Hello and welcome to Securities, a podcast and newsletter devoted to science, technology, finance, and the human condition. I'm your host, Danny Crichton. And folks, well, it's been a little while over here as we finished off season one of the podcast last year and are about to get the tapes rolling on season two.
Over the holidays, I looked over the three dozen plus episodes of Securities we published from speculative fiction and the geopolitics of agriculture to building software and biology as well as American stupidity. One theme emerged as extraordinarily popular, and that is risk and decision making.
So, producer here, Chris Gates, and I thought we'd bring back Annie Duke again to talk more about the subject. Duke is a world series of poker champion who researches cognitive psychology at the University of Pennsylvania and recently published her new book, Quit: The Power of Knowing When to Walk Away.
Our very own, Josh Wolfe, here at Lux Capital joined her and the two discuss the challenges of walking away, why professional poker players are better at quitting than amateurs, the geopolitics of war, and the importance as always of pre-mortems for quitting. Let's start with the two of them discussing a challenge even greater than scaling Mount Everest, which is going up almost to the peak and then deciding to turn around without hitting the summit.
I have to imagine that so many people forget the meta aspect of it is an option and are often anchored by the negative balance of quitting. The quote that, "Winners never quit and quitters never win," and so there's a expectation that the virtues of perseverance and stick-with-it-ness are the things that people have to cling to. It's got to be psychologically so hard for people to accept that the smarter thing to do is to quit.
The people who persevere are the heroes of the story.
You open your book about the heroes of the story that are the ones that were celebrated, but really the true heroes in a particular story that you're open with were the people that quit and survived.
Yeah, I was just frustrated by that fact that people think of grit as a virtue and quitting as a vice, when it's like why? The option to quit is so incredibly valuable. There's lots and lots of stories of grit. Many of them are about Mount Everest. To be fair, you have to be very gritty to climb all the way to the top of Mount Everest, right?
The three climbers that this story is about. The heroes of this story are Dr. Stuart Hutchison, John Taske, and Dr. Lou Kasischke. And you remember in the '90s that these climbing expeditions on Everest started to get very popular and they were part of one of these climbing expeditions in the '90s. Eight climbers, three climbing Sherpas, and one expedition leader. Now, they weren't the only expedition on the mountain because these were very crowded. So there were lots and lots of different expeditions on the mountain.
They go from base camp to camp 1, to camp 2 to camp 3 to camp 4 acclimating, and then from camp 4 is the day that you head for the summit. So they get to camp 4 and it's summit day, and the expedition leader had set a turnaround time. And the turnaround time was 1:00 PM. What is a turnaround time?
Well, it means that no matter where you are in the mountain, it doesn't matter whether you've made the summit or not. I don't care if you are a hundred feet from the summit, which is still very far when you're climbing Everest, it'll take you a long time to do that. You have to turn around if it's 1:00 PM.
So why do they set the turnaround time? Well, because people before them know that if you get to the summit past 1:00 PM, the chances that you're descending very dangerous parts of the mountain and darkness is too high.
And in particular, there's a part of the mountain called the Southeast Ridge, which is quite narrow. If you slip, you'll either fall to your death into Nepal or fall to your death into Tibet, neither-
Two great choices-
... are actually what you'd like to do. Those are two very bad choices. So if you get back to the summit past 1:00 PM on the way down, you're too likely to be on dangerous parts of that mountain in darkness. And so essentially the calculus has changed and the probability of death has become too high. The turnaround time is 1:00 PM. They all leave at midnight from camp 4 to ascend the mountain. But on this particular day, which was true of a lot of climbs in the '90s, there was essentially a traffic jam.
So there's so many people trying to summit the mountain on the same day, along basically they have to sort of do it in single file. It's the same route that they're all taking up the mountain, that it's very slow-going. Everybody's kind of jammed up.
So Hutchinson recognizes that the going is slow, and he's climbing with Taske and Kasischke because they've become friends and climbing partners. And their expedition leader comes up behind them and he says to the expedition leader, "Hey, can you just tell me how long it's going to be until the summit?" And the expedition leader tells Hutchinson three hours and then continues on up the mountain.
So Hutchinson holds Taske and Kasischke back and just says, "Hey, I think we've got a problem because we were just told that it was going to be three hours to the top of the mountain, but it's already 11:30. And what that means is that we won't get to the summit until 2:30. Let's say we're even really fast, we would get there at 2:00, and that's way past the turnaround time. So it seems to me that since we know already that we're not going to be to the summit by 1:00 PM and we've been told we have to turn around at 1:00 PM, we should turn around now and go back to camp 4."
Which they did and they lived. Now Josh, it's probably not surprising to you why you have no idea who these three people are. This doesn't seem like a particularly dramatic story that anybody's going to write a book about or make a movie about or something. It's like you have three people that climbed up Everest, they got within 300 feet of the summit. They followed the rules, they turned around, they lived, yawn, except there was a book written about them and there was a movie made about them.
And the book was Into Thin Air by John Krakauer, a documentary called Everest and a movie of the same title called Everest. So you might be saying, "Wait a minute, I read that book. I remember that guy, Beck Weathers-
Right, these are not the protagonists, right.
Right. Rob Hall, Doug Hansen. Wait, why don't I know that... did they not, did John Krakauer leave them out of the book? And the answer is no. He did not leave them out of the book. They were part of Rob Hall's expedition, those eight climbers, one of them was Doug Hansen.
So they are absolutely in the book, and not only are they in the book, but John Krakauer says that they were the best decision makers on the mountain that day. He heralds them as basically heroes in terms of their decision making. Now we know what happened to Rob Hall. He continued up the mountain. Remember, he was the expedition leader who told them it was three hours to the summit. So this now becomes pretty interesting given what we know about the information. So he gets to the summit at 2:00 PM, oh, that's past the turnaround time.
And then he stays up there waiting for Doug Hansen to arrive, who gets there at 4:00 PM. Now, you may say to yourself, "Well, maybe he had to wait. Maybe this was really good because he was making sure that Doug Hansen was okay." Except that remember, you have to go up that mountain basically in single file. So had he descended at 2:00 PM, he would've caught Doug Hansen on the way down and been able to take him back with him.
But Rob Hall really wanted Doug Hansen to summit the mountain. And so he waited there for him to summit the mountain. We can get into the reasons why if you want later, but he waits for him to summit the mountain. Doug Hansen gets there at 4:00 PM, that is three hours after the turnaround time, he immediately collapsed and dies, and Rob Hall also dies on top of that mountain.
So, who are the heroes of this story? Well, we know that the way that we remember it is that Rob Hall is the hero of the story. But why don't we think of Hutchinson, Taske, and Kasischke as heroes? They followed the rules. They turned around in a situation where other people weren't, which makes it all the harder. They got back down the mountain. They returned to their families, and I assume that they made those people's lives richer for it.
Quitters have a branding problem. No one is called a hero for quitting, but quitters can make oodles of money. In fact, around the poker table, it's not how you play your hand, but rather how fast you fold, that indicates how much money you can make. Here's Annie and Josh on the economics and sunk costs of poker.
Let's turn to another quote, which is, "Winners never quit and winners never win." Of course, this quote is the famous line from the song, The Gambler, "You got to know when to hold them, you got to know when to fold them. You got to know when to walk away, you got to know when to run."
You noted that 75% of those lyrics, three of the four sentences are about quitting.
I want to talk about that and I want to talk about poker. There's this other quote that people always say, which is, "You miss a 100% of the shots you don't take." And I think you had a great anecdote about sitting next to somebody who was basically saying, "If I would've played that, I would've won."
The counterfactual. And you sort of had an extreme absurdist view, which was like, "Well then just play every hand and see what happens." And the logic of how doing that is a sure path to ruin.
So this gets a little bit back to that worthwhile. You miss a 100% of the shots that you don't take. Sure, but you should really only taking shots that are worthwhile. That's the idea behind portfolio construction. It's not that every company that comes in the door you want to invest in, even though you're going to have some false negatives in there, okay, whatever. You want to construct a portfolio where the things in your portfolio all have a high enough probability of winning that across the portfolio, you're going to win.
So if we say you miss a 100% of the shots you don't take, then you would literally invest in every company that ever came and pitched to you. And I don't think that anybody would then invest in you. This is the issue at the poker table as well. When people think about what makes a great poker player, it's like, "Oh, the ability to read other people and they're so aggressive and they're competitive," sure, that's all true.
But what really separates the great ones from the amateurs is their ability to quit. And you can see this in a variety of ways. The first is when they get dealt those first two cards in a game of Texas HoldEm, an amateur is going to fold less than 50% of the time. So folding is just quitting. I'm done.
A professional only plays about 15% to 25% of the hands that they're dealt. So you've got professionals are quitting 75% to 85% of the time just right off the bat, and amateurs are quitting less than 50% of the time. Now, why is that? Well, part of it is what you just said, they'll say things like, "Any two cards can win," which is essentially, you lose a 100% of the shots that you don't take. So any two cards can win, but of course what you want to add to that is sure, but not enough of the time to be profitable.
So you have to think about that profit issue. Then there's also the issue of the pain of the counterfactual, which is, and in poker it's particularly painful as it probably was for Hutchinson, Taske, and Kasischke because mostly when we quit things, we have to imagine how they might have turned out.
In poker, as it was for Hutchinson, Taske, and Kasischke, you know that people are going to go on beyond you. There were still people climbing that mountain. So imagine how courageous it was to turn around knowing that they might continue up, get to the summit perfectly successfully, come down perfectly fine. And here you are like a schmo at base camp, I mean at camp 4.
So that's very hard in the face of that to think about, but what if, particularly as people are continuing on beyond you. And this is a problem at poker too. I can play a seven deuce, which is the worst two cards in the deck, and then the board comes a seven, a seven and a two, and oops, I would've won.
And that is so painful for people that they know that they folded and gave up that opportunity to take that pot in no matter whether it would be profitable in the long run or not. And so they'll start to play so that they can gather some more information so they can see some more cards that come to get to more certainty about whether it's correct to fold.
And this is generally a problem with quitting, is that that decision when it's correct is going to be uncertain. Nothing bad was happening to Taske, Hutchinson, and Kasischke at the time. It was 1:00 PM, they had lots of oxygen, it was fine, but it was correct for them to quit. But that's hard, because that's at a very uncertain time when there's still some chance that you can recover the cause. When you fold, as you get those two cards, you haven't even seen the other five cards that come,
And so this is very uncertain at that time, you're just doing a mathematical calculation. And what you find with people, just like these amateur poker players, is we generally want to accrue much more certainty than we ought to before we're willing to quit, so that we know for sure that we had no other choice.
And in fact, as Richard Thaler put it, "We won't quit until it actually isn't even a choice anymore," because we can see that the cards came and there was no way for our hand to win or we've already fallen into the crevasse or whatever. And so that's obviously well beyond the point that you should quit. So that's the first problem. And then the second problem, I think, is one of a very simple sunk cost problem, which is, and they'll say this out loud, they'll get involved in a hand, the cards will come, the cards won't be particularly favorable to them.
They'll continue playing and then they'll say out loud after the hand, "Well, I couldn't fold, I had too much money in the pot." And it's like, okay, the money that you already had in the pot shouldn't have anything to do with whether you continue with the hand because that money is already sunk, it's already in the pot.
What matters is, is the next dollar that you put in the pot going to be positive expected value or not? Are you going to get a positive return on investment or not? But this is a very common mistake people make. It's called the sunk cost effect, which is we take into account what we've already spent in deciding whether to continue. And when those amateurs say, "I had too much money in the pot," that's exactly what they're saying. And professionals just don't care as much about that. They're just like, "I don't care, like this hand's going nowhere."
And what they recognize is that that extra money that you put in the pot beyond the point at which it's correct to quit, is money that you can't put into better hands. When you stay in a job too long, that's time that you can't take to go put into a job that's more worthwhile. When you are developing a product that is going nowhere where you can't get product market fit and you keep at it, that is time and money and attention that you can't shift to something that would be more worthwhile, that might change the world. And that's the tragedy of sunk cost.
It is a tragedy, and unfortunately it's a tragedy that extends far outside the confines of a poker table. Halfway around the world in Ukraine, Putin continues his murderous war against the government in an aggressive bid for power. With hopes for a quick Russian victory dashed, Putin now faces his own tragedy of sunk costs. What do you do when you're losing but haven't lost? Here's Annie and Josh on quitting and war.
I want to turn to some cost as it relates to some contemporary events which are more serious. And then I want to go to things that are less serious like sports. But I want to start with war. You note that citing some of your friends and behavioral research from Danny Kahneman to Richard Thaler. On the sunk cost aspect, you said that something to the effect of that the rational actor presented and aware of the fact regardless of how much time, money, reputation, et cetera that they spent, that they would consider only the future costs and benefits in deciding whether to continue with the course of action.
Looking at that from a new times zero, and basically thinking about the incremental return on that incremental cost of investment. Right now in the news, we have a rational, irrational, motivated actor in the form of Vladimir Putin who now has a big sunk cost and the potential gains or losses, the consequence of the decision that he makes from here, whether they potentially use tactical nuclear weapons or something worse where he gains leverage, where he's able to create perception that he won't quit, is something that is going to define in many ways the fate of the world and certainly most proximate Europe.
How do you think about, if we call it a dilemma that he faces, I don't know if he views it that way. How do you think about somebody that has engaged in a war deciding to quit?
Here's the thing. I think we like to look at Putin here as particularly irrational in the way that maybe others would not be. But in order to understand, I think what we should expect of Putin's decision making, how he might forecast whether he continues with the war, whether he escalates the war, whether he withdraws from the war, I think we need to go back to the 1970s.
And a group of researchers, most famous among them would be Jeffrey Rubin and Barry Staw, who were inspired by seeing the US mired in the Vietnam War to start studying a phenomenon called Escalation of Commitment. So Barry Staw wrote a very, very famous paper called Knee Deep in the Big Muddy, which is obviously a reference to the Pete Seeger song, that started with this premise. We have the intuition that when we get signals, negative signals from the world about the thing that we started, adverse signs, bad news, that we will react to those signals by stopping what we're doing.
So that's the intuition that he's starting with. And it goes on to show very clearly why it is not only that we won't stop, but we escalate our commitment to the cause. So we increase our commitment to these losing courses of action even when the world is telling us very clearly that we are not. And he references a quote from George Ball who was the Deputy Secretary of State under Johnson.
And this very famously came out in the Pentagon papers that George Ball had really warned as we were considering going into the Vietnam War. He said, "Once you get in it, you won't be able to get out because as soon as you start to accrue losses, you will not be able to get out." Why? For matters of national pride, saving face, not wanting people to feel like you made it a bad decision.
You have, there's this issue of external validity, how other people are going to view you, that becomes very bad in politics. Because now you have voters who are going to judge you for these decisions and they're going to be kind of in on that sunk cost with you. Like, "Well, if we leave now before we won, then you wasted all of the taxpayer money that you spent up until this point and so on, so forth.
And then as Tony Thomas, who you know well pointed out to me, he said, "There's this extra level of sunk cost that is associated with a war, which is the lives lost." So Tony Thomas said, "Think about how hard it is as a general when a gold star parent is clinging to you saying, 'Go and win this thing so that my child did not die in vain.'" Think about the stakes there, right?
So how do you overcome that, as you're trying to say, but should I put the next life at risk? This becomes very hard to do. There's national identity involved, there's the career risk to the politician, there's the waste of taxpayer money, and then we have this, "I don't want my child's life to have been wasted."
What George Ball foresaw, this was before they'd ever gotten in the war was don't do it because I don't think we can win. And once we start, it's going to be really, really hard to stop. And that's exactly what happened during the Vietnam War. And so now you have this generation of researchers, Hal Arkes, Barry Staw, Jeffrey Rubin, who start to study these issues of Escalation of Commitment, really inspired by seeing that. Now, when did we see that for America again? We see that in Afghanistan.
We get involved in that war despite the fact that there really weren't any signals that we were winning in Afghanistan. We stayed there for 20 years. I think that it was very clear that we were never sort of winning that war when we withdrew and the whole thing collapsed in about two days. And there was a series of presidents, all of which made a pledge one by one to withdraw.
And we found it almost impossible. 20 years later, we finally got out of it. So now let's take Vladimir Putin. Well, to tell you the truth, other things aside in regards to the war, he's in a very similar situation to we were. He's now committed lives to that war, obviously spent a tremendous amount of money on that war. His forecast was terrible. So here's the thing, we think if you say you're going to Kyiv in three days and it's now six months later, shouldn't you figure out that you ought to withdraw?
Well, yeah, sure. From a logical standpoint, that's clearly a losing endeavor. Things aren't going well. He's now having to conscript people who have no training whatsoever. His economy is in a shambles and so on so forth. Yeah, but no, for the same reason that we got stuck in the Vietnam War and Afghanistan.
And for Putin, I think that it's even a greater problem. And the reason why I think it's an even greater problem is that these issues get amplified when you are doing something that is against consensus. So the whole world, well, the whole western world is against him on this. So if you withdraw, what does that mean for you? How do you give that up when you've taken such a stand against the consensus of the rest of the world?
And then also there's the issue of national identity. He is synonymous in some ways with the national identity for Russia and then his own political career. It's not clear that he would still be in the position that he is if they actually withdrew. And so I don't think at any point once that war was started, I said, "Well, that thing's not going to end anytime soon," because it becomes so hard to extricate yourself from these types of conflicts.
A word we haven't heard in a bit is quagmire, the sense of entering a situation and never finding a way out. The more we try, the more we just deepen our own commitment without escape. As hopeless as such situations can be, there are strategies for escaping a quagmire before we enter one. We've discussed pre-mortems previously on Securities and here's Annie going further into how anticipating failure can help us quit just as we need to.
One of the things that we've talked about a lot in the past is the idea of pre-mortem. Here at Lux, we always talk that failure comes from a failure to imagine failure. It's one of the ways that we try to identify and kill risks. You kill risk, you can create value. And that's really an act of imagination. Thinking about what could go wrong and is there a way that we could throw time or money or talent at those risks to prevent them from happening?
And if not, then if the company does fail or something goes wrong and it's a risk that, A, probably already knew that we were taking and we thought, if it works out great, we're going to get paid for it. If not, okay, we're going to lose money and suffer a consequence. That's fine. I always find it a failure of process and a failure of imagination.
If a company fails for something that we didn't anticipate, it just something goes wrong and it wasn't even in the bounded range of the stuff that we imagined. I still view that as a failure of process. You take it one step further, and you just mentioned this, kill criteria. A pre-mortem is useful to imagine it. A kill criteria implies that there's some action that you're going to take or stop taking. So talk a little bit about that idea because I think it's quite powerful of a kill criteria.
So if we go back to Barry Staw, the researcher who was really inspired by or I guess inspired might be the wrong word, horrified by what happened with the Vietnam War and made really studying that tendency his life's work. Let's go back to what he said, which is that we have the intuition that when we see adverse signals, when we get bad news about something that we've already started that we'll pay attention and we'll stop.
So let's think about this problem. When we start something, we are making the decision to start under conditions of uncertainty. The uncertainty is coming from two places. One is just the influence of luck on the outcome. And the other is kind of what you just really were alluding to, which is that we know very little in comparison to all there is to be known for most decisions that we make, particularly for innovative ones or early stage investing, for example, where maybe it's very early product market fit or even before.
And so we're going to discover a whole bunch of stuff after the fact, and we've all had that feeling, I wish I knew then what I know now. Our intuition is that when we find that new stuff out, we're going to stop if it's bad news. And this is what he shows, it just not just from the motivational side, but also from the behavioral economic side, from Thaler, [inaudible 00:25:46], Kahneman, Tversky, so on and so forth, that those two disciplines merge to the same answer that we don't pay attention to those signals.
So the question is why? Because that doesn't make a lot of logical sense because when you start something, you obviously have some sort of thesis about why you're going to start it. Clearly implied in that as some sort of forecast about how you think the future is going to unfold. And so if the world then goes against you, why would you not pay attention to that?
And I think this goes to something that Danny Kahneman says, which is, "The worst time to make a decision is when you're in it." So what does in it mean? When you're actually facing down that choice of having to stop what you're doing because that's the moment that you go from failing to having failed. That's the moment that you have no chance of ever recovering the cause.
So you can think about it this way, if I buy a stock at 50 and it's trading at 40, as long as I keep holding it, I might get back to 50. But the minute I sell it, that's when I know I can't get that money back. I have to take the sure loss at that point. And so that's a lot of the resistance to quitting that's happening to us. And when we're in the middle of that decision, that is when we'll be bad.
In the same sense that we're going to be much worse at eating healthy if there's an open box of chocolates in front of us. That's the insight of being in it from Danny. So what we want to do is not be in it. So how can we do that? There's a couple ways we can do that, one of which is to think in advance.
So when you choose to start something, you can imagine, well, let's imagine that this didn't go the way that I had hoped. What would I be seeing in the world that would tell me that it didn't go well? So that's basically what I was doing with the sellers. You lost the deal at six months from now, you lost the deal, looking back, there were early signals. We weren't going to win the deal. What were they? Now notice we're not talking about a particular deal.
They're not in the middle of a decision of having to qualify something out. I'm just asking them in the abstract to imagine this scenario so that we can generate this set of criteria. Now, it turns out that when you do that, you are just much more likely to pay attention to them and actually act in a much more rational way toward these loss cutting decisions than you otherwise would.
I think that when people hear that, they think, well, that seems like sort of a distinction without a difference. What's the difference if they're occurring in the world, how is that different than thinking about them in advance and then noticing that they're occurring in the world? And it turns out it's all the difference in the world. And in fact, Barry Staw's research suggests that when you do this, when you think in advance and you set those benchmarks in advance, that you end up looking about very close to someone who was fresh to the decision.
And that's really what we're trying to do. In other words, if I'm thinking if I buy a stock at 50 and it's now trading at 40 and I'm trying to decide whether to hold it, I want my decision to look the same as someone who has never held the stock and is just choosing whether they should buy it today. That's what my goal is as a decision maker. And if you think about these things in advance, you're just much more likely to look like someone who's fresh to the decision.
We always want to look fresh to a decision, and it's always good to get a fresh perspective. For more freshness on the power and strategies of quitting, read Annie Duke's new book, Quit. And now, we're going to quit this episode and keep prepping for season two of Securities. Talk to you soon.