We're eager to have former professional poker player, public speaker, and bestselling author Annie Duke on this week's episode. Before retiring from the game in 2012, Annie won world tournaments and racked up more than $4 million in winnings. Prior to becoming a legendary poker champion, she was a PhD candidate in cognitive psychology at the University of Pennsylvania. Thanks to her expertise in the science of decision-making and critical thinking, she has become a highly sought-after corporate speaker and consultant.
Annie's first two non-poker-related books – Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts and How to Decide: Simple Tools for Making Better Choices – teach you how to be a smart decision-maker. But her latest book, Quit: The Power of Knowing When to Walk Away, teaches you how to be a smart quitter.
See, it's not all about picking winners. Knowing when to sell is equally important for investing success. According to Annie...
"Quitters never win, winners never quit." That's not true. Winners actually quit a lot. And it's in fact how they win. When you look at the best investors, they are so good at getting off the positions that aren't so worthwhile that they can then reinvest that capital into things that are worthwhile [...]
When you are a good quitter, you get to where you want to go faster.
You can't just have an investment thesis to be a successful investor. Annie explains you need to have an exit strategy with "kill criteria," or specific signals occurring at a specific time. When a kill criterion is triggered, you should take it as a sign that the odds are shifting out of your favor... and that it's time to put emotions aside and get out.
Annie also highlights the value of stop losses. She says they're "one of the simplest ways you can do that [advance planning]" in investing – and in poker...
People do cancel stop losses. We need to understand that whether it's a checklist or whether it's a trading plan that we're not going to be perfect in following them. But we would be better than we would be if we didn't have them, and that's going to make all the difference to your results. So if you have a stop loss, yes, you sometimes are going to irrationally cancel one.
I had a stop loss in poker when I played. Did I sometimes blow past the stop loss? Of course. But I did it a lot less than I otherwise would've if I didn't have that particular mechanism in place for when I was supposed to walk away from the table.
Annie also discusses the psychology behind other common pitfalls for retail investors, like loss aversion, focusing on portfolio outliers, relying on intuition, and more. Today's episode is one you won't want to miss.
Author, National Poker Champion
Annie Duke is a World Series of Poker bracelet winner, the winner of the 2004 Tournament of Champions and the only woman to win the NBC National Poker Heads Up Championship. She has authored four books on poker and in 2018 released her first book for general audiences called "Thinking in Bets: Making Smarter Decisions When You Don't Have All the Facts," which is a national bestseller.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan interviews former World Series of Poker champion and author, Annie Duke, who has a new book out called, Quit: The Power of Knowing When to Walk Away.
Dan Ferris: For today's rant, we told you many times that inflation is a sticky phenomenon, and guess what, it's sticking around.
Corey McLaughlin: And remember, you can e-mail us at feedback @investorhour.com and tell us what's on your mind.
Dan Ferris: That and more right now on the Stansberry Investor Hour.
OK, so Corey and I, mostly in the Stansberry Digest, me once a week and Corey four times a week, usually, most weeks, have been telling you, and here on the show, too. We've been telling you, and telling you, and telling you, inflation is a sticky, sticky phenomenon. It sticks around longer than people think. It stays higher longer than people think. And what happened? Well, last week, the preferred gauge, the preferred inflation gauge of the Federal Reserve, the people who keep raising interest rates. It came in higher than expected. It rose 5.4%.
It's called the Personal Consumption Expenditures Price Index, the PCE. It came in 5.4%. Core inflation, by that measure, came in 4.7%, but core inflation leaves out food and energy, and I don't know about you, but I'm planning on eating every day, and I'm going to turn the lights on every single day, and the heat, and all that stuff. So yeah, we told you, it's here. It's probably going to be higher longer than anyone thinks. I mean, right?
Corey McLaughlin: It's all happening, Dan, yeah. Yeah, the reason these numbers are important is, as you said, because this is what the Fed looks like and looks at, and for now, kind of the consensus is that interest rates will top out around – or has been they'll top out around 5% or a little higher than that. But this now I'm seeing people immediately talk about 6% just like last year when people were talking about, oh, they'll go to 3%. Then it goes to 4%. OK, then it goes to five person.
So on and on, basically the same story as 2022 is happening again so far this year, and yeah, it's inflation. Like we've said, most people haven't seen this is 40 years and it's just the market is conditioned to not expect this sort of stuff, and so despite a year of it happening the same exact way.
Dan Ferris: Right. Most investors, as we speak here in early 2023, most investors haven't seen this. Certainly anybody who's just say 40 or younger has not seen this. They've not seen inflation.
I saw another thing this morning that was put out by a former guest, Dan Rasmussen, and they're saying the positive correlation of stocks and bonds is something that just hasn't been around for a while. And on a trailing three-year basis, guess what? Stocks and bonds correlate positively, again. And that's been a staple of portfolios for a long time, right? Your bonds take care of you when your stocks aren't doing well, but if they both correlate positively, that doesn't happen. You don't get that benefit.
So, yeah, things are different. It's not different as in we're saying this time is different. Things have changed in a way that they've changed many times throughout history, right? Here we are, again, at the end of a huge bubble with everything changing.
Corey McLaughlin: Right. Things aren't different this time. It's just what you're looking at is a little different, I would say. It's just last year took a lot of people by surprise. Obviously, that conventional 60-40 portfolio became a storyline as far as the worst performance it's had in forever. And people wondering, well, how did that happen? And now because the environment got flipped upside down with interest rates going higher and super-expensive stocks taking a haircut, and there you go. And so it's the same thing's happening for now.
The thing I think about now is now the Fed's getting into a point where I think they could really start to screw things up as far as the future. All right, fine. January numbers are one thing and so say they then go to overtightening mode because you can't know the future. I think if they go higher than 5% to 6%-ish, as some people think, then I think this recession question is not a question anymore, for sure. I think it's probably piling up there and we're in for another tough just advance the timeline another couple of months at least and pick up the recession story next year, too, it's to me, at least.
Dan Ferris: Yeah, and I'm convinced that the much-anticipated pivot, which of course historically would be not great for the stock market. The much-anticipated pivot is not going to happen until the Fed is under extreme duress. I said this in my Stansberry Digest on Friday and that was my main message. They don't change until the data just screams at them. All last year, I mean, I was still hearing the word transition in August and I wasn't really hearing them abandon it until later in the year, and I thought it's typical Fed. It's typical.
They maintain the status quo until they absolutely are under what they feel is too much duress. And I think the status quo has shifted and now they're in inflation-fighting mode and they don't change easily. They've been in easing mode in fighting deflation mode for decades. Now they're going to be in inflation-fighting mode until you get your recession.
Corey McLaughlin: Yeah. Dan, I think they don't know when to quit. Is that fair to say?
Dan Ferris: Yeah. They don't know when to quit. They're storytellers, man. They got to maintain the narrative. They're like, "No, no, no. Inflation's not a problem. It hasn't been a problem for decades and it won't be. It's just a transitory effect of reopening after COVID and it's supply driven," blah, blah, blah, blah, blah. And here we are with PCE coming in high in 2023. So they'll continue raising. They'll continue hiking, put it that way, and I don't think that they'll stop or ease, lower rates, until the pain gets bad enough.
I'm looking for the paradigm and I go back through history. In our last show, you reminded me of one of the paradigms I use which is Jerome Powell walking down the hall as the high school quarterback looking at his hero from 40 years ago, Paul Volcker, saying, "I want to be like Paul." So that's how we get to the new status quo here of fighting inflation and I don't think the status quo changes until they're just getting bludgeoned from all sides until, oh, boy, wow, negative GDP, negative real GDP for two quarters, or three quarters, or whatever it takes for them to realize that they have indeed hiked until they broke something. That will have to happen.
Corey McLaughlin: I'm with you, till it's painfully obvious, I think that this is going to continue.
Dan Ferris: You know what? Let's just leave it on that extremely happy note and let's go ahead and talk with Annie Duke. This is her third appearance, man. She's an awesome guest and her new book is out. I've read some of it. I've just read a couple of chapters. It's her best book ever. I highly recommend this one. If you've never read an Annie Duke book, this is the one you should get, and we'll talk about it with her right now. Let's do it. Let's talk with Annie Duke right now.
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OK, Annie. Welcome back to the show. I'm so glad to see you, again.
Annie Duke: Well, thank you for having me.
Dan Ferris: Yeah, so we're definitely going to spend most or all of this time talking about your new book called Quit, and I love this on many levels. First of all, one of my favorite ideas in life is via negativa, the negative way, what not to do, what you're not hearing, what you're not doing, and quitting is about not doing in a couple of different ways. You talk about opportunity cost and we'll get into that. So I love that. Absolutely love it, super-important. Like Charlie Munger says, "All the most famous people just say no all the time."
Annie Duke: Right.
Dan Ferris: And this is a book about how to say no. But I hope that you don't mind like I would normally say, "Hey, tell me about the book and give me an overview," and all this stuff. But I have this very specific issue that is burning a hole in my brain that I feel like I have to get to.
Annie Duke: OK, go for it.
Dan Ferris: OK, chapter 3 is a really great little story about cab drivers and you note that cab drivers rent their cab for 12 hours and they can work as much or as little in that 12 hours as they want to. So it's a really good study of quitting, of when they decide to quit working, when they decide not to work. I looked at this and, of course, you told the story of three economists. I think they're all economists, who studied cab drivers quitting and they learned that cab drivers quit at all the wrong times. They quit right when the business is picking up and they stick with it when it's going nowhere for hours.
The reason why this is very interesting to me and the very specific thing is I've read these books about learning. I'm a classical guitar player and I want to make the most of my practice time, still try to get in my practice even though I'm not playing professionally. So I want to be the best learner I can be. And one of the things that I learned from these learning books that I read, one of which by Ben Carey is really great. It's called How We Learn, is that when you're in the zone and you're really, really in the flow of it, that's the time when you should stop because it freezes that memory of flow. Then you go away, and you come back later, and your last experience is your freshest, and you were in the flow.
So when I thought about these cab drivers and I thought I almost understand it but I really don't because it's just like it's a big mistake, right?
Annie Duke: Yeah, so they're not quitting because they're in the flow.
Dan Ferris: Right.
Annie Duke: They're quitting for a different reason. It has to do with have you achieved your goal or not, are you in the losses or are you in the gain. So, first of all, let me just say that the authors on this paper aren't just any old economists. One of them is Colin Camerer. He's the lead author who is incredible. He's done so much work. His body of work is so influential. He does a lot of stuff in neuroeconomics. I wouldn't be surprised if one day he heads toward a Nobel Prize. And then a coauthor on the paper is also Richard Thaler who is a Nobel laureate and economic scientist.
So these are some pretty heavy hitters and this is work that they did back in the '90s when this idea that people aren't necessarily rational decision-makers was not as accepted as it is today. And what they were trying to figure out is that in situations where someone has really strong financial incentives to optimize when they're driving versus when they don't, do they actually do that. And if they don't, kind of why is that happening? That was the question that they're asking.
So as you mentioned, the way that cabs worked at the time, so this was pre-gig economy, you would rent a cab, which had medallions. So medallions were the licensings for the cab, very expensive. So most people didn't actually own their own medallion, so they would rent a cab and they would rent it for a 12-hour shift. Now that didn't mean you were driving for 12 hours, obviously. You had the cab at your disposal for 12 years. You could drive anywhere in there.
So they looked at trip sheets and these trip sheets were from the 1980s, so they were sort of looking back at behavior. And they wanted to figure out if the cab drivers were choosing to drive at times which were optimizing earnings, which is what a rational person would do, obviously.
Dan Ferris: Right. That's the rational economic actor, right?
Annie Duke: That's the rational economic actor. And basically what that would mean is that when the driving was good, in other words, there were lots of fares around, one would assume that they would be staying in their cab in order to take advantage of the fact that there were lots of fares around. And they could tell this by looking at the trip sheets because the trip sheets would show that they were getting a lot of fares close together, so there were lots of fares available. Their wait time to get another fare was very small.
So you would assume that they would sort of try to maximize that situation and then try to minimize being in the cab when there weren't any fares to pick up. So if the driving conditions weren't good, you would assume that they would stop driving and you could tell that also from the trip sheets because you would see a long time in between picking up fares.
So they went and looked at what they were doing, and to their surprise, that was not at all what people did. In fact, what the drivers did was when the fares were coming in really fast, in other words, when the driving conditions were really good, they were actually quitting really quickly. And when there were no fares to be had, they were staying in their cab for a very long time.
So that's weird. That's flipped. If you want to know how bad that behavior was compared to an optimal strategy, they were earning 15% less than they would if they had an employed an optimal strategy, and here's where it gets really bad. They would have made 8% more money if they had just been random. In other words, if they had said, "I'm just going to drive six hours each day no matter what."
Dan Ferris: Exactly.
Annie Duke: "Who cares?" So this was obviously costing them a lot of money, which goes against the whole idea of a rational actor because they weren't behaving rationally, and the financial incentives were clearly there, and they were actually hurting themselves financially by this behavior.
So your question was why was this happening. Because now you can see sort of a twofold problem with quitting. In one case, they're quitting too soon, when the fares are really good. In the other case, they're quitting too late, when the fares are bad. So the question is why.
And so they actually talked to cab drivers to try to figure it out and they were, "Well, what's your strategy?" And what the cab driver said is that each day they had an earnings goal. So let's say they wanted to make $300 for the day and they have this earnings goal. And then what happens is if they haven't hit the earnings goal, they stay in the cab. And if they have hit the earnings goal, they stop driving.
So you can see how that causes this behavior. So you have this benchmark, say $300, and as soon as you hit it, you're going to get out of the cab, but before you hit it, you won't get out of the cab. Well, if there's lots and lots of fares around, you're going to hit that really quickly, and then you're going to stop because you're done. And if there are no fares around, you're going to keep going in some ways sort of futilely trying to hit that earnings goal.
And this goes back to something that Richard Thaler talks about quite a bit, which is the way that our mental accounting works, which is we have these benchmarks, and when we're short of the benchmark, we're in the losses. And as soon as we hit the benchmark or exceed it, would be what we call in the gains. And one of his central insights is that we'll quit when we're in the gains but we will not quit when we're in the losses, and that's what you're seeing from the cab drivers.
As soon as they hit that goal, they're in the gains, they're done, and you can intuit that if they had a different goal like $400, then they would drive till they hit $400. If $500, then they would drive until they hit $500, because they're just benchmarking against whatever that point is in their mental account. And whenever they're short of it, they just keep driving around aimlessly really honestly wasting their time and reducing the amount that they earn.
So I think it's such a nice study for sort of really introducing this problem of calibration. Grit and quit aren't separate decisions. It's when you choose to stick, you're choosing not to quit, and when you choose to quit, you're choosing not to stick. And we need to figure out how to be calibrated between those two things. And the calibration is going to come from this concept of worthwhile. Stick to things that are worthwhile, quit all the rest. And the cab drivers are flipping it. They're quitting when the driving is worthwhile and they're sticking when it's not.
Dan Ferris: Right, so of course, I started with this with my maybe let's say 49% tongue-in-cheek example, but the real reason to start with this on a podcast about investing is that as you also indicate in your book, this is the classic investor foible, cutting winners and sticking with losers. It is of all the things that I've learned about our vast thousands and thousands of readers of our advice that it's perhaps the single most consistent, insidious mistake of them all. And actually, if I'm being honest, I've made it, too.
Annie Duke: Sure. I mean, I have, too.
Dan Ferris: Because I'm human, too, and of course, you allude to Richard Thaler's idea that part of the way to triumph over this is not to make the decision when you're in it. Don't make it in the moment. You make the decision to quit well ahead of the moment when you need to quit. And, of course, that is exactly what the best traders. I can't tell you, I must have interviewed 100 traders in the past year or two, and they all wind up there. They all wind up saying, "Yeah, you got to cut your losers and let your winners run." Exact opposite of the cab drivers.
Annie Duke: So here's the interesting thing. So there's really wonderful work by Alex Imas and his colleagues looking at both retail investors and expert or institutional investors. And what's really interesting is you see different problems with the two groups but there's quitting problems, nonetheless. And when we look at retail investors, you see exactly the problem that you see with cab drivers.
So when they're in the gains, they quit too soon. When they're in the losses, they quit too late. And the way that you can see that is you can look at their take-gain and stop-loss orders. So obviously, stop-loss order just, "If it goes to X, I'm going to sell on the downside." And a take-gain is so it's the reverse. "I'm not going to sell until I get to this number, and then at that point, I'll actually sell."
Dan Ferris: Yeah.
Annie Duke: And what he sees is that retail investors are canceling both orders but for different reasons. So when you have a stop-loss order, let's say you buy a stock at 50 and your stop loss is 40, you'll cancel it in order to hold past 40. Why? Well, we can all-in to it because "I want to get my money back."
Dan Ferris: Oh, yeah. That's it.
Annie Duke: And, of course, we know that that's an error because that's the whole point of having a portfolio is that it shouldn't matter whether you get your money back in this particular stock. The question is, is this stock worth holding at 40. In other words, if I were fresh to the decision, would I choose to buy this stock at 40 versus other stocks? And if the answer is yes versus other things that I could put into my portfolio, I would choose to buy this at 40, then you should hold and it's rational to hold.
But if the answer is, "No, I would not buy this. I would choose to buy something else," then you should be selling and people won't because they want to get their money back. So they're not thinking about, "I'm just trying to maximize gains across the portfolio." It's, "I want to get my money back on this very particular stock." So they cancel the stop-loss order and blow through it.
Now on the take-gain side, what you find is that they also cancel the take-gain order but in order to sell the stock early. So let's say you buy a stock at 50. Your take-gain order is for 60. When you get to 56, you'll cancel the take-gain order in order to lock up your gains.
So this is a concept that Daniel Kahneman has talked about quite a bit which plays into something called sure loss aversion, which is similar to what we've been talking about, which is this idea that we really don't like the idea of turning a paper loss into a sure loss. And the only time that we will turn that into a sure loss is if we sell. So if we've got this $10 loss on paper, as long as we continue to hold the stock, we may not have to take that loss.
So we don't like that moment of turning it into a realized loss, but we do really seek out that moment of turning a gain on paper into a realized gain. So that's kind of what you see in retail investors. All right, so we have that problem.
But then he looks at institutional investors, expert investors, and he says, "Well, maybe when you're an expert, you get better." And the answer is kind of, but also not.
Dan Ferris: Yeah.
Annie Duke: And the reason is, OK, so expert investors do not fall prey to that particular problem that I just described, which is, "I'm going to hold my losers forever and I'm going to sell my winners immediately." That they actually don't do. The great investors that you've talked to, they have learned to figure that one out. What they do, however, is they don't actually sell from their portfolio rationally, just in a different way.
So he's looking at funds that are fully committed and the question is let's say that you now have a new thesis that you want to trade and you have to free up funds from your portfolio in order to trade this thesis. So the question is where are you freeing the funds up because that obviously involves selling something and how good are you at deciding what to sell in order to free the funds up for the new thesis.
Dan Ferris: Yeah.
Annie Duke: OK, so he looked at their buy side decisions and he said these people are pretty good. They're 120 to 140 bps better than the market at that particular decision, so they're much better than just indexing the market, as we would expect. That's why they're experts. But then when he looked at these decisions about where they're freeing the capital from, it turns out that they're about 70 bps worse than if they threw darts at their portfolio.
So that was the benchmark that he set was what if we just randomly freed the capital up from anywhere in the portfolio, how would that portfolio do in the long run compared to what they actually chose to do. So they're 70 bps worth. That's giving back a lot of alpha. That's kind of nuts, right?
Dan Ferris: Yeah.
Annie Duke: So then he wanted to look deeper and he said, well, OK, so what is the decision that they're making? Because they're not making the hold losers, sell winners problem. That's not the mistake they're making. Instead what's happening is that they're only looking at the extremes. So they're selecting what to sell from the extreme winners and the extreme losers in their portfolio instead of looking across the whole portfolio.
And what you can imagine is that something that's sitting in the middle may often be the correct thing to sell because it's kind of not doing anything. So maybe whatever your thesis was about why it would do well isn't correct. We can make up all sorts of stories about why that might be. But they don't look in the middle. They don't look at the moderate winners, the moderate losers, the ones that are breaking even. They're looking at the huge winners and the huge losers and they're only selecting from that subset in terms of deciding what to sell. And that's causing them to give back a tremendous amount of value.
So even once you're really good at it, you're still not good at it. I mean, in the sense of you can overcome one problem, but other problems end up appearing.
Dan Ferris: Very interesting, and also, it's sort of a different version of the same thing, isn't it? Because you're focusing on magnitude of winners and losers. That's the issue.
Annie Duke: Yeah.
Dan Ferris: It's like this availability thing where the most significant thing is whatever's in front of you. The thing in front of you is, "Wow, I've made 300%. Let's trim it." Or, "I've lost 50%, let's trim it." Rather than thinking about what's not there and what's not in the performance is what's going to happen in the next five years, and where the business might be, and all of this stuff that you don't see unless you have to step back and think about it, but thinking is hard for us humans, isn't it?
Annie Duke: Well, thinking is really hard for us humans and I think that one of the things that's really hard for us is to understand that our intuitions are very often very wrong. I think that you hear people brag about how good their gut is, their nose for value, that they have a great sixth sense or their tuition is really honed. And I just think it's hard for us to accept that our intuitions, many of our broad intuitions about things are wrong.
So I'll give you an example. One of the intuitions that we have is that when we discover new information after having started something, that when that information presents some negative signal that things turned out not in a way that we expected or in a way that's going our way, that we'll actually stop what we're doing. All right, so let's simply put if we're climbing a mountain and we start off on a beautiful, clear day with a good weather forecast and a freak snowstorm all of a sudden comes upon us, we have the intuition that we'll turn around.
And when you think about this in the investment world, that whenever we make an investment, we have some sort of thesis. I'll take bitcoin, for example. So a thesis that I heard in 2021 from a lot of people was that they were purchasing bitcoin because they felt that it would be hedge against inflation and general market chaos. All right, so look it, I'm not a crypto expert. I'm not smart enough to dispute your thesis, so go with your thesis. Fine.
Dan Ferris: However.
Annie Duke: However, when after the fact you discover that it is indeed negatively correlated with inflation, right, it goes down when inflation goes up like all monetary instruments do. And except for I guess T-bills are better when inflation is going up, but when the market is in chaos, that it is going down. So when you find those two things out that you ought to sell it because the thesis going in was that those two things were not going to be true. When you discover those things are true, you ought to sell it. And our intuition is that we will.
Obviously if we see that here's my reason for entering in. Here's how the world unfolded. Clearly I'm going to exit. And it turns out that that intuition, whether it's climbing a mountain and a snowstorm comes upon you or buying bitcoin because you think it's going to be a hedge against inflation and then you find out it's not, that the intuition that we're going to walk away from those things when we see that stuff is just wrong. And it's wrong across the board.
It's wrong when you take a job, and you can imagine all the things that could go wrong, and how much you hate the culture, and leadership is toxic, and all sorts of things, that somehow you're going to quit. It's just not true. When you start a project. We can think about this with public works projects, that when everything goes wrong and the budget has quintupled and the timeline is blown by a decade, that someone's going to come in and say, "Well, obviously we should stop doing this." But nobody ever does.
So it's true in relationships. It's true for strategic plans. Name anything that we do and it turns out that not only is it wrong that when we get that information after we've started it that things aren't going our way that we'll walk away, that's wrong, but we actually double down. We increase our commitment to the cause. We believe in it even more than we did before.
And I think that that's the thing that people have to really get a hold of is to understand that you can't trust your intuition on this, and so if you can't trust your intuition on it, then you have to start putting sort of layers of strategy and tactics on top of the decisions that you make to start things in order to help you to actually be able to exit properly. Because the worst thing that you can do for achieving your goals is stick with something that isn't worthwhile and that's what the stickiness of sort of the human condition does for us is that we end up holding a stock that we wouldn't otherwise buy. That can't possibly be good for our goals of what we're trying to achieve with our portfolio but we do it every single time.
Dan Ferris: Yeah, the stickiness of the human condition. I might steal that phrase from you. I like it.
Annie Duke: There you go. Go right ahead.
Dan Ferris: There's just an inherent laziness. We'd much rather justify the thing we're doing wrong than change it and do something different, right?
Annie Duke: Right.
Dan Ferris: Yeah, so this just makes me think about people who have made remarkably good decisions at various times. And you start the book out early in the book with one of the best stories about guys who decided not to try to get to the top of Mount Everest and they lived and some other folks who didn't make that decision died. I mean, as you wrote in your book, what better place to talk about quitting than a life-or-death situation like that.
And you also said something earlier, too, about all this. You said we didn't understand back in the '80s as well as we understand now the sort of irrationality of our decision making and it's true. There's a lot of stuff. Your work reminds me of this book, The Checklist Manifesto. We finally figured out checklists, so the airline industry, among others, and the medical industry, both really hugely benefitted from checklists, this simple thing that was right in front of us, which is basically a trading plan. "I'm going to enter here. I'm going to exit there."
Annie Duke: Yeah, I think that it's very similar to what I was saying about what our intuition is. So if you're a pilot, you have the intuition that obviously you're going to check your instruments. I mean, that you're going to walk through, you're going to do all of that stuff, because you're an expert-trained pilot. If you're a surgeon, which is another place that they really use checklists, you also have that intuition that you reference before something that Daniel Kahneman has talked about, which is being in it, which means being in the moment.
And I think that we think all sorts of things about how we're going to behave when we're in it and if you're a pilot or a surgeon, you have this idea that obviously you're going to tick all of those boxes. You're going to check your instruments, you're going to wash your hands, so on and so forth. And the insight of checklists is that you're not going to do that so you have to plan in advance, which is what a checklist is. It's planning in advance and having a structure for what are you walking through when you're in the moment. Because we have to recognize that we're going to forget stuff. No matter how much of an expert we are, there's going to be something we don't check.
And so if you can accept that about yourself, that it's not a failing that's particular to you, that this is the way that human beings generally are, and create a checklist, then you're going to perform better. And we know that having checklists for pilots really reduces incidents. Having checklists for surgeons, for example, really decreases mortality. And I think that we can all think about how can we then take that idea of that kind of advance planning and now apply it to these exit decisions.
So one of the simplest ways you can do that is, as we referred to before, stop losses. So that's a really, really simple way to think about how would I plan ahead. Now as I just mentioned from Alex's work, people do cancel stop losses, so we need to understand that whether it's a checklist or whether it's a trading plan, that we're not going to be perfect at following them. But we're going to be better than we would be if we didn't have them, and that's going to make all the difference to your long-run result.
So if you have a stop loss, yes, you're sometimes going to irrationally cancel one, sure. I had stop losses in poker when I played. Did I sometimes blow past the stop loss? Of course, but I did it a lot less than I otherwise would have if I didn't have that particular mechanism in place for when I was supposed to walk away from the table. So that's the simplest version.
But then I think that what we also need to lay on top of that is to understand, I mean, we can take the bitcoin example, that whenever you put a trade on, you have a thesis. And the thesis is implying certain things about what the world is going to look like in the future. It's kind of built into the thesis. So if we take the bitcoin example, we can say, "Look, my thesis is that if inflation starts to go up," we can be very specific about it. "If inflation starts to go up, the bitcoin will not go down. It will be a hedge against inflation." So it's going to work to hedge that particular type of problem in the future.
Now when we do that and we have that thesis, again, our intuition is that if the world goes against our thesis that we're going to react to it in a rational way, just as our intuition is that we're going to check all of our instruments and do everything we're supposed to when we're a pilot. So once we accept that that's not true, what we can do now is say, "If this is my thesis, then," and you can be very specific.
"If inflation goes up by X amount and bitcoin is negatively correlated to some degree with inflation going up over some period of time." So we can be very specific. So if it's correlated at 0.7 with inflation over the period of two months, or a month even, whatever you decide would be reasonable to have confidence that that correlation is actually existing, "Then I must sell."
So now what we're doing is saying it's not just that we're setting up a thesis. Maybe you don't even want to have a stop loss. Because if you're rational, you wouldn't have a stop loss because you would actually do it this way. But I'm going to set up kill criteria. In other words, I'm going to say that when there is some sort of signal in the future that I am going to kill this trade. So and you can also do the opposite. When I see some sort of signal in the future, I may increase my commitment to the trade.
So it could be risk on, risk off, but you're actually taking your thesis, breaking it into its component parts, saying what are the signals that I could see in the future that would tell me that my thesis is wrong. And once you see those things, then you ought to get off the trade. And that will actually really increase the chances that you're going to be more rational about those decisions about when do you put risk on, when do you take risk off.
Dan Ferris: OK, so I feel like we're both advocating for, and Thaler's point about being in it, basically advocating for having a plan, making the decision ahead of the time when you're not in it.
Annie Duke: Yeah.
Dan Ferris: So let's go to the other end of the spectrum about planning because you spent quite a bit of time in the book talking about how staying committed to a plan, I mean, that's not quitting. That's not what you're trying to teach people in the book. So there's obviously something different about what we've discussed up to this point and the point you have to make about not letting a plan prevent you from quitting when you ought to.
Annie Duke: Right, so we can think about two separate things. So what we're talking about right now is a little bit like planning for the quit. So in other words, you have some sort of plan of action, so you may be putting a trade on, for example, climbing a mountain, starting a project, developing a product, starting a job, whatever it might be. And you have some sort of goal or goals associated with that plan. So in other words, the reason you have the plan is because you're trying to achieve a goal. And basically what you would say is if the situation remains the same, I'm going to stick to the plan.
But then what you add into your plan is now an unless. So it's basically building a flexible plan. So but the issue is that if we have inflexible plans, we won't quit no matter what because it's very hard for us to do that because of some cost fallacy, because of this issue of being in the losses. If you don't achieve your goal, that means you failed, so on and so forth.
So when we set some sort of goal and a plan to achieve the goal, we then want to create flexibility into the plan by adding in these unlesses. In other words, the default is I stick to the plan, unless. Now this becomes part of the plan. Unless I see X, Y, and Z.
So let's think about a really simple example of that, if we can go back to the Everest story. So people really think about Everest as a symbol of grit. You obviously have to be very gritty to climb that mountain and there's lots of stories about the grittiness of people achieving that feat. So I felt like someone should tell a story about quitting on there and this has to do with flexible plans.
So this story is about Dr. Stuart Hutchison, John Taske, and Lou Kasischke. They were part of a climb expedition that had eight clients, three climbing Sherpas, and an expedition leader. And these things were very popular in the '90s even to today, but they got really popular in the '90s to have these treks, these expeditions that would bring more amateur climbers up to the summit of Everest.
So on summit day, you leave for the summit at noon and then you're supposed to go up to the summit along a particular path and then descend back down back to Camp 4. So that would be your plan and you have a climbing plan about what route you're going to take, and when you're going to leave, and so on and so forth. But there's flexibility built into that plan and the flexibility is basically called the turnaround time. So the turnaround time for summit day is 1 p.m. And turnaround times are meant to protect you from the dangers of the descent.
Mountain climbing, eight times more people die on the way down a mountain than on the way up, because they're tired, and they don't have as much oxygen, and less adrenaline, and sometimes it's dark. And so this is what they're trying to protect you from on Everest, in particular, the darkness, because there is a part of the mountain that's very dangerous called the Southeast Ridge. It's very, very narrow. People can slip and fall on it pretty easily and you just don't want to either go up it in darkness or descend down it in darkness.
And so 1 p.m. is basically no matter where you are on the mountain. I don't care if you made it to the summit or not, at 1 p.m., you must turn around. So this is now building in flexibility to the plan. We're going to go up unless it's 1 p.m., and then we're going to abandon that and shift to a new plan which is we're going to descend right away.
So the climbers are going up. As I said, it was very popular. There were over 30 people trying to summit that day. It was creating really slow going for the climbers, and their expedition leader came up behind them, and Hutchison just said to the expedition leader, "Hey, can you just tell me how long is it going to be to the summit from here?"
Because they could sense that they weren't going very fast. And the expedition leader sort of looks at where they are and compares it to the summit and says, "I think it's going to be about three hours." The expedition leader then scurries ahead in order to try and make up time.
Hutchison holds Taske and Kasischke back and says, "Hey, listen. I think we have a problem. He just said it's going to be three hours to the summit but it's already almost 11:30, and so by my calculation, we're not going to get to the summit until 2:30. Even if we were to make up a bunch of time, we're not going to get there until two. That's already an hour past the turnaround time kind of best-case scenario, and so there's no reason to keep going up now because really in reality, we've butted up against the turnaround time.
So it took a tiny bit of convincing, but they did. They turned around, and they went back to camp, and they lived. Now it's probably obviously to you, Dan, why you've never heard of these people or why you've never heard of this story because where is the excitement? Where is the heroism? All right, well, first of all, I'd like to say that I would consider that pretty heroic. If 30 people were heading up the summit ahead of me, I had paid $75,000 to get there and trained for nine months, and I knew I was turning around and they might make the summit, I want you to imagine what that psychological pain feels like.
And yet, they still were like, "No, we had this flexibility built into the plan and we're up against the turnaround time so we're going to turn around," and so they did. So they lived. I would consider that heroic, but most people wouldn't consider that an act of heroism, so that's why you haven't heard of them.
Except you have heard of them because they are well-featured in the book, Into Thin Air, by Jon Krakauer, which chronicles the 1996 year climbing up Everest, which was a disaster. And a lot of people died, including an exhibition leader named Rob Hall. And Rob Hall went up to the top of the mountain. He got there at 2 p.m. Notice that's an hour past the turnaround time. So it's like people who blow through stop losses. He's blown through the turnaround time. He waited up there for two hours for his client, Doug Hansen, so now that's three hours past the turnaround time. Doug Hansen got to the summit, immediately collapsed, and died, and Rob Hall died in place because he didn't have the energy to get back down the mountain.
Now lest you think that it was heroic for him to wait for Doug Hansen, it's single file up to the summit, so he could have turned back around at 2 p.m., and gone and gotten Dough Hansen on the way down, and just brought him back down. Now I'm not trying to cast aspersions on Rob Hall here. I'm just saying he's the protagonist and the hero of the story that we all remember. And these three guys who were great decision-makers, and Krakauer even says they were great decision-makers, get no love in our memories at all, despite getting a lot of love from Krakauer, himself, in the book. And instead, we all remember sort of the heroism and the tragic heroism of Rob Hall.
And this is the kicker. Rob Hall was their expedition leader. So when Hutchison asked their expedition leader how long is it going to be to the summit and the answer was three hours, it was Rob Hall who was answering that question for him. And Rob Hall who scurried ahead despite the fact that they already knew that they were going to be past the turnaround time and they turned around.
So I think that that's a really good example of this idea of we need to start thinking about plans differently. Plans aren't set in stone. And the problem is that once we have a plan, and we're heading toward a goal like the summit of Everest, we're going to treat it like it's set in stone. Because the problem is that going back to this idea of being in the losses that Thaler talks about or not wanting to turn a loss on paper into a sure loss, we don't mark ourselves from the progress along the way. We're not thinking when we're 300 feet from the summit of Everest that we gained 29,000 feet. We just think about ourselves as in the loss of 300 feet. We're just short of the goal.
And the issue there is that then we're going to keep going up even though all the indications are that we ought not to because we don't want to turn that loss on paper, "I didn't quite make it to the summit," into a realized loss. And as long as we keep heading up, even if it's not a good decision to do so, maybe we can actually be like the cab drivers and hit our earning goal for the day. And that's why I think it's so amazing that these three guys turned around because there was flexibility built into the plan and they actually managed to turn around even though they were in the losses, particularly in a case where other people were continuing up.
Dan Ferris: What's incredible is that all this work has been done in the last many years about this and if we all just would have learned sooner, cut your losses and let your winners run. Do more of what's worthwhile and less of what's not. It's so utterly simple. It's biblical, practically. It should be on a stone tablet somewhere. And we, in our human way, need all these studies and examples over, and over, and over, again. It's funny. We really learn only with some great effort, I think.
Annie Duke: Well, I think with some great effort and lots of time. So I mean, the fact is that the cab drivers who had been driving for a longer time are less bad at that decision. So they do get closer to optimal behavior having wrecked it over, and over, and over, and over, and over, again. So I think that that is helpful.
I think that the problem is this idea of cut your losses, let your winners run, and let's amend that to cut your trades that are not positive expected value and let the ones that are positive expected value run. I mean, that's what that's shorthand for, right? It's such simple advice, and it seems so obvious, and it feels so much like we're going to follow it. And what we have to realize is that but when you're in it, when you actually have that loss on paper, you're not going to follow it, and the temptation to sell your winners in order to take the profit is going to be really strong even in situations where you ought to let that ride. And then separate from that, we also have to recognize a cognitive problem of what does a winner and loser mean.
So we need to realize that cognitively, the way that our mental accounting works, it's not just looking at the ledger sheet. It's not just saying, "Oh, this stock is 50 and now it's trading at 60, so therefore, obviously I'm winning to it." It's what are you benchmarking that to?
So a weird thing about human cognition is let's say you buy a stock at 50 and it gets up to 75. And so now it's trading at 75. You don't sell it and it goes down to 60. That stock is no longer in the gains, not cognitively. It is on your ledger sheet. You've made $10 on one share, but in your mental accounting, you're now down 15. And so all the things that apply to what happens when you're actually in the losses are now going to apply here even though you've made money on the stock because you're going to try to get back to 75.
Dan Ferris: Right. I can't say it any better than that so I won't try. Yeah, we humans. We're a funny lot.
Annie Duke: We are. Well, look, there's lots of ways in which we reason better than AI, so we've got that going for us.
Dan Ferris: All right, yeah. We're not going to get taken over by machines anytime soon.
Annie Duke: Well, I don't know about that part. I can't guarantee that part, but we can answer some really simple questions that even the largest language models can't, so we've got that going for us.
Dan Ferris: Well, I think it's time for my final question which is you've answered this twice before. It's the same for every guest no matter what the topic, whether it's financial or anything else. And it is simply if you could leave our listeners with just one thought about all this today, what might that one thought be?
Annie Duke: I think that we have the intuition that when we quit things that we're going to stop our progress toward our goal. It's going to slow us down. I think it's part of the reason why we think it's a failure. But I think that what people need to realize is that quitting things actually speeds you up when you're quitting at the right time. Because if you stick to something that isn't worthwhile, that's not actually helping you achieve your goal. That's actually hurting you. It's slowing you down. It's making it so that in comparison to other things that you might be doing, you're not achieving what you want to achieve quickly enough.
And if you're able to quit in situations like that, you now get to move to an opportunity that is worthwhile. It is actually going to help you to achieve whatever those goals are. And so I really want people to understand that quitting doesn't slow you down, not when it's done well. It actually speeds you up and that's the secret. People think that quitters never win, winners never quit. That's not true. Winners actually quit a lot and it's in fact how they win.
To your point, when you look at the best investors, they are so good at getting off the positions that aren't worthwhile so that they can then reinvest that capital into things that are worthwhile. That's what actually is going to move the ball forward for you. So that's the thought I want to leave people with is that when you're a good quitter, you get to where you want to go faster.
Dan Ferris: Awesome. I lied. I actually do have one more question.
Annie Duke: Oh, OK.
Dan Ferris: Well, maybe it's not a question. I totally forgot that there's a fairly popular book called Grit. Your book is called Quit. You must have known that when you named the book Quit.
Annie Duke: I did and let me just say I think Grit is a great book. I think that Angela Duckworth's work is brilliant and fantastic. I think that the issue is that for me is that her work gets misinterpreted in a way where I felt like someone needed to have the other side of the conversation. So when you actually read her work, what she's saying is that a quality of people who become successful is that even when things are really hard, that they're able to power through it and stick to the things to see what the goal at the end of the rainbow is.
Dan Ferris: Yes.
Annie Duke: Meaning they'll stick to things that are worthwhile no matter whether they're hard or not.
Dan Ferris: It takes grit to quit, right?
Annie Duke: Well, that's the thing. And I think that when people read her work, they read it as just grit, period, that grit builds character.
Dan Ferris: Mindless grit.
Annie Duke: That's the thing you should do and she would never say that. She says you want to explore a whole bunch of stuff. In exploring that stuff, you're going to quit all the stuff that isn't working so you can stick to the stuff that is even if it's hard. So I was just frustrated by the fact that people had taken from that as grit builds character and we should just stick to things no matter what. And I said someone needs to write the companion book, the other side of the equation that says, "Look, we have a problem with quitting stuff."
As Richard Thaler said, we won't really quit things until it's no longer a choice. You have to be in the middle of the blizzard before you'll actually turn around. It's not just the clouds on the horizon. It's, "No, but the summit's there. Maybe I can make it before the clouds come in." And until you're in the middle of the blizzard, you won't turn around. And the problem is then it's not even a decision anymore. Obviously, you can't keep going up at that point. You have to turn around and by then it's often too late, as we know tragically from a lot of these stories.
So I just wanted people to understand you've got to get to those decisions earlier at a time when it isn't 100% sure that you've got to quit. Because by the time it's 100% sure that you have to quit, you've already lost all your money. You want to be making that decision before your position goes to zero. And the signs are there that that's the case.
And so that's all I was trying to do. It's grit and quit go together and you need to understand what the case for grit is, but you also need to just as much, in some ways maybe more, understand what the case for quit is. And the reason why I say maybe even more is because our bias is toward sticking. That is where the bias is. So if we have a bias toward sticking, somebody ought to make the case for walking away from things and cutting your losses.
Dan Ferris: All right, so thanks for being here. I really enjoyed this. I feel like we could talk about your book for another hour or two.
Annie Duke: Oh, well, thank you.
Dan Ferris: I mean, I have all three of your books and I think it's your best one. Really good.
Annie Duke: Thank you very much.
Dan Ferris: You bet. I hope it sells even more than Grit.
Annie Duke: I don't think that will happen. Grit's going to outsell me, trust me. That is a fabulous book and it's a fabulous book that also affirms something that we already believe to be true, that we need to stick to things more so.
Dan Ferris: Exactly.
Annie Duke: I'm competing against that with a more counterintuitive idea. I don't think I'm going to outcompete Angela.
Dan Ferris: All right. Annie, thanks, again, for being here and maybe we won't even wait until you write another book to have you back.
Annie Duke: I'm actually I've got another book already a little bit in the works, so maybe a couple of years from now that will come out.
Dan Ferris: Great, OK. Excellent. Well, I guess we'll see you than, if not sooner.
Annie Duke: OK, awesome. Thank you.
Dan Ferris: All right, thanks.
Many mainstream analysts are predicting that stocks will recover soon, but I say we'll instead witness a cash frenzy unlike we've experienced in 21 years before stocks recover. And I'm urging Americans not to buy a single stock until they see it. I predicted the Lehman Brothers crash in 2008 and I called the top of the Nasdaq in 2021. But this, this is the No. 1 most important thing to pay attention to for 2023.
And I'm not talking about another market crash, or politics, or inflation, or any of these other things. As all this unfolds, the financial consequences of what I'm talking about could last for several decades if you don't understand what's happening. There will be winners and losers, and now is the time to decide which one you'll be.
This is why I strongly encourage you to read about my warning totally free today. It's all spelled out in a free report we put together. Get the facts yourself. Go to www.StockDeadZone.com to get your free copy of this report. You can learn how to get my four steps to prepare for what's coming. Again, that's www. StockDeadZone for a free copy of this new report.
What a pleasure to talk with Annie Duke, again. She's so smart and her ideas are so simple and powerful, and this one is, too. And by the way, we've had her on to discuss her previous two books and this really is her best book. She's becoming a better writer, and the stories are better, and the reading. Good writing makes easy reading, and it's just a breezy read that's loaded with insight, and information, and fantastic stories that teach great lessons. And great lessons for investors, right, as you heard us discussing during the interview. So I highly recommend it. It's called Quit: The Power of Knowing When to Walk Away, by Annie Duke. Check it out.
All right, that was excellent. That's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy.
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