We need to talk about Smart Decisions

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When playing poker, there is a term called a bad beat. This is where you do the right thing, and lose anyway. That is poker, there is always an element of chance to it.

For example, the flop comes down and would you look at that, you have hit an ace-high flush. There is nothing else on the board: you know you are holding the best hand here by far. So you bet big. Your opponent keeps calling you.

The turn arrives. It’s a deuce. That is going to do nothing or them. So you continue to bet, but he calls you again. Finally the river: another deuce. Your opponent must be bluffing you think to yourself as you shove all your chips into the middle of the table. They call you, and turn over a pair of twos. Four of a kind beats your flush, and you go home empty handed.

What did our poker player do incorrectly? Nothing! The odds of something being a) stupid enough to call you when there is a good chance you have a flush and all they have is a pair of twos and b) being lucky enough to hit the exact two cards they need in a row are incredibly small. It is a bad beat because you deserve to win the hand.

So what do you do about it?

Nothing. You keep playing how you are playing. Why? Because statistically you are going to win more than you are going to lose. Poker is a game of chance, so if you can tip the odds in your favour it does not matter that sometimes you will take a bad beat. In the long run, you will come out on top if you keep making the right decisions.

What about when I am not playing poker?

It occurs to me that the same thing happens all the time in real life. Often, we can do the right thing, and still get punished for it. It is a bad beat in life. But the same rules of poker still apply to everyday life as well. If we keep making the correct decision, statistically we are going to come out on top.

You are not always going to win at life each day. However, if you can tip the odds in your favour consistently, you can win at life in the long term.

Give me several examples

Once of the best comes from Daniel Kahneman’s Thinking, Fast and Slow. He talks about product warranties. These are profit-making schemes for the companies: they would not offer them if they did not generate money for them.

However, people tend to take them out because they think it is better to insure the risk, or that they will be upset if they have to shell out for a replacement. This may be true, but what is most profitable overall? Sure, if you just have one product warranty, that you turn down, and your electrical item breaks, you are out of pocket.

But each one of us is going to buy hundreds, maybe even thousands, of electrical items over the course of our lives. If we take out extended warranties on all of them, over the long term we are going to be significantly more out of pocket than we would be if we just stumped up to fix a broken product every once in a while.

Example two: automating and passing on a task. If you have a repetitive task that drains your time in short buy annoying chunks you could automate it with a computer, or you could train someone else to do it. Both of these options come with a high setup cost (it takes time to write the computer programme or train the other person) but reduce the amount of time you have to spend on the problem in the long term.

Example three: investing in yourself. How often do you go on training courses that you pay for out of your own pocket? If you are like me, not enough. Yet what if that training course would lead to higher earnings in the long term? Or more time? Or the ability to acquire a much-desired skill? Often this is the case.

How do we apply this to real life?

Winning in the real world requires some luck. However, we can tip that luck in our favour by making sure the decisions we make are Smart Decisions. We will not always win, but by tipping the odds in our favour, we can come out on top on the long term.

How do we do this?

  • Consider the overall implications of your decision, not just the short term
  • Challenge yourself to resist automatically taking the path of least resistance
  • Understand that we have psychological biases to taking the easy route, even though it may not be in our own interest
  • When you take a bad beat, recognise it as a bad beat, and not a bad decision

Follow these principles and I guarantee you will will die a richer, happier, more satisfied person. If not, email me after that time for a full refund.

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This entry was posted on Tuesday, November 15th, 2016 at 10:34 am and is filed under Thoughts. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.