. In other words, we form beliefs about things that we don't directly experience and that is unique to humans.  

Even if we were to keep our evolutionary belief formation system unchanged but just tweak it in a small manner, it would make a world of difference. The tweak that we should make is to update our beliefs and then based on the new information change our beliefs. Unfortunately, most of us maintain our beliefs even though we continue to receive evidence that our beliefs are false. Instead of altering our beliefs, we do the opposite; we change the interpretation of the new information to fit our beliefs. Very few of us process information with a view to ‘truth-seeking. 

Our beliefs affect how we process information. As a result, we have what Scot Adams called the 'one movie, two screens syndrome', whereby the same event is interpreted in completely different ways by different people. In other words, our pre-existing beliefs influence the way we experience the world and since our beliefs aren't formed in an orderly manner, it leads to all sorts of mischief with our decision-making. 

Once a belief is formed it becomes difficult (impossible?) to dislodge. The belief takes on a life of its own. As a result, it leads us to seek evidence that confirms our beliefs and we rarely, if ever challenge the validity of the confirming evidence that we so obtain to protect our beliefs. At the same time, we work hard at discrediting information that contradicts our beliefs. This irrational, circular information processing pattern is called motivated reasoning. It indirectly leads to our beliefs being even more entrenched than they were earlier. It doesn't take much for us to believe something. And once we believe it, protecting our belief guides how we treat further information relevant to the belief. When faced with information that is not consistent with our beliefs we act as if it an assault on our self-narrative. Hence the rise of fake news and disinformation. The internet has led to the formation of filter bubbles, and none of us is immune from these. 

The smarter you are, the more susceptible you are to fake news and disinformation. Being smart makes the bias worse, since the smarter you are the better you are at constructing a narrative to support your beliefs. The better you are with numbers, the better you are at spinning those numbers to support and confirm your beliefs. That is the way we have evolved - we are wired to protect our beliefs even though our goal is to seek the truth. 

When someone challenges us to bet on a belief, they tend to signal that our belief is inaccurate in some way. It triggers us to vet our belief and we revisit what we believe and how we formed the belief. That is the philosophy of Wanna Bet and it works. Wanna Bet triggers us into engaging in the third step of our belief formation which is vetting the belief and determining how true or untrue it is. Making a wager brings the risk out in the open - it makes explicit what is already implicit and overlooked.

We can train ourselves to view the world through the lens of Wanna Bet. 

Instead of asking ourselves or others the question - ‘are you sure?', we need to flip the question too 'how sure are you?' Once we answer that question we can form a probabilistic estimate of what we believe. By shifting or calibrating our beliefs we build uncertainty into the decision-making process and recognise that there are shades of grey between the shades of black and white. It leads to more objective decision-making. Acknowledging uncertainty is the first step in measuring and narrowing it. 

Just like in any classroom where only some students listen to their teacher, most of us don't learn from experience. Aldous Huxley, a renowned philosopher has famously said: Experience is not what happens to a man; it is what a man does with what happens to him. The point is that we have to learn to identify what the outcomes of our decisions teach us and whether there is a lesson to be learnt therein. 

When we make a bet, it is based on a belief and we expect a set of favourable outcomes as a result of taking the bet. How we figure out, what if anything we learn from an outcome, becomes another bet. As outcomes come our way, figuring out whether those outcomes are the result of luck or were the consequence of decisions made by us is of great consequence. If the outcomes were the result of our decision-making, we can feed that data into belief formation and create a learning loop. The world doesn't connect the dots for us between outcomes and causes, we have to do the heavy lifting and that is the only way we learn from our experiences. 

The way our lives turn out is the result of two things, skill and luck. Any outcome that is the direct result of our decision-making is in the skill category. If making the same decision again or if altering the decision would result in a different outcome, that is in the skill category. If an outcome occurs because of things that we can't control, the result would be due to luck. If the outcomes we obtained were not influenced in any way by the decisions we made, that is in the luck category. 

 
For any outcome that we make, we are faced with this sorting decision, throwing the decision in one of the two buckets. If this fielding of outcomes is done diligently, we can learn from our experiences, not otherwise. 

 Fielding of outcomes in the manner described above isn't easy. It is difficult to stay objective when we work backwards from the quality of an outcome and it means that learning from an outcome is a haphazard process. As a result, we make fielding errors, we take credit for favourable outcomes by putting them into the skill bucket and we conveniently dump all negative outcomes into the luck bucket. It is known as a self-serving bias. And our self-serving bias doesn't help us in any way to learn from our experiences. Our capacity for self-deception has few parallels. 

The reality is that most outcomes are the combination of the two. As such learning from experience is tricky and it doesn't offer us any orderliness; uncertainty trips us along the way. What we must learn to do is to calibrate the bets that we make. Black and white thinking or the all or nothing bias means that we think in terms of being 100 per cent right or 100 per cent wrong and there is nothing that is 'somewhat less sure' or in between these two. The reason we behave in this manner is that our self-esteem is involved and all of us have an innate desire to create a positive self-narrative. When we are asked to judge another person, we flip the narrative. So everyone other than us who get good outcomes gets them due to luck and their bad outcomes are due to skill; that's just the way we are wired. 

A lot of the way we think about ourselves comes from how we think we compare with others. This habit of ours impedes learning. To learn we need to shift our mindset. Treating outcome fielding as a bet can accomplish the mindset shift necessary to reshape habit. When we ask the rhetorical question 'wanna bet' it makes us revisit our beliefs and we then take a closer look. In the process, we make explicit what is already implicit. When we treat outcome fielding as a bet, it pushes us to field outcomes more objectively into the appropriate buckets because that is how bets are won. In this manner, we can build a habit of thinking of fielding outcomes as bets. Thinking in bets triggers an open-minded exploration of the alternative hypothesis, of reasons supporting conclusions opposite to the routine of self-serving bias. 

Thinking in bets will not rid us of our self-serving bias or our motivated reasoning, but it will make things a wee bit better and that wee bit does tend to matter in the ultimate analysis. Being a wee bit better at decision-making makes a world of difference in the real world. And, when we know that almost nobody else is doing what we are doing it, gives us an edge. Moreover, the wee bit extra we get via this process compounds over time. 

When we interact with others, truth-seeking is a good way of filtering out the decision-making process. However, while seeking the truth we must remember that this method doesn't work in all situations. Some people are not interested in the pursuit of truth-seeking. For all those who want to make Thinking in Bets a habit, we must remember that truth-seeking benefits the process. In other words, truth-seeking needs agreements by both sides for it to be effective. 

Our brains have evolved to make our version of the world more comfortable; favourable outcomes are the result of our skill and unfavourable outcomes are beyond our control (luck) and we always compare favourably with peers. We tend to deny or dilute the most painful parts of the message. We process information to protect our self-image. This is the echo chamber most of us live in. By choosing to exit this chamber, we are voluntarily opting to strive for a more objective assessment of the world. By doing this we hope to achieve a sense of happiness over the long term, instead of the short-term happiness that we live in when we are ensconced in our echo chamber. The important thing to remember is that this trade-off isn't for everyone. And each person must voluntarily choose to exit his or her echo chamber, he or she can't be forced to do it. 

 
While engaging in truth-seeking, it helps if we have other people to help us. We need decision-making or a brainstorming group or a 'buddy' who can help us do the same. Members of this decision-making pool have to be those that Think in Bets and they have to be open-minded. As a result, we shouldn't be going around the world, asking ‘wanna bet to every tom, dick and harry that we meet. Most of those whom we meet aren't interested in moving out of the echo chambers of their social construct and it’s a waste of time using these methods with them. One of the benefits of seeking help while taking decisions is that others can spot our errors better than we can, they don't suffer from our blind spot bias. Getting a buddy to watch your back (or your blind spot) isn't a bad idea at all. Again, truth-seeking isn't a cult, we don't have to cut off people who don't share our commitment. 

Once we have reached a stage where we want to truly seek and have someone to watch our biases, the next thing is that we need a formal agreement of how we are going to seek the truth (the rules of the game) and what distinguishes a productive decision-making pool. While making decisions in a group setting we need to be careful that we don't indulge in a confirmatory thought process, we must be exploratory. The way to avoid this one has to incorporate an element of accountability within the group to an external person or audience and that audience should be focused on accuracy. Diversity in thought and ideas must be encouraged. These are the three essential elements. 

The point is that we don't win bets by being in love with our ideas. We win bets by relentlessly striving to calibrate our beliefs and predictions in a way that these will more accurately represent the world. Staying objective is the goal. Confirmation Bias and Motivated Reasoning are so ingrained in our system that it is helpful if there is someone around who can help us get over the pitfalls that these present. When we seek truth in the above settings we can differentiate between outcomes and decision quality. Once we get used to this buddy approach, it becomes a habit. 

If one were to design a model for a group, practical rules of engagement like Robert Merton's CUDOS framework is one of the best. CUDOS stands for Communism (of data belonging to the group), Universalism (to apply uniform standards to all claims regardless of where they came from), Dinterestedness (vigilance against groups conflicts that can influence the group’s evaluation and Organized Scepticism (discussion among the group to encourage engagement and dissent). 

 Robert Merton coined the words, 'role model', 'self-fulfilling prophecy, 'reference group', 'unintended consequences' and 'focus group'. He founded the science of Sociology. 

The C in the CUDOS framework, which is communism doesn't refer to the political system, but the communal ownership of data within groups. Data must be shared, else it leads to bias.

The U in the CUDOS framework stands for Universalism. It means don't shoot the messenger. If we don't like the message, we shouldn't be blaming it on the messenger. At the same time, there is another idea which is don't shoot the message just because you don't like the person who delivered it. When we have a negative opinion about the person delivering the message, we close our minds to what they are saying and in turn miss a lot of learning opportunities. Similarly, when we have a positive opinion about a person, we accept what they are saying without vetting. Both are bad. The point is that information has merit, irrespective of where it came from - the accuracy or lack thereof of information should be assessed irrespective of its source. No one has ONLY good ideas and ONLY bad ideas, we can learn from almost anyone and everyone we meet. 

The D in the CUDOS framework stands for Disinterestedness, we all have a conflict of interest and it’s contagious. Conflicts of interest are not restricted to those of the financial variety, they come in many varieties. Our brains have built-in conflicts of interest, interpreting the world around us to conform to our beliefs; to avoid having to admit ignorance or error, to take credit for good outcomes of our decisions. Knowing how something turned out creates a conflict of interest that expresses itself as 'resulting'. Outcome blindness enforces disinterestedness. 

Organised Scepticism completes the CUDOS framework. Scepticism means approaching the world by asking why things might not be true rather than why they are true. It's a recognition that while there is an objective truth, everything we believe about the world is not true. Thinking in Bets embodies scepticism by encouraging us to examine what we do. It forces us to examine what our level of confidence in our beliefs and predictions is. In this way, true scepticism moves us closer to the objective truth. True scepticism isn't confrontational. 

That leaves an important part of how does one communicate with those who are not part of our group, those who don't want to Think in Bets? There are a couple of ways. 

1. First express uncertainty, never says things with an air of finality as if you're completely sure about something. Leave the door slightly open so that the other person can express his or her opinion - express uncertainty. In this way, others share helpful information and dissenting opinions. If we express certainty, the fear of being wrong suppresses others from expressing their opinion. 
2. Secondly, lead with assent. Listen for things you agree with, state those, be specific. Once we lead with assent, our listeners will be more open to any dissent that might follow. What happens is that the new information is presented as supplemental rather than negating. Instead of using the word ‘but use the word 'and'. In this way, we avoid the language of 'no'. 
3. Third, we must ask for a temporary agreement to engage in truth-seeking. We can ask the other person if he or she is venting information or asking for advice. Once that part is clear, we can then define the rules of the game. 
4. Finally, focus on the future. We can validate the person experience of the past and then ask him or her. To refocus on the future. In this way, we circle back to the question of how we can avoid making similar mistakes that we made in the past, again in the future. We need to focus on the things that we can control. When we send them thinking into the future, they take a short trip beyond their present frustrations and towards improving things they can control.

In real life decision-making, when we bring our past or future self into the equation, we tend to make better bets. When engaged in the decision-making process if we isolate ourselves from similar situations that we have been in the past and do not think about the future it leads to in-the-moment thinking where the scope of time is distorted. As decision-makers, we want to collide with past and future versions of ourselves. Just as we can recruit other persons to be our decision buddies, we can 'time-travel' and recruit past and future versions of ourselves to obtain a similar result. It helps us to stay on a rational path. Indirectly, it reminds us that every decision has consequences. At all times we are trying to improve decision quality and are trying to improve the probability of obtaining a good outcome, we cannot guarantee that the outcome will be a good one. And once the probabilities improve, good results tend to compound. 

When we make an in-the-moment decision we are more likely to be irrational and impulsive. This tendency to focus on our present self at the expense of our future self is called temporal discounting - we are willing to take an irrationally large discount now to get a reward instead of waiting for a bigger reward later. 

We must ask ourselves the consequences of our decision using the 10-10-10 framework. What will the consequences be in ten minutes, in ten months and ten years? In this way, we can trigger mental time travel. We can use this for the past as well, how would I have felt if I had taken this decision 10 days ago, 10 months ago or 10 years ago? In this way, we can move regret in from of a decision. And more often than not, it forces us to make a better decision. If we were not to engage in this framework and instead take in-the-moment decisions, what happens is that we degrade the quality of the bets that we are making and thereby increase the probability of obtaining a bad outcome. 

The way we field outcomes is path-dependent. It doesn't so much matter how we end up, what matter is how we got there. What has happened in the recent past drives our emotional response much more than how we are doing overall. 

When the emotional part of our brains starts pinging the rational part shuts down, something like what happens when a pinball machine is tilted. It's called tilt in Poker. When we are on 'tilt' we are not fit to make any decisions. 

The Ulysses contract from mythology also works because it helps us in staying focused and not succumbing to any distractions; this has become a survival instinct in today's noisy world. What happens is that we are physically prevented from acting on an irrational impulse, the option simply isn't there. It’s like taking the decision out of your hands. It creates a decision interrupt which in turn forces us to do time travel. 

We should do a scenario planning of the possible outcomes and their probabilities, as also the consequences of being wrong. In this way, we scout all possible futures and then make decisions based on the probabilities of these futures. Imagining how a possible future will play out, improves decision quality and also reduces reactivity to the outcomes. 

Backcasting is the process of working backwards from a positive future. When it comes to advance thinking, standing at the end and thinking backwards is much more effective than looking forward from the beginning. When we try and breast the future, we end up with a distorted image. The reason is that from where we stand the present and the immediate future looms large, everything else beyond that loses focus. 

Pre-mortems are working backwards from a negative future. It is the principle of inversion, you know what you are not supposed to do. 

When we indulge in hindsight bias we forget all the other alternative outcomes that could have occurred. Once something happens we assume that it was bound to happen. If we don't hold all possible futures in mind before one of them happens, it becomes almost impossible to realistically evaluate decisions or probabilities after. Once something happens, we no longer think of it as probabilistic or ever having been probabilistic. That results in 'I should have known or 'I told you so' responses. By keeping an accurate representation of what could have happened (and not a version edited by hindsight) memorialising the scenario plans and decision trees we create through a good planning process, we can be better calibrators of things going forward. We are all outcome junkies and the more we wean ourselves from that addiction, the happier we will be. 

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