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The Insight: Conversations – Special Episode with Annie Duke and Howard Marks

The Memo by Howard Marks

Wed Dec 06 2023



Luck and Decision-Making:

  • Luck significantly influences outcomes, making it challenging to accurately assess decision quality.
  • The interference of luck and hidden information creates difficulties in understanding why specific outcomes occur post-decision making.
  • Embracing uncertainty and improving decision quality involves learning from observed outcomes while considering the influence of luck.

Decision Quality:

  • Decision quality entails maximizing the probability of progressing towards personal goals through accurate option selection.
  • It varies for individuals based on their unique goals, values, and expected value calculations related to gaining ground toward their objectives.
  • Separating logic behind decisions from short-term outcomes is crucial due to the substantial influence of luck in the short run.

Separating Outcome from Decision Quality:

  • Assessing decision quality solely based on outcome can lead to inaccurate conclusions about decision-making abilities.
  • Understanding that poor decisions can result in success, and successful outcomes don't always indicate good decision-making ability is essential.
  • Evaluating alternative histories and causal drivers is critical for assessing the quality of decisions apart from immediate results.

Acceptance of Uncertainty:

  • Accepting uncertainty is vital for making informed decisions as one's beliefs form the foundation for decision-making processes.
  • Rigorous assessment of what is known versus unknown is necessary when predicting future events or making forecasts. This includes understanding base rates and causal drivers.

Decision Quality and Improving Decision Making:

  • Decision quality involves holding payoffs constant while reducing the probability of undesirable outcomes.
  • Seeking a 360-degree view by incorporating diverse perspectives can enhance decision-making.
  • Eliciting independent opinions from team members before group discussions fosters a clearer understanding of differing perspectives.
  • Documenting potential future events that could prompt an update in opinion or strategy aids in improving decision quality.

Quantifying Subjective Judgments and Risk Management:

  • Quantifying subjective judgments helps identify gaps in judgment among team members, aiding better understanding and discussion of differing viewpoints.
  • Precision in quantification is important for expressing subjective judgment but should not be mistaken for absolute truth or objectivity.
  • The imprecision inherent in the process of quantifying subjective judgments must always be remembered to maintain a realistic assessment of probabilities and risks.

Assessing Probabilities and Outcomes:

  • Most outcomes settle to one or zero, making it challenging to navigate probabilistic decisions with binary results retrospectively.
  • Risk arises from the diversity of possible outcomes even though only one outcome will occur, emphasizing the importance of considering various scenarios and their associated probabilities.

Understanding Probability and Outcome Assessment:

  • Numbers are used as communication tools to express feelings about likelihood rather than precise measurements. They convey a sense of chance without implying exactitude.