Roll the dice, play the hand

Risk and regret—Don't risk it all—Results vs. process

Hi all,

Hope you’re having a good weekend!

I took the GRE exam yesterday for admissions to graduate school. A big part of the test is vocabulary. At last, I understand the difference between the words abrogate and arrogate, adjure and abjure, and (my favorite): fractious, factious, and factitious. People scorn vocabulary. But I’ve found these new words at least highly useful for reading David Foster Wallace. I’ll try to eschew using them in the newsletter, though.

Today’s note covers a few interesting thoughts I’ve come across on risk.

Thanks for reading!

—Brendan

My great grandmother took a personal risk in boarding a ship to the United States over a one hundred years ago. There was much uncertainty about how the decision would work out. Who would she meet? Which problems would she face? Would she even make it?

I think about the thousands of actions that were required for my life to even exist—including hers and beyond. Ancestors had to leave a country, pivot a career, ask someone on a date. They had to take risks, some big, some small. I’m the beneficiary of hundreds of risk-takers before me!

As writer Annie Duke says, life is more like poker than chess. We must act on imperfect information, without full knowledge of what will happen. We have to take risks.

And to do well, we have to be good at taking them.

Courtesy of DALL-E

#1: Risk is About Regret

“Maybe regret is the best definition of risk. Risk isn’t how much money you might lose. It’s not even necessarily how you’ll feel when you lose it—over time, a lot of painful experiences turn into cherished lessons. Real risk is the regret (or lack thereof) that might come years or decades later.”

—Morgan Housel, “Risk and Regret”

One framework for deciding to take risks is regret minimization. Let’s say you have two options at a particular point in your career: stay at a high-paying, stable job, or leave to start a new business that could succeed or utterly fail. Which option should you choose?

Regret minimization says you should take the option your future self would regret the least taking. This is the exact framework Jeff Bezos used when deciding to start Amazon nearly 30 years ago, as he was in the same exact position. His story explains how it works:

“I wanted to project myself forward to age 80 and look back on my life and I want to have minimized the number of regrets I have.

And I knew that when I was 80 I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the internet that I thought was going to be a really big deal.

But I knew the one thing I might regret is not ever having tried.”

Bezos realized he would regret not starting Amazon more than starting it. From that perspective, the decision became much easier.

#2: Don’t Risk Everything:

“The Kelly criterion is a popularized mathematical formulation of a simple concept. The simple concept is: Don’t risk everything. Stay out of jail. Don’t bet everything on one big gamble. Be careful how much you bet each time, so you don’t lose the whole kitty.”

—Naval Ravikant, Kelly Criterion: Avoid Ruin

It’s true that we need to take risks to evolve and grow personally. Businesses need to take risks (expanding to new markets, launching new products, etc.) to remain competitive, too.

But it’s critical to not risk everything. Don’t put everything you’ve earned at stake. It doesn’t matter how much of an edge you have. If you lose everything, you have to pack up your bags and leave the game altogether.

Sometimes these “game ending” risks hide in ethical or legal transgressions.

Bill McGlashan, founder of TPG Growth and an extremely successful (former) businessperson, lost his role at TPG by falsifying his son’s test scores for admission to the University of Southern California.

As Warren Buffett says, “If you risk what you need in order to gain what you don’t need, that is foolish. It’s just plain foolish.”

#3: Beware of Resulting:

“[In Super Bowl 49, ] Pete Carroll was a victim of our tendency to equate the quality of a decision with the quality of its outcome. Poker players have a word for this: ‘resulting.’”

—Annie Duke, Thinking in Bets

Here's the context for the example that poker player and writer Annie Duke is talking about here.

There are 26 seconds left in the game. The Seattle Seahawks, coached by Pete Carroll, are down by 4 against Bill Belichick’s New England Patriots. They’re only about 1 yard from the end zone and have Marshawn Lynch—one of the league’s great running backs—in the back field. The Seahawks are footsteps from victory. The ball is snapped, the players rush, and QB Russell Wilson fires a short-range pass towards the end zone that is… intercepted by Patriots’ Malcolm Butler. The stadium erupts. Patriots win. Game over.

Pete Carroll was heavily criticized for his decision to pass the ball on that play. Why risk an interception? “Worst Play-Call in Super Bowl History”, “Dumbest Call in Super Bowl History”, “A Coach’s Terrible Super Bowl Mistake” ran the headlines that week. Critics judged the decision by the quality of its outcome, not by the decision itself.

Duke reminds us that there is a big difference. When we make a decision that involves some risk, even one that is likely to work out, there is still a chance we hit the wrong outcome. We can’t let the result of a genuinely good decision demoralize our confidence or cloud future judgments.

In Carroll’s situation, a few people actually came to his defense, noting that the statistics favored his decision to pass instead of run. The Seahawks had gotten unlucky. Carroll understood this too. “It was the worst result of a call ever,” he later acknowledged.

Thanks for reading! I appreciate when these thoughts lead to conversations with readers. Did you find anything interesting or surprising? Reply to me and let me know.