Great Decision Making

By the time you read this post, it will likely be out of date. As I write these words, the world is bracing itself for a Greek euro exit – according to The Independent. They may well have another election. They may not. The simple fact is that – right now – no one actually knows. We’re looking at events without the benefit of hindsight which you – the reader – looking back, obviously enjoy.

Hindsight is a wonderful thing. That’s been said before. But interestingly, no matter how much one values hindsight consciously, it’s so easy to undervalue its effect on us at a subconscious level and assume that the way that something turned out was the way it was always destined so to do.

Imagine a magician shuffles a deck of cards, places all 52 of them onto a pool table and asks you to bounce the white ball around the cushions until it comes to rest near one. You have a free choice as to which you think is nearest. The magician thinks for a moment and announces that it is the nine of hearts. Absolutely incredible. How on earth does he do it? He turns them all over to reveal 52 nines of hearts. Of course. Easy. That is the only way such a remarkable trick could be performed. And so obvious looking back because – you remember now – that he omitted to show them to you before performing the illusion.

You project yourself into the body of the person you were ten minutes ago with the knowledge you have now and cannot believe that you didn’t guess something so self-evident. But the fact is that before you found out the secret you were oblivious to the crucial information, it was anything but obvious.

Before the launch of the space shuttle Challenger – according to the Rogers Commission – NASA were aware of the design flaws of Morton Thiokol’s O-Ring but failed to address it properly. Remiss of them, of course. But obviously they didn’t know that it would lead to an explosion. It was imperfect – as probably was everything else involved with the extraordinary endeavour of propelling man into space. The commission looked back at events as we look back on the magic trick and cannot understand how someone could have made such a mistake because they cannot imagine what it must have been like to have operated without the information that they subconsciously simply take for granted.

As regular readers of this column will know, I make a living talking to companies about all aspects of risk and decision making using poker as my metaphor. At the end of a lot of such sessions, I’ll often host a poker game for participants and usually deal a table myself. I work with some of the UK’s best managers. They make demanding decisions everyday, with limited information and uncertain futures. But everyone reacts the same when – after having folded a ten and a three in the first two cards – the next three cards are ten, ten, three, thus potentially throwing away a full house. “Why are you bothered?” I say as they berate their bad luck “Because I would have won the hand” they cry. “But you did the right thing with the information you had available to you” I protest.

Again, consciously they understand the facts but subconsciously they chastise themselves for doing something so apparently stupid! It’s bizarre when you stop and think about it. It seems to be the most natural thing in the world to judge a decision not by its intrinsic quality but by the outcome – known only after the event.

Of course the opposite of this is something very challenging to our twenty first century sensibilities: that – away from the hypothetical baize of the poker table – there is such a thing as an intrinsically good decision irrespective of the outcome. That seems so counterintuitive as almost to make no sense. How can the right decision be one which in actuality ends in failure? Is it possible to judge people independently of short term, noisy and irrelevant results? I would say that it is but that it is so difficult and demanding as to be way beyond the desire – or ken – of most people in management today.

About six weeks ago, the sports section of a UK newspaper debates the suitability of Kenny Dalglish to continue to manage Liverpool in light of their appalling run of results around that time. It is generally by all contributors agreed that Kenny is in trouble but that their place in the FA cup final is protecting him: victory in that would probably save him, defeat would likely consign him to history. But win or lose that 90 minute game he is still the same man with the same essential talents. The question fundamentally is whether – for all his skills and shortcomings – he should continue in the post. Not what result he gets on that particular day? Surely?

The journalists concerned apparently believe that that result – above all others – will reveal to us how good a manager Kenny really is. As though the result of a few balls bouncing one way or the other give us greater insight than, for example, going to the training ground to see Dalglish talking to his players or (hypothetically) questioning him for a morning on his tactical responses to opposition formations.

This is tantamount to judging the playability of ten-three in poker by the result of that particular hand. It is openly allowing short term results to decide the answers to much deeper, more challenging concerns and exposing us to the biases of hindsight when judging events and the quality of our decisions given what we knew without its benefits.

It’s a utopian cry to get away from being a results-based world, I know. But in a world which moves as fast as this one does; where in a couple of days literally everything can change, it is essential. By the time you read this you will know the outcome of the decisions you’re making as I write it. But a long time before that, you should be able to say how intrinsically good they actually are. Can you?

Posted 01:57pm by Caspar and filed in Decision Making

Probability in everyday conversation

The problem with probability as a language is that it doesn’t sit well in our minds. As human beings we tend to express ourselves in single outcome terms: France will beat Scotland because they are by far the superior team… Milan will win the Champions League final now they are three goals up… Greece have no chance of winning the European Championships because they simply don’t have the players. And yet, in these, and many other cases, the spectacularly unlikely happened and one again the single outcome prediction fell down.

What’s fascinating, though, is that while our conscious minds feel uncomfortable with probability, our subconscious minds don’t appear to have a problem with the concept of uncertainty and probability in the same way.

Ask a room full of successful people what their biggest risk was (as I do as a part of my work) and you will get an array of answers from setting up their own company to moving to a different country. Every time you challenge them you ask them whether they thought they would be successful “Yes” they answer “otherwise I would not have done it.” But ask them why they chose to define it as a risk and they will very soon concede that because – one some level – they knew that they were not definitely going to be successful and that this chance of failure was precisely what defined it as a risk!

Posted 01:55pm by Caspar and filed in Risk

PERT analysis

The 1950s were a time of great innovation and advance, some developments like the Hula Hoop and the Hovercraft may well resulted individual effort in inspiration but some – like the space race was motivated by the need to win the Cold War. When the Soviets launched Sputnik in 1958, the Americans became convinced that their project management system was deeply flawed and launched a number of initiatives aimed at tacking this deficiency. One of these – instigated by the US Navy – was the Project Evaluation and Review Technique or PERT.

After looking at the outcomes of hundreds of projects, the use of PERT analysis concluded that – as Helmuth von Moltke the Elder said 100 years previously, “No battle plan survives the first contact with the enemy”  Another way of saying that single outcome predictions are pointless, Molktke was himself drawing on work by Napoleon 50 years earlier still when he wrote that “Plans are usually useless but time spent planning is invaluable” a reference to the benefits of scenario planning for the variety of different possible outcomes which may befall and decision, action or endeavour.

Specifically, PERT analysis concluded that – while projects almost never hit their original targets (sometimes coming in over budget, rarely under) a more effective way of estimating the time and money needed was to aggregate together various optimistic, pessimistic and realistic estimates giving each one a weighting according to its likelihood (or probability). While theoretically every organisation would have different probabilities, the ones created by the US Navy fit most purposes and are as follows.

Since people’s estimates were usually optimistic because people naturally overestimate how much of any system they can control and put the interventions of fate down as freak occurrences which – now the lessons have been learned will not happen again… the weighted estimate was to be four times the most pessimistic plus the realistic, plus two times the optimistic, divided by seven or:

4P  +   R  +  2O

7

Crucially the point of this analysis was NOT to tame uncertainty in the sense that the result would magically predict the future, but rather the figure created – along with the other figures for other projects would correctly predict the average time and budget needed. The figure produced is essentially just an expectation calculation. Instead of two possible outcomes (win or lose) in this case there are three and they are weighted according to their probabilities in exactly the same way as the win or lose figures were.

In this sense though – since the actual result was going to be roughly one of the three figures, PERT analysis represents an industrial game of Deal or No Deal with seven boxes containing the following amounts:

Optimistic
Optimistic
Realistic
Pessimistic
Pessimistic
Pessimistic
Pessimistic

At some point one of the boxes will be opened and that will be the result but until that time all we have is the multi outcome expectation. Until then, there is no “one” future but many possibilities, each with its own attendant probability. This is one of the reasons for James Surowiecki’s observation in The Wisdom of Crowds that expert forecasts are usually less accurate than the combined guesses of a crowd of people of people who are diverse, independent and decentralized. The aggregation of such different opinions acts as a kind of Montecarlo analysis that gives all possible futures consideration in the calculation and produces a kind of “expectation” or average of all possible futures. (See Chapter Two)

Indeed when people throughout history have made single outcome predictions and prognostications, they are setting themselves up to fail: “Who the hell wants to hear actors talk?” asked Jack Warner. Everything that can be invented has been invented” declared Charles H Duell, Commissioner of patents in 1899. “640KB ought to be enough for anybody.” Said Bill Gates in 1981

And we don’t laugh at any of these individuals: they were the best guesses that we had from experts in their field. If someone had told you in August 2001 that the world’s airlines would lose more money in the next 18 months than they had collectively made in profit since their inception you’d have thought they were crazy and yet that is exactly what went on to happen. If someone had told you in spring 2008 that Britain’s banking system would be all but nationalized by Christmas…?

The only meaningful way of talking about the future is to use the language of probability. By doing so we not only avoid the pitfalls of “pinning our colours to the mast” we also manage to tame uncertainty as well as we can – just ask any project manager!

Posted 01:48pm by Caspar and filed in Innovation, Uncertainty

The Speed of Trust

It’s not easy being a professional poker player. On the plus side, admittedly there is an unparalleled amount of autonomy and an absence of accountability: no boss, no clients, no shareholders to report to. On the other hand, it’s one of the few jobs where you can do everything right and come home down overall on the day. It’s a world in which you can win at the table only to be mugged on the way back to your hotel room with your winnings in your money belt. The risks extend way beyond those which you can logically calculate in a 52 card deck. No wonder it was once described as a hard way to make an easy living!

The most trying tribulations are often the little things that you wouldn’t necessarily think about – like what you put as your profession on your passport if you want to go on holiday to Dubai. Getting car insurance is difficult, income replacement is obviously impossible! This week, as if all that were not enough, I was refused a bank account.

The meeting was embarrassing and awkward in the way that we’re all used to in the call centre economy of 2012. Obviously the person I was talking to was not to blame. He was not the decision maker in the way that he would have been 20 years ago. He just typed my details into a computer and it dutifully said “no”.

With the exponentially increasing processing power of computers, such impersonal and data-based decisions make perfect sense. On the aggregate, they trump intuition and, of course, they’re cheaper to churn out. The behavioural biases of human judgement are replaced by the cold hard calculations of an algorithm which does not demand sick-pay or annual leave.

Somewhere, a computer processed my credit score – a function of my living arrangements and financial repayments in the last 6 years – and reckoned that there was a high probability that I would run up an overdraft and abscond. It doesn’t know who I am or what I’ll actually do any more than Amazon knows what I want to read when it recommends books that I might enjoy. But – like Amazon – it compared the data it has on me with lots of people like me and made a probability assessment which, in my case, was not good.

The link between such an assessment and the world of gambling is, historically, a close one. In the 16th Century, renaissance Italian mathematician, physician and compulsive gambler Geronimo Cardano laid the foundations of the language of probability in a work which gave more attention to his recommendations for ways to cheat at games of chance than it did to the new and revolutionary branch of mathematics that he’d produced. More famously, the creation of expectation theory was Fermat and Pascal’s solution to the Problem of the Points, posed to them by another gambling addict, in this case their friend the Chevalier de Méré.

It’s hard to overstate the importance of such works. In the creation and application of the language of probability, Cardano, Fermat and Pascal along with numerous others in the years that followed (Laplace, Huygens, Bernoulli) laid the foundations for the industrial development of the instruments of modern finance that have profoundly shaped the world in which we live. It is a long time since their formulations found their apotheosis in the world of high finance rather than the lowest of all low culture. So what on earth does the skillset of a professional poker player have to bring to the world of credit assessment which so thwarted me this month?

Ultimately of course, in a hand of poker, I’m trying to do exactly the same job as the bank manager or the algorithm that has replaced him: I’m trying to assess the honesty of the person sitting opposite me. It’s significant of course that the word credit itself derives from the Latin credo, meaning trust, and poker is a rare – perhaps unique – activity in that it legalises lying, so assessments of honesty are fundamental to success. In this way though, poker just distils a process of probability assessment in which we’re engaged with each and every inter-personal encounter: does this person threaten us as we encounter them in the street; do we trust that they’ll pay us back if we lend them money?

As with most assessments that we make, the majority of the time we do it subconsciously: we match the patterns of a person’s dress, behaviour and facial movements with our database of information built up over the course of a lifetime – in the same way that Amazon matches our purchasing records with similar customers in order to assess what we’re likely to buy.

Sometimes, though, even Amazon gets it wrong and so do we. The other day I thought a guy was going to mug me on the way to my hotel room, only to find that he was running towards me to return my phone that I had dropped at the poker table! It all happened very quickly and I based my first assessment on a limited amount of information. As more “data” became available I revised my initial assessment and was more accurate as a result.

As accurate as my bank’s algorithm is in the aggregate, in my case it also got it wrong. Far from posing a credit risk, I have no desire to take on any kind of debt and every intention of depositing a six figure sum to open the account! I tried explaining this but the man on the end of the line had no ability to converse with a computer than could not take on new information.

While we call this age of big data, the amount of information contained in my credit score is actually a tiny proportion of the whole. This is not just personally frustrating for me, it is affecting the profits of companies who are relying on such algorithm assessments for their income. Sure, they’re better than the assessments made by the relatively low pay-grade personnel who inhabited these roles 20 years ago. But they can be better still – and they will be. The question is who is going to steal a march on the competition and really open up this kind of assessment to a revolution by using the kind of granular and detailed information about me that exists out there in cyberspace.

In a world of scarcity, decisions must be made that maximise ROI and reduce risk and some people are definitely better “bets” than others. But turning me – and others who exist outside the norms of a system – down is like folding to a bluff. It’s poor play and players who can exploit this inefficiency can make a lot of money.

Posted 01:44pm by Caspar and filed in Decision Making, Risk

Judgement in a Changing World

According to Jonathan Freedland in Saturday’s Guardian Al Gore had it but Chris Huhne, David Cameron and Sir Philip Hampton all, sadly, lack it.  Indeed, Freedland continues, many others in positions of power over the years all want for this vital skill: Alan Greenspan, Peter Mandelsohn, Paddy Ashdown, Michael Gove. He’s talking, of course, of judgement and he uses as his evidence the fact that all of these people have at some point pinned their colours to a prophecy or prognosis which turned out to be untrue.

By this definition, of course, we can add pretty much most of the world’s politicians, financiers and, for that matter, columnists of the fourth estate, which is probably why all three of these professions are so wildly unpopular at the moment as people cry out in vain for some semblance of order in an increasingly unpredictable world.

The reality, however, is that if the yardstick by which we measure judgement is accurate prediction then we’re all going to fall short of the mark at one time or another. In my first submission to this publication six months ago I argued that the butterfly effect rendered any meaningful prediction of our future practically impossible because doing so required virtually complete knowledge of every tiny actor within incomprehensibly vast and complex systems.

Indeed, as the pace of change increases and the level of feedback between the different actors on our planet grows exponentially – barring monumental scientific progress in this area – effective prediction of the future is going to become less and less useful because our lives are simply more and more susceptible to the tiniest changes in anything and everything around us. Everyday, I am buffeted by the lives of the hundreds of people I come into contact with on a daily basis via the plethora of different media, all of us shuffling deadlines, changing plans and reallocating resources in response to the shifting sands of what we call reality.

It wasn’t always thus. A few thousand years ago, I would have had a role in my family unit and obviously some level of interaction with the hundred or so people in my community but broadly speaking a tsunami in Japan would not have changed the value of my pension pot and traffic jams on the other side of London would have had no effect on my ability to make my meeting on time and thus my daughter’s birthday party in the evening.

There are paintings on the walls of Lascaux in France which are separated by literally thousands of years which are – to all intents and purposes – stylistically the same. And yet a cursory study of the definition of “art” now reveals at least 35 different and distinct means of expression for the twentieth century alone!

The most successful music artist of the 50s and 60s, Elvis Presley probably had about three main “looks” culminating of course in the iconic Vegas jumpsuit of the 70s. In the 80s, Madonna became famous for restyling herself with every album – something I remember being a massive deal at the time. Now, the most successful artist on the planet, Lady Gaga, looks almost unrecognisable every time she leaves the front door, sometimes dressed in meat and other times as a man!

In business, behemoths of industry like Chrysler and Kodak founded on continuity go to the wall while new, agile, companies like Groupon and Google appear to create vast sums of capital value in periods of time too short to make any sense fifty years ago. Moreover, they appear to change their offering as the world changes around them in the most remarkable manner and in ways which appear to rip up the rulebooks. YouTube actually started off for a few weeks as a video dating site before finding a killer app as a place for people to upload homemade movies and subsequently morphing into a centralised repository for television and music video. Meanwhile I’ve lost track of the different ways that Twitter and Facebook choose to represent my information. I’m obviously getting old…

Society is changing, that is obvious. What is less obvious – until we take a time out and stare at it – is the extent to which change itself is changing and, therefore, that the way in which society deals with change needs to change as well!

This is not a new idea per se. Alvin Toffler predicted exactly this 40 years ago in his seminal book “Future Shock” which foretold of the social disorientation that would happen in the future as the pace of change accelerated to a point where there is no status quo. It is remarkably prescient for any book written about today’s society from the perspective of 1970 – particularly for one telling us how much everything’s going to change – coining terms like “information overload” and describing very accurately how we’ll all feel with things like Google News and Times for iPad at our fingertips. But where does all this leave the subject of judgement and how can anyone appear to have it in a world that is changing so rapidly and with accelerating speed?

In 1984 Philip Tetlock was a newly tenured academic in the National Research Council who had an idea that was derided by some as a kind of madness. He embarked on a study with 284 experts in their fields – spanning numerous disciplines – and collected a staggering 27,450 judgements from them all over the course of twenty years. Inspired as it was by the cold war, the study focussed on political events on the global stage before being written up as the book “Expert Political Judgement: How Good Is It? How Can We Know?” in 2005. Its conclusions were startling.

Overall, the experts fared less well than chance and only slightly better than basic computer algorithms but it was the nuances beneath this headline that made the most fascinating reading because obviously some experts did better than others. But probably not in the way that you’d think. Good judgement did not correlate with academic discipline, age or experience. It wasn’t concentrated in any particular area of the political spectrum. And it wasn’t a question of gender or any other trait of background or upbringing.

The single most significant factor that determined an expert’s powers of judgement was the degree of confidence to which they expressed their prediction. And the correlation was inverse, that is to say, the less confident they were – on average – the more accurate. In other words, the more convinced and convincing an expert’s prediction appeared to be the less accurate it actually was. And in an age where politicians, journalists and financiers get to the top by being convincing, that’s a problem.  It may mean that we have to re-write the rules on what makes good judgement and slowly but surely turn to new and better judges in the future.

Catching Butterflies

What does it mean to find the cause of an event? In the aftermath of the actions of Kweku Adoboli there will be a trial and doubtless more than one investigation by UBS and the FSA each concerned with apportioning reasonable blame and establishing the facts with a view to preventing such events from ever happening again. But how effective will such endeavours prove to be? And what on earth do the opinions of a poker player count for in such a debate?

I played poker professionally for much of the three years between 1999 and 2002 before eventually tiring of it and setting up a video production company which I ultimately sold five years later. A lot of people ask me why I started playing in the first place but more ask me why I stopped. My first answer to such a question is that it’s hard to compress the emotions of nearly a decade ago into a satisfying soundbite but that eventually it was the chaos that did it for me in the end. Over any given long term period it was clear that I was earning a living but the results of each night were clearly much more dependent on factors outside of my control than those within.

Specifically, in poker, you can’t control the cards. Naturally, everyone rationally understands that but as someone who now uses poker as a metaphor to teach the subject of risk to corporate clients I’ve lost count of the number of times I have seen a table applaud someone who just got dealt four of a kind. It’s a perfectly ordinary emotional reaction – to congratulate the player who just won the hand – but actually it’s crazy.

There is no skill in getting good cards dealt to you. And conversely getting bad cards is no evidence of ineptitude. But try rationally processing that in the middle of a bad night when card after card comes down, killing your bankroll one hand at a time. Interestingly it’s not the bad hands that you have to worry about. It’s second best hands that destroy you. Hands that start off great but suffer from freak outdraws in the later stages which ship the pot to your oblivious opponent.

The simple fact is that the turn of about 5 river cards are largely going to dictate your results for that night. 30 cards will define your week. 100 for the month. Results don’t start to become statistically significant until at least a school term of daily play. Until then the length of the dealer’s nails as they riffle the cards together between every hand will have a greater impact on your finances than all the great reads and raises that you make!

In order to stay sane and play great poker one needs to rationally understand that the way something actually happened is no indicator of the way that something was necessarily likely to happen or somehow “meant” to happen. In and of itself it doesn’t necessarily mean anything. It’s just what happened to happen on that occasion and there isn’t always anything that anyone can learn from it or change in order to prevent it happening again.

The butterfly effect is 50 years old this year. Officially discovered and named by meteorologist Edward Lorenz it derives its title from an image created by plotting the Lorenz attractor for specific values which happens to resemble the wings of a butterfly. Partly as a result of this, it is often understood to refer to the mindboggling mechanism by which a single butterfly flapping its wings in somewhere like Brazil can somehow cause a rainstorm in Reading.

This is not technically misleading although it does obscure the real lesson of the butterfly effect which, more generally, is that it is confluence of a myriad unknowable events which feedback into each other to cause the sum total of events which impact all our lives. More profoundly, I think, is the inverse implication that the incidents and episodes which affect us all profoundly find their origins in events too insignificant to calculate.

If Mohammed Bouazizi hadn’t had his face slapped in a Tunisian market in December of last year, he probably wouldn’t have set fire to himself when he did and inspired a people to rise up against their unelected dictators at that precise moment at the start of this year. Would they have done so anyway? Maybe. But not in the way that they did, and not with the exact consequences and impact on all our lives that this particular revolution will turn out to have as enacted in this way.

Another thought: If Warren Buffet had been able to retrieve messages from his mobile phone he would apparently have received a message from Bob Diamond proposing terms for a deal to buy out Lehman Brothers a day before it finally went under. Asked later if he would have gone for the deal he suggested that it was “entirely possible”. Would the systemic crisis have occurred if one man had been slightly more tech-savvy? Perhaps. But not in precisely the way that it did. The same people probably wouldn’t have lost their jobs. They wouldn’t have impacted those around them in the way that they went on to do. Your world might now look very different. We’ll never know for sure.

Try this one: if the five of diamonds had fallen on the river of a particular game of Texas Holdem in Las Vegas I would have won the jackpot of $150,000. I know for sure that I would not have met my girlfriend later on that day; wouldn’t have stayed in Vegas for the length of time I did; wouldn’t have met my business partner and set up the production company at that point in time; would not have been commissioned by the University of Nottingham to produce a promo and would not have been assigned a representative of the student union to work with – one Kweku Adoboli.

Kweku and I spent a couple of weeks working on that project. I was a thorn in his side for far too long: getting him to show me all the most picturesque locations of the campus; pestering him to get me students for the crowd scenes when he definitely had much better things to do. Who knows what effect I had on his life: the lectures he missed, the people he met and phonecalls he made that he otherwise wouldn’t. Would he have gone to work for UBS had he not met me? Quite possibly. But probably not in quite the way he actually did.

He might have said different things in interview. Met someone else on his first day. Ended up living somewhere else; going out for different drinks with different people; learning different things and perhaps – most importantly – not hitting “buy” when he meant “sell” at the precise point when he is alleged to have done so at the beginning of this whole sorry business. Whatever he went on to do, or not (and it’s important not to prejudge the results of the ensuing criminal trial) he almost certainly would not have gone on to do in exactly the same way. Kweku was by all accounts (and for what it’s worth my own personal experience confirms) a thoroughly decent man who may have ended up doing some bad things.

But as Nick Leeson is at pains to point out: you don’t set out to commit such fraud. You make one wrong decision and find yourself a victim of events to which you react in a totally unacceptable way. Like any hand of poker, it might all have been so different, if a card had flipped over in the shuffle in a slightly different way; if a butterfly had flapped its wings at a different time. The way that Kweku’s life went on to happen is no indicator of the way that it was necessarily likely to happen or meant to happen. In and of itself it doesn’t necessarily mean anything. It’s just what happened to happen on that occasion and the challenging truth is that there might not be anything that anyone can learn from it or change in order to prevent it happening again. But that probably won’t stop us from trying.

A lot has already been written about Kweku’s actions and much more will be said before it is forgotten: about UBS and The City generally and the morality of the people who work within it. Hopefully the investigations that take place will be fair and thorough and make reasonable and constructive recommendations because I’m not saying that there necessarily can’t be anything to learn as a result. That would be bombastic, dogmatic and, frankly, well beyond the remit of a humble poker player.

I’m just saying that of all the factors that people identify as having caused these sad events, no one will blame that five of diamonds for not coming off the deck. And why would they? It is just one of a myriad butterflies; an incalculable number of unknowable events which feedback into each other to cause the sum total of events which impact all our lives. But if it’s that impossible to truly understand the exact causes of an event, how possible is it to truly prevent a similar – or analogous – event from ever happening again?

We do our best. As we should. But we may as well try catching butterflies.

Posted 04:20pm by Caspar and filed in Risk, Uncertainty

Life’s not fair

“That’s not fair” I cried as my friend completed his set of Vine St, Marlborough St and Bow St that would eventually lead to victory that evening.

I wouldn’t have minded of course had he completed the transaction fairly and squarely but the deal was sealed with the offer of both four hundred pounds of monopoly currency and twenty pounds of actual sterling! “That’s cheating,” I shouted again. And thus began an argument which still rages to this day, twenty years on. To me, there is no debate; what he did was outside of the rules of the game. It was cheating.

I was reminded of this experience recently when, in April of this year, the FBI seized the URL addresses of the two biggest online poker sites, Poker Stars and Full Tilt. The action finally brought an end to their US operations five years after the uncertainty initially created by the Unlawful Internet Gambling Enforcement Act of 2006.

Some have viewed this definitive action to be a good thing, but the unacceptable sting for many players active on the sites at the time is that whilst Full Tilt had a reported $400m in players’ funds it only had $60m in the bank – apparently placing its faith in a kind of fractional reserve system of deposits that is likely to leave thousands of players nearly bankrupt.

“That’s not fair” they have understandably cried as two of the site’s founders are alleged  to have taken dividends of tens of millions from the site leaving the vast majority with almost nothing to show for years of play/work!

Interestingly, while what has happened is almost certainly illegal, and therefore obviously much more serious and profound than a bit of cheating at monopoly, the central problem is very similar: what happened took place outside the basic rules of the game. It still happened, however, and no amount of shouting or complaining is likely to change that fact.

The common perception of poker is that it is broadly a game of epistemic risk. Complete novices sometimes think that it is a game of deductive logic, like blackjack, that starts and ends with the likelihood of a particular card coming down. After playing the game for even just a few hours, however, it is clear that this is only a very small part of the story and that in practice playing the game involves making a series of inductive assessments about our opponents – assessments which get better with experience that leads to greater accomplishment and expertise.  In this respect, the decision-making process of poker is very like that of any other realm of life.

Where poker is unlike life is that often you are forced to make such a decision every 90 seconds or so. Given that you cannot abdicate, delegate or procrastinate during the process of making them, they are even less like a lot of the decisions we make in life which are often left unaddressed for as long as possible! Similarly, the decisions we make in poker are often very one dimensional, focusing merely on the allocation of money, in the form of poker chips, for the purposes of accumulating more in the long term. There is rarely any consideration of society or the greater good of those around you which ultimately is why I stopped playing professionally.

But where poker is exactly the same as life is that – despite a recognized set of rules by which the game can be played reasonably and fairly on a daily basis – from time to time those rules will be breached. Often, such a contravention will be unfair to one or more parties: people may lose money, in the real world they may lose things much more valuable and precious.

In The Black Swan, Taleb defines the “Ludic Fallacy” as the misuse of games to model real-life situations, but in actual fact both are a perfect metaphor for the other and Taleb goes on to say as much. Each has a set of rules which – if and when adhered to – make their play relatively straightforward and enjoyable. In games, however, people cheat and poker sites go under and in real life governments default and whole currencies collapse.

He creates the hypothetical situation of a “fair” coin being flipped ninety nine times and coming up heads every time. Two fictitious creations of the author – Fat Tony and Dr John – are asked for the chances that the next flip will also bring up heads. Dr John’s answer: “obviously fifty-fifty, independent events have no bearing on each other”. Fat Tony: “near enough one hundred percent heads” on the grounds that any coin that flips heads ninety nine times straight is obviously biased.  In other words, just because a game appears to have rules, doesn’t mean that they are – or always will be – adhered to.

(And even if they are, the probability is never an objective 50% Actually the uncertainty principle reigns even here as Dr Jeffrey Hamilton demonstrated accidentally in October 1972 when in a lecture on probability in the University of Warwick he tossed a 2p coin and was astonished as everyone else to witness it land on its edge!)

The effect of such a consideration in the game of poker has the interesting effect of making it much more a game of aleatory or unpredictable – some might say unquantifiable – risk. The probability that the next card is an ace is arguably far less significant in our overall calculations than the chances that the game we’re playing is somehow rigged, or the likelihood of being robbed on our way to the carpark or the probability that the website on which we’re playing doesn’t actually have our money in it, or… who knows what?

When such breaches occur, we may feel aggrieved; we may be moved to protest; we may seek revenge and we may be justified in any and all such responses. But, hopefully, there is one thing we know for sure above all else… from time to time such things will happen. They will. Life… is unfair. And any long-term strategy that does not account for such possibility must surely be inherently flawed in some respect. If we play the game assuming that nothing unfair and outside the rules of the game will ever happen then we’re not playing the game particularly well.

The only question is what will we do in response? Will we have factored such events into our analysis and strategy? Or will the memory of such events still hurt twenty years on?

Posted 01:01pm by Caspar and filed in Decision Making, Uncertainty

Luck & Return on Investment

If someone were to give us an even money return on the toss of a coin we might take it, we might not. We’d have an idea somewhere that in the Long Run we’d just be breaking even and the maths of the opportunity show that we’d be right.

There is actually quite an interesting conclusion we can draw from this theoretical proposition, however,. which is worth touching on because of course we also know, by now, that even after 100, 1000, 10,000 spins its very unlikely that we ever will absolutely even. More likely is the one of us will be up, the other down. And in this event we wouldn’t dream of calling the winner the more skillful player. We’d call them the luckiest. Which allows us to say something quite interesting about luck which flies in the face of a lot that has been written about it over the centuries:

Luck is not preparation meets opportunity, though preparation is important. And fortune will not, alas, favour the prepared mind, though it may sometimes give that impression. Contrary to popular opinion, Gary Player was not serious when he said “The more I practice the luckier I get”! He was being sarcastic, annoyed by those within the media who were putting his success down to good fortune rather than persistence and hard work.

The fact is that you do not make your own luck because luck – by its very definition – is that which we cannot control. In Covey’s terms, it is that which is outside of our circle of influence. It is that which happens after all the influence we can exert through preparation, practice and persistence is at an end. It is the source of our uncertainty; the root cause of our short term results.

We cannot change our luck. But we can usually decide which opportunity we invest in. So let’s now consider another opportunity.

Imagine now that the same person offers us a very similar but distinctly different opportunity. This time: same coin toss, same 50% chance of success but now instead of an even money return we are being offered a 10-1 reward when we win. What is our expectation now?

Posted 12:51pm by Caspar and filed in Decision Making, Uncategorized, Uncertainty

Being in Control

In Struck by Lightening Jeffrey S Rosenthal recalls that in 2002 a group of professional statisticians tasked with planning the annual scientific meeting of the Institute of Mathematical Statistics for July 2004 were initially considering Israel but responded to the increase in terrorism of the period and moved it instead to Spain. Upon looking at the figures, however, Rosenthal shows that between October 2000 and April 2002 319 people were killed by suicide bombing. 750 Israelis died in road accidents during the same period. In other words, delegates were twice as likely to be die in a car crash than in a terrorist attack. Ultimately, of course, the statisticians are right. Statistically, they were safer going to Spain than Israel. But not by much. The point is that they felt much safer. Why?

Control is a key word here. Given a choice people prefer to do things which they think they can control. The more they think they have, the safer they feel, even – as in the case of driving in their car instead of sitting on a plane – that isn’t actually the case.

In general, focussing on the things we feel we can control is no bad thing. In his seminal work The Seven Habits of Highly Effective People Steven Covey divides the concerns of the world and its inhabitants into two categories. The universally applicable category is our Circle of Concern. This is, fairly obviously everything about which we are concerned, from the price of petrol to what we’re going to eat for dinner tonight. Some of these concerns, says Covey, are out of our control. There’s nothing we can do about the price of petrol, we might say, so that stays in our Circle of Concern.

But a subset of all the things than concern us is the set of things over which we have some influence. We can decide what we buy to eat for dinner that night and so we focus on that, because that is what effective people do.

There are three points to make about this very elegant way of looking at the world that account for the phenomenal success of the book in the last 20 years.

The first is that no matter how obviously outside of our circle of influence something seems to be, there is usually always something we can do to effect some small measure of control over something. We can’t change global warming single handedly, for example, but we can reduce our personal carbon footprint. As Margaret Meade once observed: “Never underestimate the power of a few committed people to change the world. Indeed, it is the only thing that ever has.”

The second point to make is that once they have proactively identified all the different ways in which they can assume some degree of control over that which initially appeared to be beyond, effective people do NOT spend their time worrying about things in their circle of concern anymore.

Traffic jams, bad weather, random acts of God… all these things may well be naturally frustrating but the only response that makes any sense is “what can I do?” As a Buddhist priest once explained the essence of Buddhism to me “If there’s something I can do about something, I do it. And if there isn’t I forget about it.” It’s a powerful philosophy and approach to life, there’s no doubt about it.

Finally, though, the point that’s often lost on people as they become seduced by the power of Covey’s prose is that however effective they become, however much they grow their circle of influence through the direction of their discipline and the power of their proactivity… there will always, always, always be aspects of their lives which they cannot control. These elements won’t make them any less effective or successful. They won’t mean that they cannot be great leaders of men. But they will mean that there will always, always, always be uncertainty in everything they do and every decision that they take. And that will never sit right with us.

Ceteris paribus, humans don’t like uncertainty or the unknown. When Lisa Simpson tries to hang out with a homeless but harmless saxophone-player, Marge objects and bundles Lisa into a car saying to the vagrant “It’s nothing personal – I just fear the unfamiliar.”

In his benchmark Hierarchy of Needs Abraham Maslow tells us that after the satisfaction of our basic needs, essential to survival, such as eating, drinking, breathing, sleeping and sex, the next most important thing to us as humans is certainty.  Personal security; financial security; health and well-being and a safety net against accidents/illness and the adverse impacts they cause.

We’d rather drive than take a plane because we feel that more control makes us more safe. We’d rather hold a conference in Spain than Israel because by doing so we feel we have minimised uncertainty. But we won’t eradicate it. Not if we want to eat, or drink, or have sex, or travel from A to B.

Every decision we ever take, we take in a world of uncertainty so we need to understand how we deal with it every day because if we do this we can understand a little more about why we do what we do.

Posted 08:58pm by Caspar and filed in Motivation Theories, Uncertainty