The Pitfalls of Bias in Betting and Investing

Thinking in Bets | 361 Capital BlogThe room is surrounded with people and cameras and in the middle of it all sits an oval table with bright green felt big enough to sit nine people, a dealer, and two piles of poker chips. You command one stack of chips, waiting patiently for the first two cards of what will be a total of seven dealt to you and your opponent, two hole cards and five shared cards. Before the cards are even dealt you have a good feeling about this hand, so you peek and see a 7 of clubs and a 2 of hearts. Despite knowing that this is statistically the worst hand in poker, you trust your “gut” and decide to call your opponent. He has raised prior to the rest of cards being seen, which of course indicates strength. To your delight, 7, 7, 2 comes on the flop, with these cards you know that you’ve gone from the statistically worst hand in poker to one of the best possible outcomes. Question: Did you make a good decision?

Recently I finished reading the book Thinking in Bets by Annie Duke. As a professional poker player, Duke discusses many concepts that she experiences in playing, including one known as “resulting.” This phenomenon is the tendency for individuals to judge their recent decision making based on the outcome or result of their selection. Duke’s argument is that the quality of your decision making is based on the depth of the thought process used in making that decision, not the outcome. In short, she cites a high-quality process as the genesis for proper decision making by asking if it was thorough? And, can you defend it? Is it repeatable?

In my experience, I feel that many financial professionals suffer from resulting, particularly when it comes to alternatives in recent years. A decision to incorporate alternative investments into client portfolios may feel like a bad one as near-term results haven’t panned out as you expected. But, does that mean it was a bad decision to incorporate alternatives in the first place? To answer this question, we’ve looked at the outcome of alternatives over the past five years. Looking quickly, and with a resulting lens, yes, that decision may appear poor.


Source: Bloomberg. Data as of 12/31/2018. Past performance is not indicative of future results.

However, when we look at the results over a more extended time frame, the decision now appears more favorable.


Source: Bloomberg. Data back to common availability: 12/31/1989-12/31/2018. Past performance is not indicative of future results.

Investing and money are emotional topics, which lead us to the tendency of leaning unreasonably hard on behavioral biases, including resulting. However, it’s important to avoid the pitfall of biases and understand that what may seem to be “bad decisions” could simply be well thought out decisions with unfavorable near-term outcomes. We all can leverage learnings and past data to create a better, more thorough process to achieve a higher probability of your desired outcome. Ultimately, the fact remains: short-term outcomes shouldn’t diminish the value of a thoughtful process.

Finally, suppose for a minute that instead of lady luck smiling down on you during the heads-up poker match, you were the opponent and your pocket Aces were busted by 7 deuce off suite. Did you make a bad decision to raise pre-flop? How do you know?

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