“Resulting” is a word that’s often used in the world of poker, and it was popularized by former World Series of Poker Champion Annie Duke in her excellent book, “Thinking in Bets”. As she describes it, resulting is “creating too tight a relationship between the quality of the outcome and the quality of the decision. You can’t use outcome quality as a perfect signal of decision quality, not with a small sample size anyway.”
When making a decision that has a probabilistic outcome, there is always some level of luck involved. This is particularly true in Duke’s field of poker, where even if you have the perfect process and make all the “right” moves, you could still succumb to bad luck and lose a hand. After losing that hand, most people will tend to attribute the loss to poor strategy or a bad decision, letting the outcome drive the analysis of the decision-making process. This is “resulting” in a nutshell.
The best decision makers are able to separate luck from process, which allows you to understand what was attributable to skill and what was attributable to luck. This is difficult for us to do, because as Duke says, “We’re rational beings that think things are supposed to make sense. It’s very hard for us to wrap our heads around a bad outcome when we didn’t do anything wrong. Or that there’s a good outcome that’s just random. We’re really uncomfortable with randomness in that way.”
Last week, the Wall Street Journal had an article that focused on the poor decision making of many NFL teams, particularly on whether to go for it on 4th down. The article outlines how few teams use analytics in their decision-making and how the Arizona Cardinals could have significantly improved their chances of success against the Ravens by going for it on 4th down inside the 5 yard line on 3 separate occasions. If the Cardinals had gone for it those 3 times and failed, they would’ve come away with zero points and many people would have blamed them for poor decision making. This is exactly what Annie Duke means by resulting - judging a decision by the outcome rather than the process.
Ironically, the week after the Cardinals-Ravens game, the Ravens went the opposite way with their decision making in a game against the Kansas City Chiefs. They continually followed the analytics and went for it on 4th down and attempted several 2 point conversions. Unfortunately for us Ravens fans, they failed on too many of those attempts and ultimately lost a close game. Many Ravens fans were upset with the decisions, looking at the outcome and determining they should have kicked the field goals or extra points. But to those who understand the statistics behind the decisions, the Ravens had the right process in place and made the correct decisions.
There are many parallels to resulting in our financial lives. Every day we help clients make important financial decisions, and luck often plays a role in the outcomes of those decisions. Following a good decision-making process is critical to successful financial outcomes and we work with clients to outline and follow a good process.
However, there is a big difference between making decisions on the football field or at the poker table and the decisions we help our clients make. These decisions can change lives, so we need to carefully consider the magnitude of the impact that bad luck can have on the outcome. The Ravens lost their game against the Chiefs, but that was just 1 game out of a 16 game season. Losing a hand of poker might knock you out of the tournament, but there will always be another one. If you suffer bad luck in your financial decisions, you might wind up unable to live the life you want to live.
In the world of personal financial advice, we can’t always just “go by the numbers”. Financial questions might have an “analytically correct” answer, but if bad luck could lead to a result that you can’t live with, then it still might not be the right answer for you. It’s important to focus on the full range of potential outcomes, and to make sure your decision-making process considers the impacts of each. You’ll still be drawn to resulting after the outcome is revealed, but at least you can feel confident you did everything in your power to make the right decision. Making good financial decisions is an ongoing process throughout your life and we are here to help you with this.
-Chris Benson, CPA/PFS
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.