Do you know what thinking in bets means? Don’t worry will explain it to you; it is a mental framework that was devised by Annie Duke, a former poker player. In this article, we will go over two real-life instances of how people incorrectly analyze decisions based on their outcomes. Then, we will explain why the analysis is wrong and, when playing poker, how you can consider luck.
Bad Decision! Good Luck
Mike was full of excitement when a new close friend told him about cryptocurrency. On Reddit, there was a buzz about crypto, and everyone was discussing how much growth potential it has. Mike thought he was early enough to earn big returns in a short period of time.
Mike was so convinced by the concept of cryptocurrency that he invested all his savings. After a fortnight, Mike’s dream became a reality, got 10 times higher investment, and then cashed out. Mike confidently told himself, ‘That was the best decision I had ever taken.’
Good Decision! Bad Luck
Jane was employed in a Consumer goods company in the Marketing department. One day, she got a job offer from a tech firm. The offer was promising: she would get a chance to lead a team, a promotion, stock options, etc.
After thinking about the offer for about a week, Jane decided to accept the tech firm’s offer. It was a wonderful chance for her, and the tech firm gave her hope for a promising future. However, a few months later, there was a recession.
The recession hit the tech industry hard, and the stocks dropped. Her tech firm decided to do restructuring and, in the process, fired her. Since she was new in the firm, she didn’t get any severance. Jane was in trouble because in a recession, getting a new job was almost impossible.
Jane said this to herself: ‘That was the worst decision I have ever taken.’
Think like you are a Poker Player
Life is nothing more than a game of decision-making. Career changes, what projects to work on, investments, all the decisions that you need to take. Over the long term, the better decisions you take, the more successful you will become.
However, people make one mistake when assessing the decisions they make; they judge the decision’s quality based on the outcome it leads to. This is a flaw, and it leads to a dangerous illusion for future decision-making. Like is like a poker game, it is not a game of chess. You might not notice it, but luck plays a bigger role in life than you think.
Mike’s decision was terrible, he gave away all his savings to crypto, but luck saved him. Jane made an excellent decision for her career; unfortunately, she had no luck. When you think in bets, it enables you to take probabilities and luck into consideration and helps you become a much better decision-maker.
Three Key Steps for How to think in Bets
Imagine betting with a Friend
Let’s say you want to purchase real estate, and you expect to get healthy returns within a three-year span. Imagine your friend betting against your decision. This will force you to think that maybe your friend knows something you don’t, and you can find the blind spots in your thought process before making the decision.
You should calculate the expected value
Players that play poker professionally decide to make a bet or not by doing a calculation on hand and calculating the bet’s expected value. For instance, 300 dollars lay in the pot, that is the total amount of money you can earn. You require 50 dollars to call your friend’s bet, and your estimate shows that you have a 25 % chance of holding the winning hand.
The expected value of this bet will be 35 % of the 300 dollars, which is 75 dollars. Since your expected value of 75 is higher than the 50-dollar bet, it is sensible to bet 50 dollars for that hand. You should use the same concept for your life decisions. You should compare the bet and expected value by estimating:
- The potential reward a decision offers
- The resource to get to the reward
- Probability of getting it
Assess your previous decisions
Another great way of making good decisions is by assessing your previous decisions. If you don’t find mistakes in your decision-making process, you run the risk of repeating those mistakes. Two things decide the direction of our lives: luck and the quality of the decision. When you understand the difference between the two, you will understand the concept of thinking in bets.