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The BID

What poker tells us about risk

Esta semana con Maria Konnikova, campeona mundial de póker

Muchas personas pueden pensar que el póker es un vicio. Sin embargo, es probable que nos enseñe menos sobre cómo ganar dinero y más sobre la manera en que tomamos decisiones. ¿Qué sucede a menudo? En la vida, al igual que en un juego de póker, no somos tan buenos tomando decisiones como creemos; especialmente, cuando nos falta información.

En este episodio de The BID, Maria Konnikova; psicóloga, autora de superventas del New York Times y campeona mundial de póker; analiza cómo navegar la incertidumbre, superar los prejuicios y tomar las mejores decisiones posibles con la información que recibimos.

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    Mary-Catherine Lader: Poker may seem like a vice, but perhaps it teaches us less about how to win money and more about how we make decisions. Like investing, for example, poker requires us to make decisions, gauge risk and trust our choices, all with incomplete information. And we’re not as good at making decisions as we may think we are. So how do we overcome uncertainty, our biases, and do our best to get it right?

    On this episode of The BID, we’re doing something a little different. We’re bringing you a live recording from our Latin America Investment Forum in Miami, where we spoke with Maria Konnikova. Maria is a psychologist who specializes in risk and decision making. She’s a New York Times bestselling author, and a world champion poker player.

    Maria talks to us about how she got into poker, even though she detests gambling, why sometimes the smartest people in the room can often make the worst decisions, and why the only certainty in poker, as in life is – yeah, you guessed it – uncertainty. I’m your host, Mary-Catherine Lader. We hope you enjoy.

    Thanks so much for joining us today.

    Maria Konnikova: Thanks for having me. 

    Mary-Catherine Lader: I’m going to ask the obvious question first, how and why did you get into poker?

    Maria Konnikova: So, I initially got into poker for a book, which is going to be my next book, called The Biggest Bluff, about the role of chance in our lives. And I had no interest in poker, I didn’t know anything about it. I hate casinos, I hate Las Vegas, I hate gambling, I hate everything that has to do with that world. And I came across poker actually from game theory. So someone recommended that if I’m interested in chance, I should read John Von Neumann. And it ends up that John Von Neumann created game theory because of poker; he was an avid poker player. He was a horrible poker player. But he had this insight — he also played chess, he played Go, knew a lot about the gaming world – that if you wanted an analog for life, if you wanted an analog for true strategic decision making, poker was the game for you. It wasn’t chess, because chess he found incredibly boring because it was a game of complete information. There is always a right answer; there is no uncertainty because everyone knows everything and theoretically, you can solve chess. Poker, like life, is a game of incomplete information. There are things that we know in common, but there are things that only I know and there are things that only you know. And we need to play each other and we need to portray ourselves in certain ways, and we bluff and we do things that always convey information. He said that is human decision making. If I can solve that, I can solve the world. And so that is how I initially got into the game. And it was so funny, because I ended up becoming good, leaving The New Yorker, where I’d been for a number of years, to play poker full time. And people would say, oh my god, you became a professional gambler? And I would say, absolutely not. Because if you think that poker is gambling, you don’t understand poker. Gambling is when you can’t control things, and poker is a game of skill. So over the long term, the most skilled poker players, the most skilled investors are going to come out on top. And the key is approaching it the right way, and using it correctly to approach your decision making process. And if you do that, then it becomes something very, very different from gambling; it becomes a strategic endeavor that can I think unlock some of the greatest things about human decision making and help you think about risk, help you think about uncertainty in a much smarter way. When I was getting my PhD in psychology, I studied decision making and decision making under conditions of risk and uncertainty. And over and over, what you come up with is that we’re really bad at it, that the human brain is really bad at probability, that we have all of these biases. And what I realized was that poker is actually a solution, because the human brain learns from experience. It doesn’t learn very well from descriptions. So I can tell you about probabilities and you’re not going to actually be able to internalize it in a way that’s going to translate into your actual decision making process. Poker forces you to make these decisions and to sample probabilities correctly and becomes the tool that can help you un-bias your decision making in very powerful ways.

    Mary-Catherine Lader: That was very convincing. I’ve never played a very successful hand of poker, so next time I see you, I’ll ask for a personal tutorial because it sounds like it’s a very useful approach and framework for life. So taking us out of that specific game and sort of what you learned about decision making, what are some of the attributes that you’ve observed in your research of good decisions made under conditions of uncertainty versus bad decisions?

    Maria Konnikova: Yeah. So one of the key things that I‘ve learned is that we need up being pretty bad at figuring out what we can and can’t control. When you put us in a stochastic environment, and environment where there is a lot of uncertainty, especially an environment that is noisy where there’s not necessarily direct feedback between what you do and what happens—like the stock market for instance. There are so many things going on and you can’t account for all of the factors. We tend to assume a little bit too much agency, so we tend to assume a little bit too much control over outcomes if those outcomes are good. If something goes the right way, we say I am the best, I am so smart, look at me, look at how well I decided that. And then if a decision goes against us, there is so much in the environment you can blame. You can say, you know what, I actually thought of everything but this one thing happened, it’s not my fault. I can’t control it.

    Mary-Catherine Lader: Sounds like that is familiar—laughter in the audience.

    Maria Konnikova: So the beauty of poker is it’s a game, it’s a circumscribed environment, that is why it’s easy to learn because there are only so many variables. In the investment world, the variables are infinite, life is messy and there is so much noise. When I did my thesis work, which involved stock market games, we actually had actual investors play stock market games. And I found that people who were incredibly smart and very good at what they did, ended up falling prey to something known as the illusion of control which is thinking that you’re in control when you’re actually not. So they had to pick stocks and bonds and get feedback based on their decisions, on how much money they were making, and then they could have a strategy and then they could change that strategy. And what ended up happening was when the environment shifted, the people who were very smart didn’t shift as quickly as the people who were less successful, because they said, oh, no no, my strategy is good it’s just there are all these other things wrong. So I’m just going to keep doing what I’m doing because I know what I’m doing. And then other people would actually listen to negative feedback and say, well I don’t know what I’m doing and so I guess maybe I should do something different and they ended up making a lot more money. And so, that’s one of the key variables that I’m trying to get people to stop doing; stop falling for this illusion of control because it’s very powerful and it impedes learning. You’re not going to become a better investor, you’re not going to start making better decisions, if you constantly blame other things for your mistakes and you constantly take credit, even when maybe your decision was actually absolutely wrong and you just got incredibly lucky.

    Mary-Catherine Lader: That’s really powerful and compelling, but it’s very hard to put into practice, right? So what does that mean, trust yourself less is the right answer? How does one do that every day, how do you do that successfully and still have the sort of confidence to make decisions?

    Maria Konnikova: Yeah. I think that it’s a very fine balance: you can’t constantly question yourself because then you’d be paralyzed if you wanted infinite information, because ultimately we are making decisions under conditions of uncertainty. And we’re not going to be able to know everything. But I’m a big believer in having as objective of a framework as you possibly can. When you’re playing poker, it’s very easy to make a bad decision then get lucky when the one card you needed comes your way, and then you kind of forget that your decision was bad because you’re outcome-oriented. You look at the outcome and you say, my decision was good. And on the other hand, if you made the correct decision, but then you ended up losing, sometimes you start questioning yourself. And so it’s incredibly important to actually divorce yourself from the outcome. So when I talk to my coach – and I think everyone needs coaches no matter what you do — you need to have someone with whom you can talk through things. I think this is incredibly true in the investing world. So when I talk to my coach, he actually doesn’t care if I won or lost. He doesn’t care what the outcome was — all he wants to know is to go through my decision making process. At every single step, why did I do what I did? What was I thinking was going to happen? Did I think several steps ahead, did I think how people would react to my decision? So because I know I’m going to be explaining this, I actually have to think through it rather than just reflexibly acting. So I think this is something that we can implement in everyday life in all of our decisions. At every step of the way, actually keep a record of what you’re thinking, what variables you’re considering, what things you think will look like, so that you don’t fall prey to something known as hindsight bias which is where you take the data that you have right now and retroactively apply it to back then. I call it a decision diary and I think these can be incredibly useful to help you get back in the moment.

    Mary-Catherine Lader: This is the right moment to mention your husband is a portfolio manager and you regularly dispense this advice to him. So let’s switch gears a little bit, taking about risk, decision making to talking to about trust. Everyone in this room relies on trust for success, in our relationships, in our word, trust in the brands and organizations that we support. And we’re also living in a time of great diminishment in trust, particularly in large institutions. So what is going on, what do you make of that, what is the research on why we trust today?

    Maria Konnikova: Yeah. I think the first thing, which is a really wonderful thing, is that trust is usually really good, and we’ve evolved to trust. So when I first started researching the psychology of trust, I didn’t know if it was good to trust or bad to trust. Because you can see that both arguments would kind of make sense, right? That maybe it’s better to not trust anyone, because you’re safer. But it ends up over time that we seem to have evolved to trust and that trust is actually the default human condition. And if you stop to think about it, it makes a lot of sense, because who is going to survive in the wild, right? Is it the lone wolf or is it members of the pack? You actually see throughout time and over history and throughout different societies that societies that have higher levels of something called generalized trust, which is trust in your fellow human beings, they tend to thrive. They tend to do better economically, they tend to have stronger social institutions. And on an individual level, individuals who score higher on a measure of generalized trust, they tend to do better academically, they sometimes have higher IQ in certain areas, they tend to be healthier, they tend to be happier, they tend to live longer. So it actually ends up that –

    Mary-Catherine Lader: Trust is good.

    Maria Konnikova: Yes, trust is good, and trust is associated with all sorts of really positive outcomes. And like I said, trust is the default. So when you run studies where you actually don’t give people any instructions and you have them play different games where they’re playing with other people, they start off trusting usually and they end up doing much better. And if you give them specific instructions like hey, that guy over there might not be so trustworthy, you might want to look out for them — then all of a sudden, that dynamic falls out the window and they end up doing much worse and getting worse results as a group. But to me, it’s actually inspiring that if you don’t tell them anything, they start off with good intentions. Now that said, right now we are living at a time where we do see levels of trust at an all-time low. So in a lot of surveys around the world, you see that people are trusting governments less, they’re trusting institutions less, they’re trusting journalism less. We have the fake news hashtag, right? That seems to be permeating everything. But I also think that we can overcome it because I do believe in the power of trust ultimately. And I think that people understand that too.

    Mary-Catherine Lader: So you mentioned two things that were particularly current and interesting: one is that you believe we can recapture trust, and the second that, on an individual level, it’s very powerful. And it’s interesting to think about how even as we have this diminishment of trust in large institutions, we have these large technology platforms that mean that more and more of us are getting in an Uber with a stranger and trusting them to drive us somewhere. We’re trusting a stranger to host us in their home because of AirBnB. And it’s intermediated by technology, and somehow that app or that technology platform creates trust. Why does that work, why does that happen? And what is the takeaway that you see in that for how we can build and recapture trust in pretty short order?

    Maria Konnikova: Well, I think it’s interesting and it goes back to something that I talked about earlier on about how the mind learns, and the fact that we learn from experience. Experiences are much more vivid than any description, than anything you read, than anything you hear. And as these technological platforms become ubiquitous and they’re everywhere, what is your experience usually? It works out, right?

    Mary-Catherine Lader: It works out, and if it doesn’t, you complain and give them two stars, and you get a free ride.

    Maria Konnikova: But normally it doesn’t work out in horrible ways. Normally everything is fine, and if it doesn’t work out, it’s because your driver was on his phone or your driver was annoying, or the AirBnB had a broken shower. These are small problems and we trust that they’ll get taken care of and normally they do. And so we actually have had a lot of positive experiences that will then make us more likely to trust this. Now, if anyone here ever had a really, really nasty experience, with AirBnB, with Lyft, with Uber, with anything, where you have this sharing economy, all of a sudden, that is going to go out the window. Because experience is going to trump everything else. So even if everyone says, you can use this, you can say, well I had this one crazy driver who got into an accident and then I had to go to the hospital. I’m never using ride sharing again. And then you end up in the middle of nowhere with no car and ride sharing, and what do you do? The one thing that can fight through negative experience is convenience. Because we’re also pretty lazy. And so you can go on a moral crusade about how you’re never going to use Facebook because of their privacy violations, but then it’s just really convenient so you just keep your account on the side. I think that is one of the reasons that these technologies have been successful and that we do trust in them. And I think the underlying nature of this is that – my last book was about deception and people who deceive us – and it ends up that most people aren’t out to get you. Humans are pretty decent for the most part. And so normally it’s just fine to trust, and the bottom-line of that book was that yes, you might be deceived and you probably will, but that is okay because that’s a side effect of being human. And you don’t want to live in a world where you couldn’t be deceived because that’s also a world where trust is dead.

    Mary-Catherine Lader: It’s interesting. Much of what you just said really applies to fintech actually. But when you have a bad experience with your money, it’s pretty painful. It may feel more painful to some than getting stranded in ride sharing. And so what we’re going through now is seeing many of these fintech start-ups trying to add in the necessary process, the necessary procedures, and even really user design, to ensure that they comply with regulations, to ensure they can protect against those bad outcomes. And much of the challenge is that tension between wanting to create convenience and wanting to preserve against a bad outcome. What do you think then is the solution and is an answer for some of these tech companies to build that trust? Is it this sort of quick feedback loop that you mentioned, or sort of big solutions like some of the government actions that have been described?

    Maria Konnikova: Yeah. I think feedback is incredibly important. I think transparency is very important, being transparent with what you are doing and aren’t doing, and what you can’t yet do, even though you wish you could. By the way, this is a slight tangent, but I think that this is one of the reasons why people have trouble sometimes with AI technologies, because there isn’t transparency there and you want to know what goes into those decision making algorithms so that you can make a decision for yourself. What are the factors, and can I trust them? Because an AI is only as good as the people who built it. And if we don’t know what goes into that black box, that’s scary. And that goes back to what we were talking about at the very beginning: uncertainty. The human brain hates uncertainty and hates ambiguity, and doesn’t function well in those types of environments. We want to resolve it. And the people who are going to come out ahead are the people who not only tell the best stories, but tell stories that check out.

    Mary-Catherine Lader: So going back to that theme of uncertainty, it’s exactly right in that it has a sort of negative dynamic. What is the psychology behind that? Why does uncertainty necessarily imply that we have to somehow exercise caution and prepare for the worst?

    Maria Konnikova: I think it’s just the way that the human brain is wired: all of the data we have about the way that humans think makes it very clear that we want things to be neat. That’s why we just jump to say, A causes B; we jump to put people in categories, to put labels on things, to make the world explainable. Otherwise, if everything is uncertain, then what world are you living in? Is this room here, am I here? You get into these metaphysical/existential debates right away. And it actually ends up that the way that we are wired, so to speak, to see the world, it’s a two-step process that was first described by a psychologist named Daniel Gilbert, at Harvard University. And what Gilbert found is that there’s two stages to any sort of perception, any interaction, basically anything that happens. The first one is belief. So first we need to believe that things are true. Because that is the only way our brain can process it. Even if it’s just for a millisecond. I call this the Pink Elephant Effect. So the moment I say “pink elephant,” to understand what I just said, just for a second, you need to picture a pink elephant. And then the second stage if verification: is this true or is this false? And you can right away think, oh, pink elephant, pink elephants don’t exist, false. But what ends up happening is that the second step isn’t automatic, unlike the first step. So the first step always happens. But the second step doesn’t always happen. It can be disrupted. We can be busy, we can be stressed, we can be emotional, we can get distracted. And so we just have this belief, this underlying belief that stays in our mind and becomes an incorrect memory. But that is also one of the reasons why we have false certainty about certain things we’re so much more confident in than we should be given the information that we have, because we have this memory of, oh, it’s definitely true. But just imagine how many pink elephants you encounter every single day and they don’t have a big waving flag that says hey I’m a pink elephant. You have to figure out whether or not I actually exist. You just say, yup, pink elephant, come into my head and stay there. And so I think this false sense of certainty is one of the ways that we deal with uncertainty and one of the reasons we become so overconfident, especially in areas where we have some sort of expertise. Because the more you know, often times the more you think you know. And some of the studies on overconfidence that scare me the most are that the greatest experts in certain areas are most prone to overconfidence because they have so much experience that they can’t entertain the notion that they might not know a specific thing.

    Mary-Catherine Lader: So we’re back where we started, the uncertainty of uncertainty as the only certainty. And pink elephants is a very memorable visual of that. I’m going to end with a rapid fire round of questions, which we do on every episode.

    Maria Konnikova: All right.

    Mary-Catherine Lader: Okay. You ready? So you have to answer in one sentence or less.

    Maria Konnikova: Okay.

    Mary-Catherine Lader: Fake news: fad, or here to stay?

    Maria Konnikova: I think if I had to choose one of the two, it would be fad because I believe in the human mind’s ability to get through fake news.

    Mary-Catherine Lader: You’re an optimist in this.

    Maria Konnikova: I’m an optimist.

    Mary-Catherine Lader: In poker, Five Card Draw or Texas Hold ‘Em?

    Maria Konnikova: Texas Hold ‘Em.

    Mary-Catherine Lader: Why?

    Maria Konnikova: Because if you’re looking for a model of human information, it’s the perfect mix of knowns to unknowns. In Five Card Draw, it’s too much chance, there’s too little information that is in common.

    Mary-Catherine Lader: Davos, where you gave a keynote this year, or Miami?

    Maria Konnikova: I have to say Miami, right?

    Mary-Catherine Lader: There was a correct answer to that question. Which brand do you trust the most?

    Maria Konnikova: Wow. Which brand do I trust the most. So I don’t buy a lot of clothes, I hate shopping, so I’m going to say one of the brands that I actually trust is a clothing brand, Everlane. And it goes back to some of the things that we were talking about with trust and transparency. So they tell you exactly where they’re sourcing every single thing that they use and they break down their price, they show you exactly why you’re paying what you’re paying. And they pay their workers really well.

    Mary-Catherine Lader: And what about the least?

    Maria Konnikova: Facebook.

    Mary-Catherine Lader: Popular answer these days. Thank you so much for joining us, Maria.

    Maria Konnikova: And I still have a Facebook account.

    Mary-Catherine Lader: And so do I. Thank you so much for joining us, it’s been a lot of fun.

    Maria Konnikova: Thank you so much.