February 2018

Thought For The Month

I recently decided to reduce my running commitments. There will be no press coverage of this and no big testimonial dinner has been organised: given my ability I will be of no loss whatsoever to the running community – although running shoe manufacturers will miss me greatly. My decision is not due to injury or old age, but instead to longer-term concerns over the damage I may do to myself if I push my luck for another five or ten years. To many this decision seems entirely irrational (‘if you’re not injured you should keep going. Listen to your body’), so I was delighted to find support for my actions when reading Thinking in Bets – Making Smarter Decisions When You Don’t Have All The Facts, by Annie Duke. Ms. Duke is an ex-professional poker player who won over US$4 million in tournaments and believes many of her strategies can be exported to facets of life beyond the poker table.

Ms. Duke covers much of the old ground that can be found in, amongst others, Kahneman’s, Thinking, Fast and Slow and Tetlock’s Superforecasting (and the vast bibliography suggests she has left no stone unturned in her search for answers). One suggestion she makes for improved decision making, and credits to Suzy Welch, is the 10-10-10 rule. How will I feel about this decision in, say, 10 hours, 10 months and 10 years? (the ‘10s’ obviously need to be calibrated dependent on your chosen pursuit. A hand of poker lasting about 30 seconds is very different to buying a stock on a 5 year view). So, yes, on a 10 hour view my running decision might not look too smart, but if I don’t reduce my efforts and in 10 years’ time I am hobbling around waiting for two new hips it might look very different.

This concept of including a ‘future us’ in the decision making process is particularly appealing for a contrarian investor. Often when we are considering purchasing a stock, its price is falling, bad news is in the ascendancy and we are often told that the stock is ‘dead money’ or worse. However, by considering a different time horizon it is possible to ignore the noise and babble (often masquerading as something more structural) which can often drive short–term price movements. On the other hand, a share might appear optically cheap, but less attractive once we consider the company’s medium-term prospects – the dreaded value trap.

It is good to have a successful practitioner sharing some real life stories and proving that what the academics have told us for some time can be applied in real life. What Ms. Duke doesn’t tell us is what to do once practitioners have all become aware of these psychological tricks. The professional world of poker must have used up its share of patsies many years ago. How did she outfox the remaining high-rollers? Fortunately in fund management the ever increasing presence of index funds suggests the patsies are becoming ever more dominant in the short-term.