Episode #448: Annie Duke – Why Great Investors Are Great Quitters – Meb Faber Research

Episode #448: Annie Duke – Why Great Investors Are Great Quitters

Guest: Annie Duke is an author, corporate speaker, and consultant in the decision-making space, as well as Special Partner focused on Decision Science at First Round Capital Partners, a seed stage venture fund. She’s also the author of Quit: The Power of Knowing When to Walk Away. As a former professional poker player, she has won more than $4 million in tournament poker.

Date Recorded: 9/21/2022     |     Run-Time: 1:21:17

Summary: In today’s episode, Annie shares why quitting isn’t always as bad as advertised. She shares what behavioral biases lead us to want to either quit a trade too early or avoid quitting a bad trade, and shares actionable advice you can take to counteract this problem.

As we wind down, we touch on The Alliance for Decision Education, a non-profit Annie founded to empower students with essential skills to make better decisions. Be sure you check this link for the organization’s virtual poker tournament on October 27^th at 6:30p ET.

Sponsor: AcreTrader – AcreTrader is an investment platform that makes it simple to own shares of farmland and earn passive income, and you can start investing in just minutes online.  If you’re interested in a deeper understanding, and for more information on how to become a farmland investor through their platform, please visit acretrader.com/meb.

Comments or suggestions? Interested in sponsoring an episode? Email us Feedback@TheMebFaberShow.com

Links from the Episode:

• 0:39 – Sponsor: AcreTrader
• 1:53 – Intro
• 3:02 – Welcome to our guest, Annie Duke; Quit
• 3:30 – A quick summary of her first two books; Thinking in Bets; How to Decide
• 8:32 – Why the word quit has a bad reputation
• 13:36 – Grit: The Power of Passion and Perseverance
• 14:16 – Thinking about the opportunity cost of quitting and seeing it in a positive light
• 17:09 – Survivorship bias and deciding when it’s time to walk away
• 25:02 – Trying to make a decision when you’re “in it”
• 38:22 – Practical tips to become a better quitter
• 45:08 – Why we could all benefit from having a quitting coach
• 58:58 – Ron Conway’s framework and kill criteria for startups
• 1:02:51 – The ways we rationalize why we shouldn’t quit
• 1:11:11 – Being reluctant to quit when our ideas become our identity
• 1:12:27 – Overview of The Alliance for Decision Education
• 1:17:52 – Episode #297: Tim Ranzetta, Next Gen Personal Finance
• 1:18:18 – Learn more about Annie; alliancefordecisioneducation.org; Poker tournament

Transcript:

Welcome Message: Welcome to The Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria investment Management or its affiliates. For more information, visit cambriainvestments.com.

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Meb: Howdy friends, we got a fantastic show today. Our guest is Annie Duke, a consultant in the decision making space and previously a professional poker player who’s won millions and millions of bucks. She’s also a best selling author of books like, “Thinking in Bets” and just released her newest book “Quit: The Power of Knowing When to Walk Away.” Today’s episode, Annie shares why quitting isn’t always as bad as advertised. She shares why behavioral biases lead us to want to either quit a trade too early or avoid quitting a bad trade and shares actionable advice you can take to counteract this problem. As we wind down, we touch on the Alliance for Decision Education, a nonprofit Annie founded to empower students with essential skills to make better decisions. Be sure to check the link in the show notes for the organization’s virtual poker tournament on October 27, at 6:30pm Eastern. If you retweet or repost my episode with Annie on either Twitter or LinkedIn, you’ll be entered to receive a free entry into the poker tournament. That’s worth $2,500. Please enjoy this episode with the fantastic Annie Duke.

Annie, welcome to the show.

Annie: Well, thank you for having me. I’m excited to be here.

Meb: You know, I’ve probably spent…I was trying to think of someone who I’d spent more time with over the last few years who I’ve never met in person, who I’ve actually never talked to. You’re probably somewhere in the top five. I’ve listened to all your podcasts you’ve been on.

Annie: Okay.

Meb: I’ve read your books. You have a new one out we’re going to get into today, called “Quit.” So, I’m really excited. Before we get to your newest book, which is great, and it just come out, I think it’s probably important to talk a little bit about, to the extent you can convince them, your first two books because it gives somewhat of a framework and lead-in to your most recent book. And I feel like it’s hard to skip over your earlier writings and hop directly to what we’re going to talk about today. So, give us a quick summary from the author herself of your first two.

Annie: Really what the first two are exploring, broadly, is the problem that we have as decision makers in terms of uncertainty. So, pretty much every decision you make is made under uncertainty and the uncertainty comes in two forms. One is just plain luck. Right? Like, you could be totally omniscient. And you could understand what the future might hold perfectly from a probabilistic standpoint. So, you could know for sure, like, I’m going to win 80% of the time and 20% of the time. But once you’ve made the decision, you actually don’t have control over when you’re going to observe the 80% versus the 20%. So, that means that sort of definitionally speaking, 20% of the time you’re going to get a bad outcome. And you just don’t have any control over that, even if you have perfect knowledge. But then, the fact is that for most of the decisions we make, we don’t have perfect knowledge.

So, we’re trying to approach that. But for most of the things that we decide about, we know very little in comparison to all there is to be known. And we’re trying to do some forecasting, making educated guesses about what we think that the future might hold, given any option that we’re considering. But, I mean, we’ve all had that feeling, after the fact, of I wish I had known then what I know now. And that’s that feeling of that sort of exertion of hidden information on the outcomes that you get. So, I was really, in both of those books, I was exploring the topic. In “Thinking in Bets,” I was exploring that topic generally, and how it really kind of can wreak havoc on our ability to close feedback loops.

You know, obviously, the way that we learn is from experience, partly, so you make a decision, you get an outcome, you’d say, “Hm, what did I learn from that?” And then hopefully, that makes you make better decisions going forward. But the influence of luck and hidden information make that actually quite hard to do, to figure out like, what is the relationship between outcomes and decisions? Because in the short run, that relationship is pretty loose. And what I was trying to sort of explore there was, where do we go wrong? And figuring out sort of what this feedback means? And how could we maybe get a little bit better? So, that was what “Thinking in Bets” was about. And then, “How to Decide” was really just a practical book to go along with “Thinking in Bets,” which was to say, the thing you have control over is the hidden information part. So, I’m going to give you some tools, some real practical tools that you can implement in your daily life, to try to improve the quality of the decisions that you make by improving the quality of the information that’s going into the decision. And by learning how to actually structure the way that you think about an option, right? So, you have an option, you have to think about what are the different possible outcomes? What are the payoffs? What are the probabilities of those occurring? All informed, obviously, by your mental models, or the mathematical models that you have or the information or the facts on the ground that you believe that you know, that are relevant to what you’re deciding about. So, that was what that book was about.

In “How to Decide,” however, there was a very short little section, which was about a page and a half long, which was actually about quitting. And I was making the point that one of the things that I wanted to explore in that is that when you sort of look at some of the methods that you might employ to improve decision making, to improve our ability to close these feedback loops, it seems like you’re going to be taking a lot of time with your decisions, which is daunting, because we make lots and lots of decisions. And like, where are we going to find the time for that? And so, chapter seven of “How to Decide” actually explores how you might speed your decision making up, because for a lot of things that we decide, we should actually be going faster. We should use a better process, but we should go faster, because the amount of certainty that we actually need in order to make a decision is a lot less than we tend to accumulate. And I said one of the things and it’s about a page and a half in there, one of the things that allows you to go faster is that you have the option to quit. Because when you make a decision under uncertainty, under the influence of luck and hidden information, after you’ve started something or after you’ve made the decision, there’s going to be new information discovered. And having the ability to change your mind makes it so that you can be less certain when you make the initial choice. So, I had that little section in “How to Decide” that then blooms in…you know, I didn’t know it at the time when I was writing it, but it ended up blooming into the current book that I wrote.

Meb: I was thinking about this this morning out in the ocean. And I think there’s probably no other phrase, if you were to say to me, or I have a five-year-old now…so, if the teacher or one of the coaches or something came up to me and said, “You know what, your son’s a quitter.” I can’t think of anything that would like crush my soul or be like, you know, just like viscerally emotionally just hit or, particularly anyone who’s involved in sports, right? Like, I feel like that phrase is so ingrained. That’s like the number one. Like, you can be a terrible athlete, whatever, but like, a quitter. And so, this phrase, there’s so much baggage, maybe being the wrong word, but a lot wrapped up in this concept. So, talk to us a little bit about why, you know, quitting in general may have a bad rap, I think I’ve maybe heard you say at some point, but…

Annie: It definitely has a bad rap. Well, okay, so you’ve kind of gotten to kind of one of the core reasons why I wrote the book is I’m on a mission to rehabilitate the word, for people to realize that quitting is totally fine. So, here’s the issue. Like, I can tell you all sorts of situations where your son might quit in the middle of a game, where if they continued, you would think it was a stupid choice. Like, if your son got a concussion, I assume you would very much like him to quit. And it’s really easy to come up with all sorts of situations where quitting is the better choice. Here’s the problem, I think, like really broadly, before we get into the details that we have when we’re thinking about this quit decision is that we think of them as somehow as opposing forces, as if it’s a binary. And when we think about this dichotomy of them as opposing forces, grit has won the day for sure, like, grit is a virtue. When you say that someone’s gritty, you’re saying something very, very good about them. It’s synonymous with character. When our child, you know, starts something like playing the trombone, and then they come and complain to you, you try to push them to continue to do it in order to build their character, to teach them to not be a quitter. And quitting is a vise, right? It’s synonymous with a lack of character. In fact, it’s synonymous with cowardice.

So, we have, I mean, if you sort of go through like a thesaurus, and you look at what are the synonyms for grit, and what are the synonyms for quitting or quitter, or…you’ll see that it’s very heavily imbalanced, where grit is positive and quit is negative. So, we’re seeing this reflected back at us in the English language, so much so that when people who clearly, like nobody could question their grit, are faced with a choice of like retirement… So, let’s take Lindsay Vonn and Serena Williams. What you’ll see from them is that they’ll announce that they’re leaving the sport, and then they’ll follow it with saying, “I’m not quitting.”

And they’ll usually say something like, “I’m starting a new chapter,” or “I’m excited for what the future is going to bring.”

Meb: Serena says she is evolving.

Annie: She’s evolving. There you go, “I’m evolving.” And it seems so weird, right? Lindsay Vonn is clearly really gritty. But when she retired, she announced that she wasn’t quitting. She said, “I’m stopping skiing.” This is in her announcement. “I am stopping skiing. My body is broken, and it’s screaming at me to stop.” And then she followed it with, “But I’m not quitting.” So, but you are quitting, and why are you so afraid to say this? And then same thing with Serena Williams, like, she’s not quitting, she’s evolving. No, she’s quitting. She’s not going to play professional tennis anymore. She’s quit and that’s fine. She’s, you know, the GOAT. So, I think she’s allowed to do that. Same thing with Lindsey Vonn. But we have such a negative bias toward the word that when we do actually quit, and we want to talk about it to other people, we use all these euphemisms, like we’ve evolved, like starting a new chapter. The big one in business, is pivot.

But pivoting is quitting. So, why do we feel the need to sort of like, give the word the Voldemort treatment, like that which will not be said, and instead, like, you know, serve it soft with these euphemisms so that we can avoid actually saying the word. So, that’s really what I’m trying to do is just say, like, we have to start rehabilitating this. And we have to recognize that there are so many different cognitive biases that I’m sure people are familiar with, from reading, you know, “Thinking, Fast and Slow” and whatnot from Daniel Kahneman’s work and Richard Taylor’s work, that all you can pull this same thread through them, which is we have trouble as human beings stopping. It’s very hard for us to be willing to do that. And we have this big bias, which I think is probably surprising to people, we have a bias toward grit in general.

So, you know, people love Angela Duckworth’s book, as do I, by the way, and I think that if you read my book, I hope you have already read hers. And if you haven’t read her book, “Grit,” you should go read it, because she…the science that she’s talking about is really important. But given the popularity of those kinds of books, I think that if you ask most people like, what’s the, you know, sort of worst part of the human condition? You know, do you think it is that we just like quit things too much, or that we stick to things too long? And I think most people just intuitively say, “Oh, we quit too much.” That’s the popularity of those books. But when you actually look at the science, it’s actually usually the case that we stick to things too long. And I think that’s what we need to recognize. And if that’s the case, then quitting is a good thing. So, why are we so mad at the word?

Meb: You talk a lot about opportunity cost, as a way to think about quitting. And I think that’s, for those who are listening to this topic, maybe walk us through about how should we think about in our lives, you know, some examples of how we can implement this in a thoughtful way that is beneficial rather than kind of getting stuck in all sorts of situations. Because my goodness, I mean, there’s so many examples, whether it’s personal relationships, whether it’s jobs, whether it’s, you know, moving, on and on, how can we start to think about this where it’s additive?

Annie: So, let’s try to take this a little bit of a time. We can see how the conversation goes. So, let me just start with opportunity cost. So, the issue with opportunity cost is anytime you’re pursuing a particular path, that means that that’s time and attention that you can’t spend pursuing something else. So, like, in the simple sense, let’s imagine you’re an investor and you’re fully committed. And then you see something else, another trade that you’d like to put on. If you’re fully committed, that’s stopping you from being able to make that trade. So, you would have to quit some part of your portfolio in order to free the capital up to be able to do the other thing. And what you’re basically saying is the path that I’m on has a certain expected value. I’m either winning to it, or I’m losing to it by a certain amount. And there’s also an expected value associated with the paths that I am not taking. And that is the opportunity cost, right? So, if you’re on a path, and there’s some other path that you could be on, where you would be generating more profit, and I’m not just talking about money, it could be more happiness, for example. So, let’s think about it as broadly as you would gain more ground towards your goals.

Then, the fact that you’re doing the thing you’re doing has costs associated with it. Those are opportunity costs, meaning that you can’t go and do the thing that would be better. And this becomes a really important kind of starting point for how to think about quitting, is that I think that part of the problem for us with quitting is we think if we quit, we stop our progress. Or at least it slows us down. But actually, quitting done well, because quitting is a skill, we ought to get good at it, quitting done well speeds us up, it gets us to our goals more quickly. Because if we’re on a path where say, we’re losing ground, or where we’re not gaining very much ground in comparison to other things that we could be doing, if we quit, then we can do those other things that are going to cause us to gain more ground. So, when you quit at the right time, you’re actually going to get to where you want to go faster. So, I think that’s kind of a piece. And that’s getting that concept of opportunity cost wrapped into the way that we think about quitting. So, that’d be kind of the first place I would go. There are a lot of other places to go, which we can certainly talk about.

Meb: Well, we’ll wander down some paths. And so, I think here’s the hard part for a lot of people. You know, quitting, for many, it is like a finality, right? Like, the hard part for many is like, it closes the door on whatever it is. And it could be a dream, it could be something trivial, but it means it’s over. And so, in many cases, I think people struggle with the quitting concept because everyone’s, in my mind, like, always hopeful and cheering for something to work out, whatever it may be, regardless of the opportunity cost. Like, it implies a sense of finality and maybe failure, or maybe not so much failure. But and the hard part, and you talked about this in the book, is there’s so many examples of hindsight bias, where you look at it. Look, I live in LA. So many actors, producers involved in this world that are just hustling and struggling. And I mean, it’s like investment banking, but with less pay. It’s so competitive. And you look out and you say, “Okay, well, at what point is this, like, you know, that I move on?” You know, I’ve had a little bit of success, but at what point, and then you look at the people like Anthony Hopkins, Jon Hamm, others who had success. They went, went, went then, like, they’re, like, 50 or something.

Annie: Okay, so Jon Hamm, and Anthony Hopkins, great examples, right. So, we want to be really careful about survivorship bias, which too, in retrospect is not true, necessarily, prospectively. So, we’ll point to people who, oh, they worked and worked and worked. It wasn’t till they were in their 40s till they finally found success. So, never give up. Never give up. I actually saw someone post on Twitter, you know, we know that the venture world is a little slow at the moment. And there was somebody who said, who was very successful, who said, “It took me 14 months to raise my seed round. So, I say never gave up.” And the problem with that is that what’s true in retrospect is not necessarily truth prospectively, right. So, there’s always going to be outliers. But for every Jon Hamm, there’s 100,000 people who, you know, had big dreams and goals for theirselves and ended up being a waiter with acting on the side for like, their whole lives. So, we have to remember that right, is that we have to think about what the causal relationship is and not fall prey to survivorship bias. So, the question is, like, how do you actually untangle those problems, which are really hard? Particularly when, generally, when we’re pursuing something, there is some progress at least that we feel we’re making along the way. So, if you take something like acting, no doubt Jon Hamm got some roles. Were they the big breakout “Mad Men” role? No, but he was getting some roles. You know, I’m sure he started off maybe extras and then he was getting supporting roles or a few lines here and there. And it’s really easy when you’re in it, when you’re in the middle of that stuff, to say, “My break is coming tomorrow. I just got to keep going, because I just got hired for something. And now I’ve seen this other producer and I’ve created this other relationship. I know, I know that I’m going to be able to break through.” But that can keep going on ad infinitum.

And the problem that we have is couple fold. One that you touched on, which is that we set a goal, which is like a finish line in a race. And so, imagine if you’re running a marathon and the finish line is 26.2 miles, and you’ve made some progress, you’ve run eight miles or something, but then you break your leg. Do you continue running? And the problem that we have is that we have the intuition that we won’t, but a lot of people actually do this. There’s a woman I talk about in my book called Siobhan O’Keeffe, who did this, and then three other people in that same marathon, it was a 2019 London Marathon. And then just search marathons and you’ll see that people are always doing this because of what you said about failure is that we don’t measure ourselves by like, I had a few acting roles, and that’s okay. We measure ourselves against did we actually get to 26.2 miles. So, it’s not that we gained eight miles, it’s that we’re short the finish line, we’re in the losses, in this particular case by about 18 miles. And if we keep going, maybe we can actually achieve the goal. But if we quit, that’s the moment that we have to take a loss on paper and turn it into a realized loss, right, that’s the moment that we can never actually make it. If we quit acting, we’re never going to be Jon Hamm. And that’s a horrible moment for a human being. Because as long as you have the gamble on, in other words, you’re continuing, maybe you can actually make it work. And when you quit, that’s when you’re taking the sure loss. So, let’s just start there.

So, one of the things in terms of untangling these problems is to recognize that when you’re in it, when you’re sort of facing those decisions down, particularly as you start to accumulate this time and effort, and, you know, it becomes part of your identity, what you’re doing and, you know, you’re sort of moving a little bit toward your goals, it’s going to be really hard to stop. So, what we have to do instead is not leave the decision to when we’re in it. We have to do it in advance. So, let’s think about if you started, okay, because we can do it later. But let’s talk about…let’s say, I set out for LA, and I’m like, I’m going to be the next Jon Hamm. Basically, what you can do is say, what is my tolerance? Beforehand. How many years am I trying to give this a go? Am I willing to try to give this a go? And figure that out in advance. And then decide what success looks like for you. So, you know, let’s say that you decide that you’re young enough that you’re willing to give it five years. And then say, what would I need to observe? Like, how many roles would I have to have gotten? Would I have to be net positive in terms of income, and not waiting tables anymore? Like, whatever it is for you, you figure it out. And then write those things down, we’ll call them kill criteria. And if you haven’t hit those, then you kill the project. You go and do something else.

So, now, what if you’re already five years in though, and you didn’t do this in advance? And you’re like, but I got these roles. And I, you know, I got a line in this film. And I got to stand on the set next to Brad Pitt or something. And so, I feel like I really made it. And I know it’s just around the corner. You know, the producer said they were going to help me out or something like that. Well, sit down at that moment and say, how long am I willing to continue to do this? And what would I need to see? So, when people say things like, “I know I can turn it around.” It’s really good to say, what does that look like? What does turning it around mean here? In what period of time? Write that stuff down and commit that if you don’t meet those criteria, that you’re going to walk away. And this is kind of the one of the best ways to deal with it. And you should be putting that on kind of a regular cadence. So, here’s a really simple example of a kill criteria. A stop loss is a kill criteria. It’s saying I know that if I own a stock, and I start losing on it, and now I’m in the losses, so it’s going to be really hard for me to sell it because I’m going to say ridiculous things like, “Well, now it’s really cheap.” Even though I know that if I were to approach that stock today, that I would not think it was a buy. So. it’s a very classic sunk cost fallacy. You know, I want to get my money back. And so, you’re using all these rationalizations. And of course, it doesn’t make sense. Why would you need to get your money back in that particular stock? Like, just go put it in something else and get your $10 back that way. But this is what happens to us. And we know this, right? So. what do we do in advance when we put in this…the buy order, we also put in a stop-loss order, because what we recognize is that after we’ve lost a certain amount of money, so we’ve accumulated those sunk costs, it’s going to be really hard for us to walk away at that moment. So, let’s make the decision in advance. Well, you can do that for your acting career, also.

Meb: There’s a lot that you mentioned that I think is really on point. You have a few phrases in the book that I’m definitely storing away, will definitely cite you with him, but kill criteria is a great one. And this illusion of progress is another. As you mentioned stop-losses, you know, I have some friends that have a very large research organization. And they’ve been publishing investment research for 20 years, hundreds of millions of dollars in revenues. It’s a very large, successful business. And a number of years ago, they ran a experiment and looked at all of the recommendations they made over the years. And then they said, okay, what if, because there’s some trend following philosophy within the organization in some areas, but they said, “What if we had added stop-losses to these recommendations? Would they have worked out better?” And the answer was universally yes. Right? And listeners, this is not saying this is for everyone, or the approach. And, Annie, I’m a quant, and everyone listening kind of knows that. But the phrase that you have that’s one of my favorite phrases in the book, and there’s a lot, is the phrase of being in it, trying to make a decision when you’re in it.

We did a poll, which we love to do on Twitter, and there’s two versions, but they’re kind of the same thing. One was you have a written investing plan. And the vast majority of people, you know, 80%, 90%, the answer is no. And then the second, which is a derivative of the first but same situation said, “When you make an investment, do you when you buy something,” mutual fund, ETF stock, whatever, Bitcoin, “do you establish the sell criteria ahead of time when you place the trade?” And it’s like, 90% said, “No.”

Annie: No, they don’t.

Meb: Yeah.

Annie: I’ve done some coaching with PMs. And, you know, here’s where I think this problem is, is these are PMs, they’re expert investors. Obviously, they, you know, if they have a team, they have quants, and analysts who work with them. And they have some sort of investment thesis. And the thesis for what they’re going to trade is making some sort of prediction about what the fundamentals are going to look like, and then what the implications of that are, right. So, they are writing down the thesis. But here’s the problem that we have, whether it’s investing or anything else, is that we have the intuition that once we’ve made that decision to start something, that when the world goes against us, right, so we do this information discovery, we find out oops, I broke my leg in the middle of the marathon, that when the world goes against us, we will react to that. And we will actually exercise the option to quit. So, in the case of these PMs, they’ve got their thesis. The thesis implies certain things about what the fundamentals are going to look like, for example, in the future. And then when the fundamentals don’t look like that, they assume, they make the assumption, the intuition, that they’re going to react to that in some kind of rational way. But what we know is that they don’t. It’s just not true. And so, you want to take that extra step. I know it feels like a distinction without a difference. But it really isn’t. It really is different to say, here’s my thesis, this is this is why, this is my rationale for why I’m putting this trade on. And I’m going to write down specifically what my stop out criteria are. And also, by the way, what my by up criteria are. Because we do have an attendant problem, which is we actually tend to quit too soon when we’re in the gains. So, when we’re making money on something, we’ll stop out often too early. And when we’re losing money on something, we’ll stop out too late.

So, it actually helps with both sides of the equation. Remember, I’m not disagreeing that sometimes we’re not gritty enough, right. I just don’t think that that in general is our biggest problem. But in this case, it’s true. And Alex Semos did some really interesting work with some collaborators where he was looking at expert investors. These were institutional investors in conditions where they were fully committed. And they needed to free up capital to trade some new thesis. So, he looked at the buy side decisions. And what he found was that they were really generating a lot of alpha, I think it was like 120 bips on average, on their decisions to enter into a position. But what was interesting was when he looked at their exit decision, so remember, they’re freeing up capital to go do something else. When he looked at their exit decisions, they were actually losing about 70 bips to those decisions. Now, what was the benchmark, of course, because you want to know what that is? It’s what if I threw darts at the portfolio to figure out what to sell. Right? So, that’s the appropriate benchmark in this particular case, and they’re losing 70 bips to that. Now, these are really smart people who are making a lot of money when they’re deciding to buy. So, why is that happening?

Well, the first thing that he found was that they were using a heuristic where they were only looking at the tails of their portfolio, in other words, the extreme winners or the extreme losers, in order to decide what to buy or sell. But, you know, that’s a proxy, right? Like, ideally, you would look at your whole portfolio to try to figure out what had the highest expected value, keep that, and then what had the lowest expect value, sell that so that you could go put your money into this new great thing that you wanted to trade. But they don’t do that. They look at the tails. And then the problem is that you have a huge feedback problem. Right? Because nobody’s tracking it. On the buy side, you’re tracking what you own. So, you’re getting this really nice feedback loop that’s telling you is the world unfolding the way that I predicted, in the way that made me want to buy this in the first place. But when you sell it, it’s out of your portfolio. So, nobody’s checking it against any kind of benchmark. And this is why we need to have this exit criteria, right? Like, you need to…what is that criteria that you’re going to sell, or you’re going to draw down or you’re going to buy up or whatever, as you enter into the decision, because then this problem wouldn’t be a problem anymore, because either it would satisfy those things or not. You wouldn’t just be looking at a certain subset of your portfolio to decide how to free that capital up.

Meb: Yeah, I mean, looking at a lot of my friends in the discretionary investing world, and I’m talking about firms that manage billions, tens of billions, 100 billion. So often, you look at the fundamental subjective process. In so many of these little phrases, kind of survivor bias of outcomes work their way in where you talk to someone. And the challenge particularly is, you know, in the investing world, the market environment could last a decade, you know. From financial crisis to not too long ago, it was one very particular environment, growth stocks, growth e-type investments, S&P, and every little dip resulted in new highs. And so, listening to investors, like this is a random example. But like you have a portfolio management team, all the analysts or PMs get together, they pitch their stocks, and they pick like, and then, you know, you have the example where the 1pm. it’s like, “Yeah, but like, do you guys remember when so and so’s stock went down by 50%, and we doubled down and then it’s like our best performer.” It’s like you have a sample size of like, two or… And so, what’s so interesting about what you’re talking about, and every institution, you guys need to hire Annie as a, I don’t know if you do this, but come consult for some of these big shops.

Annie: Yes, I have a job where I do that.

Meb: She’s a million dollars a day, listeners. If you mention The Meb Faber Show, you get a 10% discount. So, but what really hit home to me earlier that you were talking about is, you know, no one has a plan or written rules, first of all, so start to think about that. And most of the reason that people think, you know, they need the rules is for the losers. And I think that’s useful.

Annie: But you need it for the winners also.

Meb: Right. And so, I was getting ready to say as like, you know, some of our…I’m a trend followers, and I also do angel investing. And so, so much of investing is about these power laws, these very large outcomes where you make 10, 50, 100x or whatever. And so, but so many investors, we see, there’s a great phrase, I want to attribute this to Jerry Parker. So, Jerry, sorry, if this wasn’t you. What did he say? He said, “Investors are hopeful with losses and fearful with gains.” And so the one bagger or the two bagger, it’s amazing, you doubled, you tripled your money, thinking about that vacation in France, buying a new condo, whatever. But that’s often just on the path to the 5, 10, 50,100 bagger. And so, thinking about how to deal with one stock that becomes 90% of your portfolio, are you…people love the binary in/out, but how to think about what to do with that ahead of time before you’re in it, before you’re stuck in the middle.

Annie: I think this is really important for people to understand is that, you know, Richard Thaler talks a lot, Nobel laureate talks a lot about mental accounting. And mental accounting is a cognitive phenomenon, right? It’s not like your actual balance sheet, necessarily, although it can align with that, right. So, if I buy a stock at 50, and it’s at 40, in my mental accounting, I’m in the losses $10. And also in my actual ledger, right. And if I buy a stock at 50, and it’s now trading at 60, in my mental accounting, I’m in the gains, and also on my ledger. But this is also true, like, for example, if we go back to the marathon, and thinking about as a cognitive phenomenon, if I’ve run 16 miles of a marathon, you could say, well, aren’t you in the gain 16 miles. But no, because it’s a marathon, there’s a finish line, which is 26.2 miles, so I’m actually in the losses there, 10.2 miles. So, this is just the cognitive phenomenon.

And this idea of being in the gains or being in the losses distorts our behavior, in as much as how much do we want to leave luck in the equation, right? In other words, do we want to take on risk or do we want to reduce risk, risk on/risk off? Right? So, this is work back from Kahneman diversity. So, people with…Daniel Kahneman, people are very familiar with the idea of loss aversion, which stops us from starting things, right. It’s like, oh, I don’t want to buy that stock because it maybe I’ll lose and then I’ll feel bad. Even if the stock has positive expected value, and it’s within your risk tolerance. You won’t do it because it just has a higher possible loss associated with it than some other thing that actually has a lower expected value, but like you’re less likely to just have a loss. And so, you’ll choose the thing that has a smaller loss associated with it, even if it’s got a lower expected value because of loss aversion. So, that’s a starting problem. But what he points out is that there’s a companion problem, which is called sure loss aversion, S-U-R-E, sure loss aversion. And that’s once we’ve already started something, we now cognitively will end up either in the gains or in the losses. And what happens is, when we’re in the losses, we don’t want to turn that into a sure loss. Okay, so as long as I own the position, as long as I have the stock, right, I could get my money back. So, if I keep risk on, it’s a way for me to maybe not have to turn a loss on paper into a sure loss into a realized loss. And we’re averse to that, to turning things into sure losses. And that will stop us from stopping. Now, on the flip side, is that when we’re in the gains, we want to go risk off, because we do want to turn gain on paper into a sure gain or realized gain. Now, this is so much so that as you just pointed out, we’re willing to pay to have the opportunity on both sides of the coin.

So, the original work that he did, which I’m going to put in a slightly different example, with Amos Tversky, goes like this. I owe you $100. So, I’m going to give you $100, or you can flip a coin. And if you win, I’ll give you $220. And if you lose, I’ll give you zero. Now, obviously, you know that $220, doing that has a higher expected value, right? In one case, you’re going to get $100, but it’s sure, it’s guaranteed. In the other case, you have an expected value, a long run win of $110. So, you really ought to take that gamble, because you’re winning to the decision, but people won’t. Why won’t they? Because if you take the gamble, as opposed to taking the sure win, that’s the only way that you can go to zero. So, they don’t do it. So, they’re paying $10 for the opportunity to not risk zero.

But now let’s take the flip side of the equation. Now, you owe me $100. Okay, sad for you. So, you owe me $100. And so, now you’re in the losses 100. And I say to you, “Okay, you owe me $100. But do you want to flip a coin? And if you win, zero, you don’t owe me anything. And if you lose, you’re going to owe me $220.”

Okay, so again, that expected value is worse. In one case, you’re negative $100. In the other case, if you take the gamble, and you leave the risk on, it’s really $110 loss in the long run. It’s costing you $10 to take the gamble, but indeed people do. Why? Because it’s the only way to avoid the sure loss. That’s the way that you can get to zero, it’s the only path open to you. So, it’s on both sides of the equation that we make these irrational decisions, which is why we need to be thinking about these benchmarks or kill criteria in advance, so that we can actually be more rational, both in terms of when we quit, but also in terms of when we persevere.

Meb: Is there any practical tips on this to start to think about, hey, here’s some things you can do to get just better at removing, you know, the shame or the mental block of thinking about quitting?

Annie: So, yeah. I mean, look, ideally, what you need to start doing is thinking about things on a longer time horizon. So, there’s a phrase that I think everybody should be saying to them, I’m stealing it from Ron Conway, who is the founder of SV Angel. And the phrase is, life’s too short. So, what you have to realize is you have a limited time on the planet, and you have limited attention for things. And it’s a complete tragedy to spend your time on something that you are not getting enjoyment out of, that is not making your life better, as far as you can tell, just because there’s a finish line and you’re afraid of finishing short of the finish line. Because those precious moments, how much time, you know, by chapter two, you realize that the book isn’t for you, and you read 10 more chapters, that time that it takes you to read those 10 chapters is time you could spend reading a book that is actually going to be worth your while or I don’t know, watching a TV show or hanging out with your family or going dirt biking. I don’t really care, but it’s going to be better than whatever you’re doing. And so, we have to keep reminding ourselves that life’s too short to ever spend your time on something that isn’t worthwhile. And just to be clear, this is something that is very much ingrained in the book “Grit,” by Angela Duckworth. It’s just people misinterpret her work. Because what she says is you have to explore a lot of stuff to find the thing that you’re passionate about, to find the thing that is worthwhile, and then stick to that even if it’s hard. She’s not saying perseverance on its own is a virtue in that you should stick to things no matter what. There’s a big and misinterpretation going on. And that’s kind of what we’re saying.

So, in poker, you know, there was a saying among the top players, which is life is…poker is one long game.

And what was that? It’s okay to fold one hand, because you’re going to play thousands and thousands of them. It’s okay to quit a game, because you’re going to play in thousands of thousands of those, right? So, it’s one long game, and the thing is to make decisions that are maximizing your expected value over your lifetime. And that’s going to require a tremendous amount of quitting. Now, here’s the thing that I want people to know, though, is that certainly experience helps you with this. You know, it’s like, the stock market goes down, but you’ve experienced this before, so you’re not panicking. And you’re like, I’m just going to, you know, I want to invest in all parts of the cycle. And I’ve been here before, and I know it’ll be fine, right. So, that’s going to help you. It’s good. That type of experience is going to help you with these types of decisions.

But in the end, I think that what we have to recognize is that, you know, that can help, but we’re going to be really crappy at the decisions. So, there’s kind of three strategies that we can use to help us be better in order to disentangle the emotions from the decision. One we already talked about, which is think about these things in advance. So, when I say things like invest at all cycles of the market, that’s actually part of my sort of kill criteria, right? It’s like my advance planning. If the market goes down, I don’t much care. There’s amount of rebalancing that I want to do. I want to make sure that my portfolio is balanced in a particular way, I have on a regular cadence that doesn’t have anything to do with whether the market is up or down to evaluate what sectors I do and do not want to be in, you know, how heavily I want to be in one thing versus another and that kind of thing. But it’s separate apart from market movements. And that’s because I know I’m going to be a bad decision maker in those moments. And so, I have made pre-commitments to how I’m going to behave in those moments. Okay, so even there, that’s part of how I’m taking the emotion out of it.

And then the second thing is, you’ve got to get yourself a quitting coach. Because the other thing, so you can be not in it by thinking about it in advance. That’s one way you can do it. But the thing is that other people aren’t in it with you. So, we’ve all had that experience of watching somebody in a relationship where you’re just thinking, like, man, this is so obvious that you should be ending this thing, you know, and they’re not ending it. Because they keep saying, “No, we’re going to, I think we can turn it around, and we’re doing our 17th round of couples counseling,” and whatever, and you’re like, oh, my gosh, it’s never going to work. We can see it from the outside, right? When someone’s miserable in the job, we can see it from the outside. When they have a startup that just isn’t working and you can tell it’s not that they’re a visionary, it’s that they’re just grinding away at something for fear of having failed, you can see it from the outside. But you can’t see that from the inside. So, get somebody from the outside to really help you.

And this is where things like financial advisors, for example, are so incredibly helpful. Because it’s not only that you can have like, stop out criteria to understand like, when should I be selling, what would be the conditions under which I might buy up, so on and so forth. But you can make that commitment with the help of somebody who’s going to coach you and guide you in those moments where you’re panicking. And this is such an incredibly powerful concept, and, by the way, backed up very well by science. I just want to say that, that Daniel Kahneman himself has a quitting coach. This is where I got the idea from. Daniel Kahneman’s quitting coach is Richard Thaler. I mean, I think we’d all do pretty well to…like, a couple of Nobel laureates looking for a quitting coach. But if Daniel Kahneman needs a quitting coach, don’t you think you do? I mean, come on.

So, the science actually, some of the science that really backs this up is so fun. So, Barry Staw, who’s like a real giant in the field of what we call escalation of commitment. This, when you get bad news, or bad signals from the world, sort of doubling down on the path that you’re on, as opposed to walking away. He did this really simple thing, which is he looked at bank loans that were in a state where they needed to be written off.

And, essentially, he just compared what happens when new management comes in. You know, so, you have some loan officer who’s responsible for the loan. Let’s say they get replaced from somebody else, or new management comes in, or that kind of thing. And what he found was that when the person who made the original decision or approved the original decision to give the loan was still in place, they wouldn’t write it off. It just sat on their books. But when someone new came in, all of a sudden you got this rationality about what the state of those loans were, and now all of a sudden, they got written off. Like, all the bad ones sort of got written off all at once. And you can see where that is, right? Like, it’s like, I gave the loan. I’m in endowed to it. It was my decision. I don’t want to feel like I made a mistake or, you know, you’re sort of feeling the loss of the money. And as long as you keep it on the books, maybe they’ll pay it back. But obviously, if it that’s not the case, you should write it off and you shouldn’t keep it on your balance sheet anymore. But it takes new people, people who are fresh to the decision to be able to actually do that.

Meb: I mean, the quitting coach concept, I mean, it’s everyone can relate to this, right? Like, just think about your friend, your so and so. This decision is just so obvious. And you can see it, but like, I can see it apply in my life too, where maybe it’s not, you know, the most life changing outcomes. But a good example, we always give to investors about their portfolios. We say, “You know, the average financial advisor that’s been in business 20 years, owns across his book of business, something like 200 mutual funds, because they’ve just bought them, they’ve collected them, they, you know, they then get the attachment to them.” The old like, was…Thaler mug, you know, I get…they just sit there. But that feels a little abstract. And so, I always tell people, I say, “Listen, pause the podcast, go out, walk out to your garage. Take a look around what’s in your garage. And I guarantee you, there’s zero, zero of you that if tomorrow, your garage was empty, you would go buy all the same stuff in the garage, right? Like, that old aquarium is sitting there, like…”

Annie: Like, oh, maybe I’ll use it again someday.

Meb: Roller skates, like, on and on. And I just went through this personally, because we renovated our house, which is kind of a bummer. Because when you move, you have to take everything and move it to a new place. So, it’s easy to cleanse. But when you’re renovating…

Annie: You stick it all in your garage.

Meb: Right. And so, we then went through this very painful, in retrospect, process where it’s like, every item do you keep or give away? And I wish and I still may do this, by the way so, but I wish I either had a friend come over or I wish that we just said let’s…we’re getting rid of all of it. Like, this is it. Sorry, clean slate, this is all gone to save ourselves the mental clutter of having to decide about all these things. But it’s almost like you wish I had hired a friend to come over and be like, all right, we need an objective third party to be like, “Yo, you’re never going to use these golf clubs from,” you know, and so, where I’m going with this is I’m ready for the Annie Duke app, or like, it’s like that when AI…get the Annie Duke AI in a couple years, put on my Google Glasses and be like, “All right, Annie, can you walk me through this,” you know, this, this? “Give me some framework for how to think about this.” Because I feel like everyone on the planet could use some form of non…impartial third-party decision maker.

Annie: I talked to a woman, Dr. Sarah Martinez, for the book. And it was a completely accidental thing. So, people will write in to me. And I really try to respond to everybody. I don’t succeed, but I try. And she happened to write in to me as I was starting to think about this book. And I think I might have been like, a couple chapters in or something. She actually ended up in chapter two, but…and she wrote me, and she said, “I’m thinking about quitting my job, but I really need help. Can you give me any tips?” And I’m like, “Oh, I happen to be reading a book about quitting. Do you want to get on a Zoom?” So, we got on a Zoom. And it was a really interesting story. And I think it shows you the power of just talking to someone who has an outside view, right, who can sort of maybe see things more clearly than you can because they’re not carrying all the debris of some cost, as you pointed out, endowment. Like, it’s my mug, don’t take it away, or even your identity being wrapped up in what you’re doing.

So, she was an emergency room physician. And she had done that for many years. And then she got promoted and became an administrator as well. So, by the time I talked to her, she was only doing about six shifts a month in the ER and the rest of it was administrative work. And when she had started, she really loved emergent medicine. You know, she loved the challenge of it, you know, the problem solving, so on, so forth. And the other thing that she liked about it was it was basically shift work. So, you did your shift, and yeah, the shift was really hard, but when you went home, you were done. And that wasn’t the case with administrative work anymore. And what she had started to find over the last few years was that it was impinging on her family life. So, she had two children that were…who were quite young. And she just found that like, her job was not particularly compatible with making sure that when she came home, she was paying attention to her children because she was having to attend to administrative stuff, basically, sort of 24/7. So, she was miserable. And as she described what had kind of happened over the last few years, if you had listened to it Meb, you would have been like, wait, why is she writing to me? Like, I mean, it’s very clear that she should quit. She’s really unhappy.

So, it turned out she had another job in the offing, which is why she had written me. And so, after she told me how unhappy she was, I said to her, “So, I just want to understand, like, what’s stopping you from quitting here?” And she said, “Well, what if I hate the new job?” So, I mean, this is like a very deep answer, because one of the insights from Kahneman and Tversky, combined with the work of Richard Zeckhauser on status quo bias is that when we’re already doing something, we don’t think about it in any way as a new decision or one that we were starting each day anew, right? It’s like, it’s just the status quo. It’s the thing about the path of least resistance, what’s always been done. But remember loss aversion is a starting problem. When we think about the losses that might be associated with the decision, it prevents us from starting. So, now we can see this here, right, as some potential loss that’s associated with her new job, what if I hate it? So, it’s preventing her from starting and switching to that, but notice that the fact that she was already miserable in her own job she was willing to tolerate, because it doesn’t feel like she’s starting something fresh. So, there’s loss aversion in that case is asymmetric. Right? Like, we feel it on the switch, but we don’t feel it on the thing that we’re doing.

So, I just paused, sort of acting as her quitting coach, right? And I said, “All right, well, let me ask you something. I hear you. Like, it’s scary. So, if it’s a year from now, so let’s say that you stay in the job that you’re in now and it’s now a year from now. What do you think the probability is that you’re happy in the job?” And she immediately said, “Zero percent.” She’d been miserable for a few years. It’s not like this was an unknown quantity. So, she said, “Zero percent.” So, I said, “Well, what’s the probability you’ll be happy in the new job?” And she said, “Well, I don’t know. I haven’t done it yet.” I said, “Well, just give a guess. Like, what’s your best guess?” She goes, “I guess 50/50, like, maybe half the time, I’m really happy in it.” And I just said to her, “Sarah, is 50% greater than zero?”

Her face was just like, you know, in that moment, she was like, oh, my God, this is like, so obvious. Of course, I’m supposed to quit. But she couldn’t see it before because she was in it, right. And all of those things, like loss aversion and status quo bias. And then, you know, the other thing is that she was really worried that the other ER doctors would think she was a wuss, that her bosses, in terms of the administration, administrative position, would be really disappointed in her. And then there was all the time and effort in her training that she had put into the job. And what if she abandoned that? When it, simply put, it’s just, you’re going to be happy zero percent of the time here and 50% of the time here, so go do the other thing. But she needed someone from the outside to relieve her of all of that debris, and allow her to actually make the switch, which she did end up doing.

Meb: I wonder what percent of the time that someone comes to you, listeners, and Annie, you can…I want to hear your guess, where they have a situation like this. And they’re thinking about quitting something. It seems like, most of the time, they already know the answer, right? Like, they know the answer is probably to quit. They’re just kind of, you know, for one of the many emotional attachments to it, you know, either need someone to agree with them, push them or whatnot. But I love to say to people, and this goes back to the optionality of quitting something, you know, when someone comes up to me, is like, “Meb, you know, I got fired from my job. Meb, something bad happened.” And Joe Kowilnick has a good example of this. But I’d say first of all, “I’m sorry, you know, you went through this,” but…

Annie: And second of all, congratulations.

Meb: Congratulations. I say, “Congratulations.” And they’re usually taken aback. Like, “I just got divorced.” “Sorry about this.” I had this lunch the other day, and I said, “I’m sorry to hear that, but congratulations.” Like, this is, you know, a new…see it as a good thing. Joe Ko’s the thing, mental attitude he takes is he just says, “Good,” to these sort of situations, whether the thing be positive or not, is just because good. Now, you can put it behind you and move forward with the rest of your life, with whatever it may be that may be a lot better.

Annie: Yeah, you know, I mean, this reminds me of a couple of things. So, if I can just throw two things out. Here’s the first thing. Again, this has to do with opportunity cost. And the fact is that once we started something, we tend not to explore the other things that might be available to us. So, when something is forced upon us, it allows us to go maybe find something better. We don’t always, but it gives us a chance to do that. And I think about, you know, a lot of startup founders, when things start to falter, and they’re not going well, one of the rationalizations that they have for continuing, is what about my employees? I owe it to my employees to keep going. And this goes to that congratulations kind of thing. Well, no, you actually owe it to your employees to shut this down. Why? Because your employees, this is a startup, are working for very little cash comp and a lot of equity. And they’re very smart, obviously, and they’re very dedicated and they’re gritty. And now, by continuing, you’re trapping them in a job where you’ve determined that the equity isn’t worth their time. So, you owe it to your employees to actually let them go, so that they have the opportunity to go find something that is worth their time and their attention, where the equity is worthwhile. And I think that that’s such an insightful way to think about it. Stewart Butterfield was the one who kind of first framed it that way for me as he was making the decision to shut his company, Glitch, down, which was developing Game Neverending. And that’s the way that he sort of talked himself through that, is that I owe it to my employees because I’ve now determined that the equity is not venture scale, and that’s what they signed up for. And now that I realize it’s not worth their time, I need to free them.

And I think that what this goes to is actually in relation to some of this explore/exploit, like, people want to read “Algorithms to Live,” by Brian Christian and Tom Griffiths. This is explored much more deeply. But I think about the way that ants operate. So, forager ants, you know, they’re in a colony, they go to some new territory, they look around for food, so they’re all kind of scattered looking around for food. And then once an ant finds a food source, as it brings the food back to the colony, it lays down a pheromone trail. Now, obviously, when it’s one ant, that’s pretty faint, but other ants will kind of pick it up, and they’re pre-wired to follow that pheromone trail. So, now, another forager ant is going to follow that pheromone trail. When they find the same food, on the way back, they’re also going to lay down a pheromone trail. And that’s going to get reinforced until you end up with the ants marching in a line. You know, like the ants go marching one by one, hurrah, hurrah. Okay. So, when you actually look at that behavior, where they’re marching in a line as that pheromone trail gets stronger and stronger on the way to that quality food source, when you actually look at the colony, what you’ll see is about 10% to 15% or so, of the forager ants aren’t following along. They’re just, they’re sort of scattered wandering around. So, you’re like, what’s the deal with this? Like, these malingerers? Are they like ant anarchists? Like, what’s the deal? Why aren’t they getting with the program? And it turns out that what scientists have figured out is because they’re continuing to look for food.

So, why are they continuing to look for food? Well, because the world is uncertain, right? Like, you find the food. Maybe it’s like, watermelon on someone’s back deck, but then maybe they come and clean it up. And then the food’s not there anymore. So, you have these other ants that are continuing to explore, which is really helpful for the colony, because now they discover backup food sources. And those backup food sources are really important when your plan A doesn’t work out anymore, because someone cleaned the watermelon up. And then sometimes that backup plan that you’re sort of out there searching for turns out to be even better than the thing that you were exploiting in the first place. And so, you can switch to that.

Now, obviously, human beings aren’t a colony. So, what happens is we go toward the watermelon. And we don’t see any of the other stuff that’s available to us. So, in some ways, when that watermelon gets cleaned up, that starts us in exploration mode, and we start looking around for other food sources, right. And so, I actually have a chapter in the book on forced quitting, lessons from forced quitting, because, look, I’m not saying, you know, it doesn’t always work out for everybody. But what it does do is free you up to start exploring other opportunities. And I think that we saw a really big example of this with the Great Resignation. So, people, I think, when they’re thinking about the Great Resignation, they think that everybody sort of across every sector quit. But it’s not true. The people who quit were actually the ones who were laid off in the first place. In other words, people in the service sector. So, you have people in the service sector who are forced to quit. That’s what being fired is or being laid off is. That presumably allows them to start thinking about the world differently, examining their values. What do I really want out of a job? What are the opportunities that are available to me that they weren’t actually exploring before. And when the world starts opening up, they don’t necessarily go back to their old job. Right? Because you have the great reopening. Now, there are lots of opportunities available. So, they’re sort of looking around and you see them quit, but they weren’t quitting just to quit, they were quitting to switch to something new, which they were exploring because the pandemic had put a pause on their career. You don’t see that same behavior from people who held their jobs through the whole thing, because those ants were on the pheromone trail going to the watermelon, whereas the other ones were forced to wander around. Right? And I think that this is…it’s like, such an important lesson when you talk about like, good, or congratulations, when that happens, to kind of reform that as an opportunity to start anew.

Meb: And the life is short comment, I think it’s so thoughtful, because it’s not judgmental, right? Like, and someone who’s in it, the funny thing and I know you work with First Round, everyone knows going into startups, it’s like, whatever, 80%, 90% fail, whatever the number is. It’s a lot. And every founder knows that. And every founder talks about it, but then you ask the founder, you know, they’re going to be the 10% that succeeds, right, like, and so…

Annie: Yeah, I think I have those stats in the book, which I don’t have at the top of my head, but it’s something like 70% of founders think they’re going to be the one or it might be higher than that.

Meb: It’s like Lake Wobegon, like, times 10. And they’re all talented and brilliant, and…

Annie: Well, they all are generally talented and brilliant. It’s just most startups fail.

Meb: Yeah. And so, like, that’s just the math of it. But I thought and you laid this out in the book and listeners, there’s a lot of really great stories in there we’re not going to touch on today, so you got to go read it. But kind of walking through the framework of, I think you said it was Conway but, you know, he says, “Look, I…” Basically, I’m paraphrasing, you can correct me, but he says, basically, “Startup, I think you need to shut down.” And they’re like, “No, we’re not going to do that. Here’s the reason why.” And like you said, he’s not super judgmental. He’s like, “Okay, like, maybe you might succeed. But let’s lay out the criteria, because you’re in this, from which we can make an objective decision in three or six months. Like, what would we need to see for this to continue?” Because then it gives it and I think this works great with employees too, where, like, “Look, this isn’t really working out. But if you think you really, this hasn’t happened, like, what needs to happen for this to work out?” And have the criteria, because otherwise, it just feels very emotional. So, I thought that that was like one of my favorite parts of the book, that sort of line of thinking.

Annie: Yeah, so Ron Conway, it shows us the combination, the powerful combination of kill criteria and a quitting coach. So, Conway can see that the enterprise is no longer worth pursuing. He goes to the founder. The founders says, “No, I can turn it around.” He says, “Fine. What does that look like? Let’s set out and say this is what, you know, revenue is going to look like in two months, or this is how far along the product is going to be in two months,” whatever you figure out, you know, and you work on that together. So, notice, he’s not disagreeing with him, as you pointed out. He’s like, sure, yeah. So, let’s figure out what that looks like. And then they revisit it in two months. And, you know, if they’ve hit it great, if they haven’t, no. And this is something that I have people use with employees all the time as well. I think that it makes it a lot easier. And you know, and he really takes pride in that. Because he says, life’s too short, like I don’t want this founder to waste their time on something that isn’t worth their time. I would prefer for them to be going on to something else. So that, you know, free their attention up so they can go do something great. And what I think is really important to point out about this is because somebody will have said this to me like, but if he knows that it should be shut down today, why isn’t he making them shut down today? And the answer is because they’re not ready to. But, yeah, they might not shut it down for two months. But if he didn’t go through this process, they might not shut it down until literally every bit of capital was burned, right? They might go on for another year and a half. And so, it’s not really a waste of two months to use this kind of process. It’s actually saving you like another year, another two years where they might work on something that really isn’t worth their while.

And I think that conceptually, that’s something incredibly important to think about. Astro Teller at X, which is Google’s Innovation Hub. He says the same thing, you know, and this is this thing about like, waste is not a backward-looking problem. It’s a forward-looking problem, right? Like, if you spent money on something, that’s gone. What matters is should I spend another dollar on it going forward? He actually approaches projects trying to get to the answer about whether you should quit or not really fast. And as he says, if I can get to the answer at $2 million, instead of $9 million, it’s not that I’ve wasted $2 million. I’ve saved seven. And that’s definitely Conway’s approach as well.

Meb: Yeah, I mean, one of the biggest takeaways that professional, particularly startup investors, say, and I think they could be a little more clear about it with all the founders from the get-go, is that in many cases…care is the wrong word. I would say they don’t care if a startup fails. Obviously, they prefer it does amazing. But if a founder has an idea, they try it. It doesn’t work out, but they fail with like, grace, dignity, transparency, and do it in a way that…almost always the second go round that founder will get a shot like, if he has another idea. She has a great company number two. But so often you see the ones that are, you know, have the shame, embarrassment or afraid and they just kind of go ostrich, full like, head in the sand, stop updating, disappear. Or just, you know, kind of what you said, just like, nuke all the money in a Hail Mary pass. That’s probably less likely to get, you know, a new second shot. I mean, everyone in VC loves second shots. Look at, lordy, what’s his name that just got funded a zillion dollars? WeWork, Neumann.

Annie: Yeah. Right. Yes, that’s true. Although I… But yeah, I mean, I think this is one of the things that we have to remember is that we have such a bias against quitting, that there’s all sorts of ways that we rationalize that we shouldn’t quit. So, you know, it might be I owe it to my employees, right? That could be one. But one of the things that Conway hears all the time is I owe it to my investors. My investors believed in me. They invested money in me. And so, I owe it to them to give it every last try in order to try to turn it around. And he says, “No, you don’t. You owe it to your investors to return the capital,” and also, just so that you know, they’re more likely to give you more capital in the future if you do that. It’s not a bad thing. They’re not going to think that you were a quitter in the sense that we opened the podcast with, right. They’re going to actually say, “Wow, this is a really thoughtful individual who got to the answer, figured out it was a no, and returned the capital,” and he points out to them, again, as an outside observer with lots of experience, that they’re likely to be funded again.

Astro Teller says the same thing, you know, really, because they’re funding such big innovations. These are generally people who are coming in with innovations they want to pursue that are kind of like their life’s work. So, you know, they’re very attached to it. There are a lot of mugs involved, like Thaler’s mugs that they have there. And when it comes to that decision about whether to shut the project down, you know, they’re all afraid that, well, I’m going to lose my job, and you’re going to fire me from here, and, you know, so on, so forth. And Astro Teller says, “Look at all these people here. They were all on projects that we shut down, and look, they’re over here now.” So, he’s trying to point out to them that there’s life after that as well. Because I think, again, when we’re in it, we don’t see the long-time horizon. We don’t see that idea that like, it’s one long poker game, or, you know, life is one long game. And we’re just so afraid of that moment, again, of taking the sure loss, of going from it’s failing to now, it has failed. We’ve taken all the risk off because we’ve quit. And now we know for sure, we can’t turn it around. It’s such an awful moment to us that we can’t see beyond that, and we start to rationalize the decision to stick to it. Part of the rationalization is people are going to criticize me or they’re going to think poorly of me, if I walk away. That’s not really true. It’s more you’re going to think poorly of yourself. But most people are going to be relieved for you.

Meb: Tell me your opinion on this. Is this useful or not? With a lot of the decision making, and quitting would be an example, there’s a lot of sayings and platitudes, and all the sort of comments that everyone loves to use, particularly with survivor bias examples, and there’s a million of them, you know. Quit while you’re ahead. Don’t be a quitter. There are probably 50. Are those best avoided in the decision making process, if you’re trying to make an objective decision? And like, almost every time you’re talking to a friend or something about this, and they trot out one of these comments as if it’s like, the…here I blessed you with this, you know, insight, they feel dangerous to me, because often they feel like a survivor bias hindsight outcome.

Annie: There are so many things wrong with them. First of all, let me just say most of those things have…carry with them what’s called the illusion of explanatory depth, which is one of my favorite phrases, which is something that isn’t really deep, but feels deep. So, the best example of that is when people say it is what it is, right? It sounds like ooh, that’s really deep. But if you think about it, it’s not deep at all. It’s just the illusion of explanatory depth. But when it comes to aphorisms about quitting, they’re all giving you really bad advice. Right? Like, winners never quit, quitters never win. How could that possibly be if I’m holding a bad position, like, I’ve got a stock that’s losing, I shouldn’t run it to zero, I should quit and go put my money into something else. And in fact, when you think about things like sunk costs, and endowment, and status quo bias, and sort of the pass/fail nature of goals, right, like, that stopping short of the finish line, is just a failure, no matter that you already ran 16 miles. It doesn’t matter. Like, all of these forces, omission/commission bias, so on, so forth that make it so hard for us to quit, that the act of quitting is actually one of courage. Because you’re really bucking all of this cognitive debris, that makes it really, really hard to walk away from something including the head trash that we have, which has to do with what we call external validity. How are other people going to think about me? Where you think they’re going to think you’re a loser. And you have to have the power of your conviction to be able to walk away from something because you know that even if they can’t see it, that you know this is not the right path for you to be on.

Because the right time to quit, the perfect time to quit is usually going to be when it’s not obvious to people around you. Because it’s a forecasting problem. What you don’t want to do is get into a situation where you’re already fallen into the crevasse. And yeah, then nobody’s going to criticize you for not continuing up the mountain because it’s not a choice anymore. You got to do it before you get to the crevasse. And what that means is sometimes other people aren’t going to see it. So, it’s really scary to walk away in those situations where some people may call you a quitter. And it takes a lot of courage. So, when we think about these aphorisms, like, winners never quit and quitters never win. Of course, winners quit a lot. It’s part of how they win. They have to because they have to always be switching. That thing’s not working. Let me move over to this thing. If at first you don’t succeed, try, try again. We need to add something to that, which is if it’s worthwhile, right. Never give up. Well, never give up unless you’re one of those people who goes on, you know, American Idol back in the day when they showed the bad auditions, who Simon Cowell says, “I’m sorry, you’re screeching like a cat.” And you’re like, I’m not giving up my dream. And it’s like, are you kidding me? You’re terrible at this.

Meb: It makes for good TV, though.

Annie: It does make for good TV. And then, what’s interesting is the only aphorism that’s positive about quitting, quit while you’re ahead, which encourages this horrible behavior of stopping out, as you said, when you’re at 2x, or 3x, when if you had held on to it, it would go to 20x. And the expected value says that you shouldn’t actually sell it. So, we need to stop thinking in aphorisms. And we have to start thinking in nuance and really get down to what the core of the matter is, which is, you know, on balance, if you look at the costs and benefits of what you’ve already started, and you assess it today, do the benefits still outweigh the cost in comparison to other things you might be doing, including switching costs. Right? And that’s really what it comes down to. And, you know, we just, we really, for a variety of reasons that have to do with ourselves and other people, we generally just don’t get to that decision until it’s way too certain that things are going badly. And every single second, you know, this is the Astro Teller thing. Yeah, after $9 million, you know, for sure, it’s not going to work. But if you already had the information that you needed, after dumping $2 million into it, you just wasted $7 million, that you could have been spending on something amazing, because you were so afraid of walking away because winners never quit and quitters never win.

Meb: Wow. You have some great examples in the book. And I don’t want to get to them here. But just give the listeners a tease about, you know, some people who are reluctant to quit, because so much of what they’re doing is that it becomes their identity. And one of my favorite quotes, the last couple years was an Adam Grant quote, and I always get it backwards, because I use it both ways now, but he talks about he’s like, “I don’t want my ideas to become my identity.” And I use it both ways. I don’t want my identity to become my ideas where you get attached to something and then you can’t quit it because it becomes, you know, who you are. And so many of these, when we talk about athletes, you know, how many have quit right at the top. I mean, Serena and maybe John Elway, but so many, MJ and everyone else just keep, Muhammad…

Annie: People were really mad at Barry Sanders. I mean, I think that’s the other thing that we need to remember is that as we look on other people, it’s that feeling of, you know, it’s why I want to fall into the crevasse. Because when Barry Sanders quits at the top of the game, people are like, their heads explode. You know, when Seinfeld quit. You know, wait, why? Because it’s not obvious to them that that’s the time to quit. But as Seinfeld said, like, “I don’t want to be around for when I jump the shark.” You know, like, things are good now.

Meb: Before we let you go a little bit, tell me what the Alliance for Decision Education is. Give us some insight, because you guys are hosting a poker tournament coming up. Give us a little preview of what y’all been doing.

Annie: We’re hosting an online virtual poker tournament to raise funds for the Alliance for Decision Education. So, you can go over to the website there, which I’m sure will be in the show notes. And you can sign up for the poker tournament, which we hope you will. This is an organization that I co-founded with Eric Brooks, and we are trying to bring decision education into every K through 12 classroom. So, you know, I mean, when we think about the education system, like, think about teaching something like trigonometry. Why? Yeah, I mean, the idea that, you know, I think that, you know, when those types of things worth having, people thought, well, if we give people really hard math problems to deal with, it’s going to teach them how to think and reason. And that’s been disproven over and over again, back from the early 1900s, actually, a guy named Thorndyke disproved that. What we really need to be doing is saying, “Look, in a world where you don’t need to memorize facts anymore, where you can look up any mathematical formula, what we need to do is teach people how to think. We have to teach people how to decide.” And we need to start teaching those skills very early. Right? Things like, how do you figure out what’s true? How do you construct a good decision to figure out what option to choose? How do you think about habits and habit formation and changing your habits? Here’s one for a little bit older kids, how do you start thinking probabilistically? Right? How do you start to realize that for any option you’re considering, like, there’s different ways that things could turn out. You need to sort of examine those and start doing some forecasting around that. So, really thinking about the model of social emotional learning, where kids these days, you know, in K through 12, every single year are getting some social emotional learning, in order to help them with things like bullying, for example, and emotional control and empathy. And we think we need to do the same with decision education. And, you know, it’s a little bit of a tragedy that in the adult world, work on decision making and decision science has become so incredibly popular, but not thinking about, well, if it’s really good for a 35-year-old, it would probably be really good for an eight-year-old.

So, to take the kind of knowledge that has so permeated the adult world in terms of books like “Thinking, Fast and Slow” by Kahneman, where people are really starting to understand this decision making space, you know, the work of Michael Mauboussin, for example, or Phil Tetlock, Adam Grant, Don Moore, so on, so forth, Katy Milkman, and say, let’s take what we know from that and start thinking about how we could implement that into K through 12 to create better decision makers. And our motto is better decisions lead to better lives, which lead to a better society. And I think we’re all feeling that need right now.

Meb: How do you guys go about it? Is the kind of mission to train teachers? Are you doing online courses? Are your goal to get actual, like, coursework into the schools? Like, how do you go about this mission?

Annie: Yeah, so, the goal is definitely to get actual classwork into every single school. But the way we’re doing that is not by being direct program providers, although we do some of that. When we looked at other educational movements that were really successful, like the SEL movement, and actually, STEM, what we saw is that behind the scenes, there was an organization which we would call a field builder, or a field catalyst, basically saying, we’re going to take this world, we’re going to define the field, in our case, decision education, we’re going to create common language around it. And then we’re going to start to accelerate that field. We’re going to catalyze the field. So, we do that in a variety of ways. Some of that is through core curriculum development. We have a teacher fellowship, where teachers come in and they learn the material, and then they create curricula that they then bring into their own schools. We also fund research. So, we take people who are doing research, maybe in adult decision making, and get them to start doing that research and thinking about the applications to children so that we can get a body of scientific proof that this is worthwhile. And to understand, really, from that standpoint, what works. And then obviously, we’re trying to create push and pull in terms of policy levers, parents demanding this for their children. And that’s really how something like STEM happens, right, or social emotional learning.

There was an organization called CASEL that’s been around for like, three decades. But it wasn’t until 10 or 15 years ago, that you started to see social emotional learning appear in every single school. But what they were doing was taking people who are sort of circling their center of gravity and bringing them into the fold. So, like, another thing we do is we fund other nonprofits. We help to accelerate other nonprofits who are in our space, doing things like civics, for example, or financial literacy, which would be definitely in the space of what we do. And, you know, we just have a long view of it. We sort of think about it as a moonshot, something that would really improve individual lives and really improve society. And it’s going to take a decade. And we’re here for it, you know, and we hope other people are willing to come along for the ride because we think that this is one of the most important things we can be doing right now.

Meb: We’ll post the link in the show notes, listeners. We did a podcast with a group that’s doing similar but focused on personal finance, getting into schools, Tim Ranzetta, Next Gen Personal Finance, and they’ve started to have a lot of success, where it was like 10% of high schools taught any sort of…

Annie: Oh, that’s amazing. Yeah.

Meb: …personal finance. But now it’s up to almost half, which is kind of amazing. But we’ll post a link in the show notes, listeners, both for Annie’s website alliancefordecisioneducation.org, as well as the poker tournament, as well as the new book, “Quit.” Check it out, listeners. It’s really awesome. Annie, this was a whirlwind. We’d love to have you back in the future. Thanks so much for joining us today.

Annie: Well, thank you for having me.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.