Thinking In Bets
Click here to buy the book.🚀 The Book in 3 Sentences
Thinking In Bets is the ultimate guide to thinking about risk.
Written by former World Series of Poker champion Annie Duke, this book uses examples from business, sports, politics, and poker to share practical tools for making better decisions.
In it, you’ll discover how to differentiate between outcomes driven by luck or skill, you’ll become more open to dissenting viewpoints, and you’ll learn how to embrace uncertainty when planning for future decisions.
🧠 Key Takeaways
We tend to link positive outcomes with good decision-making and negative outcomes with bad decision-making. But the reality is that the causation between decisions and outcomes isn’t always as straightforward as we’d like to believe.
We all acknowledge that luck exists, but there's still resistance to admitting just how much it can influence our lives. We feel much better believing that the world is a straightforward place where you're guaranteed success if you do the right things and check all the right boxes. But reality isn't that simple, and the stock market is even worse.
Improving as an investor is a lot like being an athlete. Just like a football or basketball player reviews game film to get better, you need to look back at your previous investment decisions if you want to improve.
It’s easy to think that a decision is great just because it led to a positive outcome. However, what actually makes a decision great isn’t the outcome itself—it’s the process that led to that decision in the first place.
We all want to be the kind of person who has all the answers, the one who knows—but sometimes, we just don’t. Admitting that you don’t know what you don’t know is a much more freeing and honest way to go about life.
At the end of the day, every investment decision is based on a range of possible outcomes. If one of the less favorable outcomes occurs, it’s easy to feel like you made a mistake. In reality, you made that decision with the best information available at the time. The market sometimes throws unexpected curveballs that create undesirable outcomes.
Whether you're buying, selling, holding, or even choosing not to invest, you're essentially placing a bet on how the future will unfold. When you decide to buy a stock, you're betting that the information you have from doing your research will eventually lead to that stock going up. On the other hand, choosing not to buy a stock is a bet too—a bet that either the stock won't perform well or that your money could be better invested elsewhere.
If we see our beliefs as either completely right or completely wrong, then any new information that contradicts what we think feels like a personal attack. We’re forced to either admit we were completely wrong (which feels terrible) or disregard the new information so we can keep believing we're right. Naturally, most of us choose to ignore dissenting information because it protects our ego.
Just like compound interest, where small, steady returns build on themselves over time, recognizing and acting on learning opportunities can have a snowball effect on your knowledge and decision-making.
The truth is a lot like eating Brussels sprouts: it might not always taste good, but it’s good for you. And just like eating Brussels sprouts, seeking the truth—even when it doesn’t go down so well—is a better decision than avoiding it. In the long run, it leads to greater fulfillment and better outcomes overall.
Temporal discounting refers to our tendency to prioritize immediate gratification over delayed gratification. In this context, spending your discretionary income in the here and now is such a difficult thing to pass up because you get to feel its effects right away. However, while spending now is easier, saving for the future is what will truly improve your life over time. This same idea applies to anything with long-term benefits—exercising, eating healthy, reading instead of watching Netflix, and so on.
✍️ Memorable Quotes
“In the exercise I do of identifying your best and worst decisions, I never seem to come across anyone who identifies a bad decision where they got lucky with the result, or a well-reasoned decision that didn’t pan out. We link results with decisions even though it is easy to point out indisputable examples where the relationship between decisions and results isn’t so perfectly correlated. No sober person thinks getting home safely after driving drunk reflects a good decision or good driving ability.”
We tend to link positive outcomes with good decision-making and negative outcomes with bad decision-making. But the reality is that the causation between decisions and outcomes isn’t always as straightforward as we’d like to believe.
The same principle applies to investing. Just because an investment went your way doesn’t necessarily mean the decision to make that investment was a good one—and vice versa.
The key is to focus on the process—the reasoning behind the decision—and not get too caught up in the outcome. By doing so, you’re more likely to make consistently good decisions over time, even if they don’t all go the way you planned.
“We are uncomfortable with the idea that luck plays a significant role in our lives. We recognize the existence of luck, but we resist the idea that, despite our best efforts, things might not work out the way we want. It feels better for us to imagine the world as an orderly place, where randomness does not wreak havoc and things are perfectly predictable.”
We all acknowledge that luck exists, but there's still resistance to admitting just how much it can influence our lives.
Why? Because it's unsettling to think too long about all of the things that are outside of our control.
We feel much better believing that the world is a straightforward place where you're guaranteed success if you do the right things and check all the right boxes. But reality isn't that simple, and the stock market is even worse.
When it comes to investing, no matter how much research you do or how confident you are in your investment thesis, random things can always happen to derail even your surest of decisions.
As investors, this can be both unnerving and humbling. We need to accept that our decisions won't always lead to positive outcomes and that sometimes things just won't go our way for reasons outside of our control.
That doesn't mean we shouldn't try to do the best we can. It just means that luck is part of the equation, and we shouldn't lose sight of that.
By doing so, we can better manage our expectations and keep ourselves from becoming too overly confident. It also serves as a good reminder that investing is as much about managing risk as it is about getting rewards.
“If we want to improve in any game—as well as any aspect of our lives—we have to learn from the results of our decisions. The quality of our lives is the sum of decision quality plus luck.”
Improving as an investor is a lot like being an athlete. Just like a football or basketball player reviews game film to get better, you need to look back at your previous investment decisions if you want to improve.
This means reflecting on every move you make. Did you buy the right stock, and did you buy it at a reasonable valuation? If you sold out of a stock, was the timing right?
To gauge this, I’ve found it helpful to keep a running log of all the positions I’ve sold. I track when I sold the stock, the price I sold at, what the stock’s current price is, and my overall gain or loss on that investment.
By taking time to reflect on these things, you can fine-tune your strategy, dissect the decisions that weren’t so great, and make better decisions (and more money) in the future.
“What makes a decision great is not that it has a great outcome. A great decision is the result of a good process, and that process must include an attempt to accurately represent our own state of knowledge.”
It’s easy to think that a decision is great just because it led to a positive outcome. However, what actually makes a decision great isn’t the outcome itself—it’s the process that led to that decision in the first place.
“There are many reasons why wrapping our arms around uncertainty and giving it a big hug will help us become better decision-makers. Here are two of them. First, “I’m not sure” is simply a more accurate representation of the world. Second, and related, when we accept that we can’t be sure, we are less likely to fall into the trap of black-and-white thinking.”
We all want to be the kind of person who has all the answers, the one who knows—but sometimes, we just don’t. Admitting that you don’t know what you don’t know is a much more freeing and honest way to go about life.
When we can be honest about the things we don’t know, we’re less likely to think in absolutes—black or white, right or wrong, is or isn’t.
This is especially true when it comes to the stock market. It’s easy to say one stock is a winner, another one’s a loser—but the truth is that it’s a fluid situation, so you can’t permanently label investments one way or the other.
By submitting to the constant flux of the stock market (where really anything can happen), we can open ourselves up to more nuanced thinking. This can lead to better decisions, a more open mind, and less judgment passed on the investment decisions of others.
“When we think in advance about the chances of alternative outcomes and make a decision based on those chances, it doesn’t automatically make us wrong when things don’t work out. It just means that one event in a set of possible futures occurred.”
When it comes to investing, nothing is guaranteed.
We might think we’ve found a great investment based on our research, but the market is unpredictable, and things rarely ever go as planned. With that, it’s important to remember that just because an investment doesn’t work out, that doesn’t mean the decision to invest was wrong.
At the end of the day, every investment decision is based on a range of possible outcomes. If one of the less favorable outcomes occurs, it’s easy to feel like you made a mistake.
In reality, you made that decision with the best information available at the time. The market sometimes throws unexpected curveballs that create undesirable outcomes.
Ultimately, the most important thing is to focus on your investing process, not the outcomes. Good decision-making isn’t about always being right—especially in the stock market where there is so much outside of your control—it’s about following a disciplined process that will lead you to make the best decisions possible.
“Whenever we choose an alternative, we are automatically rejecting every other possible choice. All those rejected alternatives are paths to possible futures where things could be better or worse than the path we chose. There is potential opportunity cost in any choice we forgo.”
Opportunity cost is a crucial concept that all investors grapple with, and it’s an important one to understand.
When you decide to invest in a stock, you're essentially saying no to every other investment option available at that moment. Each of those rejected options could lead to a different outcome, for better or for worse.
And obviously, we can’t possibly predict where the other paths will lead. The only thing we can control is how well we weigh the pros and cons before deciding to buy/sell a certain stock.
“Investments are clearly bets. A decision about a stock (buy, don’t buy, sell, hold, not to mention esoteric investment options) involves a choice about the best use of financial resources. Incomplete information and factors outside of our control make all our investment choices uncertain. We evaluate what we can, figure out what we think will maximize our investment money, and execute. Deciding not to invest or not to sell a stock, likewise, is a bet.”
Whether you're buying, selling, holding, or even choosing not to invest, you're essentially placing a bet on how the future will unfold.
When you decide to buy a stock, you're betting that the information you have from doing your research will eventually lead to that stock going up. On the other hand, choosing not to buy a stock is a bet too—a bet that either the stock won't perform well or that your money could be better invested elsewhere.
The hard part about investing is that we are always working without all the information. No matter how much research we do, there will always be forces outside of our control that impact the outcomes of our decisions—market sentiment, unexpected company news, or other random events.
The takeaway here is that all decisions are bets—whether you’re investing in something or deciding to pass—and not every bet will pay off.
But in the long run, if you're investing in solid companies and holding onto them for a long period of time, it's pretty tough to lose. After all, time in the market still beats timing the market.
“Truthseeking, the desire to know the truth regardless of whether the truth aligns with the beliefs we currently hold, is not naturally supported by the way we process information. We might think of ourselves as open-minded and capable of updating our beliefs based on new information, but the research conclusively shows otherwise. Instead of altering our beliefs to fit new information, we do the opposite, altering our interpretation of that information to fit our beliefs.”
As human beings, we're naturally wired to defend our beliefs, even when faced with information that renders them to be false. Instead of letting new insights guide us toward the truth, we often twist the facts to fit what we already believe.
This happens because sticking to our existing beliefs is easier, more efficient, and more comfortable than changing them. Our egos also play a big role in resisting that change.
When it comes to investing, this tendency can lead to poor decisions if we get too attached to a stock simply because it aligns with our original thesis. As tough as it may be, it's far better to recognize when new information contradicts your current point of view and then adjust accordingly.
“If we think of beliefs as only 100% right or 100% wrong, when confronting new information that might contradict our belief, we have only two options: (a) make the massive shift in our opinion of ourselves from 100% right to 100% wrong, or (b) ignore or discredit the new information. It feels bad to be wrong, so we choose (b). Information that disagrees with us is an assault on our self-narrative. We’ll work hard to swat that threat away. On the flip side, when additional information agrees with us, we effortlessly embrace it.”
If we see our beliefs as either completely right or completely wrong, then any new information that contradicts what we think feels like a personal attack.
We’re forced to either admit we were completely wrong (which feels terrible) or disregard the new information so we can keep believing we're right. Naturally, most of us choose to ignore dissenting information because it protects our ego.
In investing, this happens all the time. For example, let’s say that after a month of diving deep into a stock, you’ve learned all about it and are convinced it’s a great investment.
Then, some new data or news comes out that causes the stock’s share price to completely tank. Maybe the company missed its earnings expectations, or maybe the CFO was arrested for public intoxication…something like that.
Now you’re faced with a choice: either rethink your position or convince yourself the new information doesn’t really matter. And since it’s easier and feels a lot better to think you were right all along, you’ll be tempted to dismiss the bad news and stick to your original opinion.
On the other side of that, if the investment suddenly shoots up in share price—you’ll feel great, and you won’t even think to second-guess the information because it reinforces your original conviction in the stock.
But here's the thing: this type of behavior can lead to dangerous blind spots. If you only accept information that aligns with your existing beliefs, you’re not investing based on reality—you’re investing based on emotion.
So how do you avoid this trap?
You do so by learning to think of your beliefs as fluid, not as set in stone. Instead of thinking you’re always either 100% right or 100% wrong, look at new information as an opportunity to fine-tune your point of view.
Maybe you weren’t completely wrong (it’s rarely ever that black and white), but the situation has changed, and that’s okay. You should be able to admit that.
Changing your mind doesn’t mean you’ve failed, it just means you’re evolving. In the end, successful investing isn’t about defending your ego or maintaining some infallible image, it’s about staying flexible and open-minded, even when it’s uncomfortable.
“The benefits of recognizing just a few extra learning opportunities compound over time. The cumulative effect of being a little better at decision-making, like compounding interest, can have huge effects in the long run on everything that we do. When we catch that occasional learning opportunity, it puts us in a better position for future opportunities of the same type. Any improvement in our decision quality puts us in a better position in the future.”
Just like compound interest, where small, steady returns build on themselves over time, recognizing and acting on learning opportunities can have a snowball effect on your knowledge and decision-making.
Each of these opportunities, even if they’re small, improves your foundation for future decisions. In both investing and decision-making, incremental progress can lead to big results.
With that said, this mindset also serves as an encouragement to focus on progress instead of perfection.
If you plan on investing for a long time, not every stock will be a big win. But by getting just a little better and a little wiser every day, you can develop a process that compounds both mentally and financially to a point where reaching your goals practically becomes inevitable.
It’s not a matter of if, it’s a matter of when.
“Living in the matrix is comfortable. So is the natural way we process information to protect our self-image in the moment. By choosing to exit the matrix, we are asserting that striving for a more objective representation of the world, even if it is uncomfortable at times, will make us happier and more successful in the long run.”
The truth is a lot like eating Brussels sprouts: it might not always taste good, but it’s good for you.
And just like eating Brussels sprouts, seeking the truth—even when it doesn’t go down so well—is a better decision than avoiding it. In the long run, it leads to greater fulfillment and better outcomes overall.
“Saving for retirement is a temporal discounting problem: the gratification of spending discretionary income is immediate. Putting it away for retirement means we have to wait decades to get enjoyment from that money. We are built for temporal discounting, for using the resources available to us now as opposed to saving them for a future version of us that we aren’t particularly in touch with in the moment of the decision.”
Temporal discounting refers to our tendency to prioritize immediate gratification over delayed gratification. In this context, spending your discretionary income in the here and now is such a difficult thing to pass up because you get to feel its effects right away.
That quick (but fleeting) dopamine hit is also why many people struggle to invest. The payoff for investing is delayed, often by decades, which can make it hard to connect with the future version of yourself who will benefit from it.
However, while spending now is easier, saving for the future is what will truly improve your life over time. This same idea applies to anything with long-term benefits—exercising, eating healthy, reading instead of watching Netflix, and so on.
No matter what the activity is, delaying gratification requires discipline and a focus on the bigger picture. You have to overcome the instinct to live only in the moment and remember that today’s sacrifices create tomorrow’s freedom.