Learn to be comfortable in an uncertain world – with Maria Konnikova

No matter how much we try to mitigate risk, says writer, psychologist and our latest podcast guest, Maria Konnikova, we do not know what is going to happen in the next minute, let alone tomorrow or next year

02/03/2021

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, Equity Value

Fortuna, the Roman goddess of luck, was often depicted wearing a blindfold – the implication being that she was impartial or, more bluntly, not that bothered upon just whom she bestowed good or bad fortune. Progressing from poker ingenue to international champion with more than $300,000 in tournament earnings, writer and psychologist Maria Konnikova became well acquainted with a close relative of Fortuna – Variance.

Konnikova’s route to the upper reaches of the world of poker is highly unusual in that, as she describes in her latest book, The Biggest Bluff, she spent months studying textbooks and absorbing advice from her mentor, Poker Hall of Famer Erik Seidel, before she played a single hand of cards. When she joined us as a guest on The Value Perspective podcast, we asked her how she made her peace with the ups and downs of variance.

“The truth about life in general – not just poker – is it is uncertain,” she begins. “No matter how much you try to mitigate your own risk, you simply do not know what is going to happen in the next minute, let alone tomorrow or next year. In other words, life is full of variance, which is basically the distribution of probabilities of all the things that could happen and the ‘noise’ that surrounds that.

Life happens

“If you are someone who does not like nuance, as we were discussing earlier, and who does not like to live in the world of the uncertain, then variance can be very scary and you will want to try and reduce it. You want things to be predictable and nice but, even if you think you have taken every possible precaution, things happen – life happens – and variance does not care about you or your precautions.

“Sure, if you do not skydive, you are probably going to have a lower risk of death than someone who skydives every single day so, yes, you can address things like that – however, you might have never smoked a day in your life and you could still end up with lung cancer. Not doing something does not mean you totally eliminate variance – you can reduce it by certain behaviours, but you cannot eliminate it.”

One of the big lessons poker taught Konnikova was that you never know which way variance will go. “The best thing you can do therefore is just to keep making good decisions,” she says. “You put yourself on the right side of variance in terms of your decision-making process but you also understand that the outcome is going to be what it is going to be – you cannot completely control it. That is variance – that is chance.”

On the right side of variance

One of the big lessons poker taught Konnikova was that you never know which way variance will go. “The best thing you can do therefore is just to keep making good decisions,” she says. “You put yourself on the right side of variance in terms of your decision-making process but you also understand that the outcome is going to be what it is going to be – you cannot completely control it. That is variance – that is chance.”

Value investors well understand the importance of doing all we can to put ourselves on the right side of variance – indeed, as we noted in Horse Sense, value is at heart a set of rules to help us do just that. For example, value investors aim to buy companies that offer a ‘margin of safety’ – that is to say, the price we pay for any investment should be cheap enough to allow for a range of unexpected adverse outcomes.

Or, as we noted in Value is the answer, when good news is already priced into a stock, bad news can have a disproportionately negative effect but, with a business bought on a cheap valuation, a little good news can go a long way. The strategy is buoyed by almost 150 years of history that shows searching out good but unloved stocks in the cheapest part of the market will, on average and over the longer term, deliver strong returns.

 

Win or lose

If you make a poker decision based on the probability you are a 75% favourite to win a hand, says Konnikova, then you have made the right choice and, faced with the same situation, you should make that same choice again. Yet this must go hand-in-hand with the knowledge you will lose 25% of the time. “That is true in life, just as it is in poker,” she adds. “It happens all the time but you never know when it is going to happen.

“People may think, I have been unlucky a few times so I am ‘due’ some luck – or if they have been lucky, they might think they are on a run – but probabilities do not care. Variance is just out there – it has no memory and no idea who you are – and even personifying it in the way I am doing now makes it seem more alive than it actually is. Variance is just all the outcomes out there in the world – it is just what happens.

“So, if you start understanding that – and it is one of the biggest lessons I have taken from poker – you realise it does you no good to focus on variance itself. It is outside of your control and, when something negative happens, you may start feeling sorry for yourself or berating yourself. Or, when something positive happens, you might get very happy and emotional. Either way, you might not then be thinking clearly.”

Focus on actions

Instead, Konnikova argues, it is important to focus on what happened before a particular outcome. “Focus on the things you actually can control – your actions, your reactions, how you deal with the event,” she says. “Then when you are on the wrong side of variance – when bad things are happening – you can push through that because you realise, oh, you know what, that is just variance.

“And you will know to focus on continuing to think well, to react well, to do well. That allows you to get through those dark patches in a much more emotionally healthy way, to be more resilient, to be in a position where you can still take the risks you need to take, rather than becoming so scared that you are paralysed and inactive. It is a really powerful lesson.”

Uncertainty can be beautiful, Konnikova points out, adding: “Do you really want to live in a world where you know exactly what will happen every minute of every day, where everything is modelled and predetermined? I certainly wouldn’t. A lot of the beauty of life lies in uncertainty and surprise and the fact we do not know. Poker has definitely made me much more comfortable in the world of uncertainty than I ever was before.”

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Fund Manager, 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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