Base rates and countering ‘tilt’ – with Annie Duke

In the second of three pieces based on our podcast conversation with US poker player and author Annie Duke, we focus on the importance of mental tools such as base rates and how to counter being ‘on tilt’


Andrew Evans

Andrew Evans

Fund Manager, Equity Value

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

This time last year, here on The Value Perspective, we enjoyed an extended chat with Annie Duke, the professional poker player turned business consultant, whose 2018 book Thinking in Bets we have referenced in articles such as How to have no regrets as an investor and Lessons from the controversial 2015 Super Bowl. Her next book, How to Decide: Simple Tools for Making Better Choices, is due out this September.

More recently, we have been running a series of podcasts looking at how people from walks of life beyond investment approach decision-making in uncertain and complex environments. While our conversation with Duke was not originally intended to feature among these podcasts, we hope you will agree its discussion of probabilistic thinking, base rates and a focus on outcomes makes it an excellent addition to the series.

Having talked through the benefits of thinking in terms of probabilities – and with outcomes and timeframes to come – we move on to the sort of mental tools Duke believes can help with decision-making. Might, for example, focusing on ‘base rates’ – that is, giving greater weight to more general probabilities than to newer or more immediate information, as we aim to do here on The Value Perspective – be a helpful approach?

Very much so, Duke agrees, before taking this a step further. Since there will almost always be some element of uniqueness to any choice they need to make, she argues, investors ought to consider not one single base rate but as many as they can. “Really try to think out of the box,” she says. “Ask yourself, what are other reference classes you could look at? What other things have similarities to this problem?”

Overvaluing special knowledge

Briefly taking a step back, Duke notes the point of base rates is to help form a more precise idea of a starting point for understanding how often something will happen in general – but there will always be variants on that and hence uncertainty. Investors can then be tempted to fill in the gaps with their own knowledge of a situation and the problem here, she warns, is people “often overvalue knowledge that is special to us”.

Considering base rates can therefore act as a discipline to ensure we are building in the ‘outside view’, says Duke – in effect, preventing people becoming “locked into thinking they have more precision than they actually do”. Furthermore, she adds, “looking for other types of reference classes might inform and better refine the base rate you are trying to discover”.

Another way to bring the outside view into decision-making is, logically enough, to incorporate the views of others – indeed, Duke sees it as vital that systems are built into any decision process to allow different people to say what they think. “What you want to ensure is that your process is allowing for cognitive dispersion and then marry the outside view with the inside view,” she continues.

“You don’t necessarily want to go on base rates alone because you may well have some knowledge that is particular to the situation and allows you to understand things will be a little bit different to what the base rate tells you. So the base rate disciplines the way you are applying your own personal knowledge to the situation – and this intersection of the inside view and the outside view is where accuracy lives.”

‘On tilt’

While we are on the subject of seeking to ensure that behavioural biases – such as setting too much store by our personal knowledge – do not intrude on the decision-making process, it seems appropriate to focus on one that actually has its origins in poker. ‘Tilt’ or being ‘on tilt’ describes a mental state of confusion or frustration that leads a player to adopt a less than optimal strategy that is often, though not always, overly aggressive.

If they are honest, that is surely a feeling all investors will recognise so does Duke have any advice to help avoid succumbing to tilt when enduring tough periods of performance? To her mind, there are two important angles here – first, what can be done as investor and, second, what a group or enterprise can do to make sure people are less likely to make decisions on tilt.

Before addressing them, however, Duke stresses tilt is by no means confined to times of underperformance. “Tilt can also happen when you are in a period of really good performance – it’s called ‘winners tilt’, actually,” she explains. “So let’s instead broadly define ‘tilt’ as whenever your emotions are causing your risk attitudes to be distorted.

“Generally, the way upside tilt happens is that when you are in the middle of a good run, very often the reaction is to try to clamp down on volatility. So, for example, if you have a big winning position in a trade, it is much more likely you will exit the trade in order to lock in the win – even though, if I were to ask you, rationally, if you would put that position back on tomorrow, you would.”

An upward march

Still, Duke concedes, most people think of tilt in terms of being on a bad run – at which point they will often seek to get out of their rut by chasing extra volatility or risk. “What that means is that, if you have a losing position, you are very unlikely to exit it,” she says. “Even if, were it a brand new trade tomorrow, you would not put that position on but you are desperately trying to get back to zero.”

“What is interesting about all that, of course, is that if they were completely rational, investors would view what they are doing as one long game – in other words, what was happening in the moment or on any given day or week, would not matter very much because it would just be one of the normal upticks and downticks that are, hopefully, all part of some sort of upward march.”

That, alas, is not how the human brain is wired to work. “Our brains are incredibly path-dependent so they can get really caught up in what has happened recently,” says Duke. “So much so that, let’s say I have a position that has doubled but now I lose half of that back, then – even though the position overall is still a winning one – I will actually be acting like I’m on tilt on the losing side.

“That’s incredibly irrational, right? The position is actually winning but I’m not viewing myself as a winner in that moment because I have come significantly off the peak of where it was. Likewise, if I have had a position that was down a lot but has now come back up, the way my brain is going to look at it is as if I am winning. That is how path-dependent we are.”

Understand the signals

If that is the scale of the ‘tilt’ problem then, what is Duke’s solution? “On an individual level, I would want to understand the cues that tell me I am probably in this ‘tilty’ state,” she replies, suggesting these could be physiological (sweaty palms, say), verbal (‘I can’t believe this is happening’) or behavioural – for example, a pattern of chasing more volatility after a big loss or closing out positions after a big win.

None of these necessarily means tilt is happening, says Duke, only that it might be – and it is the responsibility of an individual or group to identify their own signals. “Write them down,” she advises. “Make a list and hold yourself and the people around you accountable to it so that when people recognise their signals, there is a trigger in place that says, hey, take a breath – maybe you are on tilt.

“Once you do that, you can put processes in place for yourself or the group to reduce the chances tilt is going to influence decision-making – and most of those have to do with just getting out of your emotional brain. It is basically allowing you to ask yourself, if I was looking back at this situation a year from now, would I think I was behaving rationally? Would I think I was making my best decision?”

This “time travelling”, as Duke calls it, is a way of getting people “out of the moment”. “This is where that path-dependency is occurring,” she continues. “Pushing yourself into the future can help you recruit the more rational part of your brain, which naturally causes the limbic system –  the more emotional part of your brain – to start to calm down.”


Andrew Evans

Andrew Evans

Fund Manager, Equity Value

I joined Schroders in 2015 as a member of the Value Investment team. Prior to joining Schroders I was responsible for the UK research process at Threadneedle. I began my investment career in 2001 at Dresdner Kleinwort as a Pan-European transport analyst. 

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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