Afford Anything - The Power of Knowing When To Walk Away

Episode Date: January 25, 2023

#424: We’re taught to stay in the game. Persist. Be gritty. Try, try again. But sometimes, the best decision is to walk away. Move on. How do you know when that’s right? When should you double-down … and when should you fold? Today’s guest, Annie Duke, won more than $4 million as a professional poker champion. She wrote the bestselling book Thinking in Bets and co-founded a nonprofit that teaches kids decision-making skills. Her most recent book, “Quit: The Power of Knowing When To Walk Away,” teaches the behavioral science, mental models and recognition of cognitive biases needed to successfully quit. It highlights real-world examples of startup founders, athletes, mountaineers, and entertainers who either quit – or didn’t – and explains how to make a wise, grounded choice. She joins us on today’s episode to describe the forces that hold us back from quitting – and how to recognize when quitting could lead to a better life. For more information, visit the show notes at https://affordanything.com/episode424 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, to any limited resource that you need to manage. And that opens up two questions. First, what matters most? And second, how do you make decisions accordingly?

Answering those two questions is a lifetime practice, and that's what this podcast is here to explore. My name is Paula Pan. I'm the host of the Afford Anything podcast. And today, former professional poker player Annie Duke joins us to discuss how to sharpen the decision-making skill of when to quit. Knowing when to walk away is crucial to success in any endeavor, whether it's career, investment, relationships, and yet we live in a society in which we are fed ideas like

winners never quit and quitters never win. Many of us have internalized this message. And as a result, we stay in bad jobs for too long. We hold on to poorly performing investments because we, quote, unquote, are just waiting for him to come back. We wallow in toxic relationships. Many of us tend to stick to the wrong course of action for far too long. There are even cognitive biases such as status quo bias that fuel this tendency. And so in our upcoming interview, Annie Duke, who is internationally acclaimed as a decision, decision-making expert, draws on behavioral science to explain strategies for identifying

when it's best to stick it out and when it's better to walk away. As I mentioned, Annie Duke is a former professional poker player. She won more than $4 million in tournament poker before retiring from the game in 2012. She is the co-founder of the Alliance for Decision Education, a nonprofit whose mission is to teach students how to make better decisions, more sound decisions. That doesn't mean telling them what choice to make. That means teaching them the skill of decision making. She is also a consultant in the decision-making space.

She's the best-selling author of Thinking and Betts and How to Decide, and her newest book is called Quit. Here she is Annie Duke. Hi, Annie. Hi, how are you? I'm great. How are you doing? I'm good. Annie, you have written about how quitting is a decision-making skill that is worth developing.

Now, this is not something that's often talked about. There's a lot of social pressure to never quit. Quitting has a negative connotation to it. Before we get into the skill of deciding how to quit, can you first describe, why does this matter? Why should people have, for lack of a better term, a goal or a skill set of knowing when to quit and when not to. Developing the skill to quit when the time is right is going to get you to where you want to go faster. And there's a really simple way to think about it.

If you're in a dead end job and you don't quit, you're stopping yourself from having the opportunity to switch to something that would be a lot better. If you're in a toxic relationship and you don't quit, you're blocking the opportunity for you to be able to go find a happier relationship. or maybe even alone would be happier. In that most extreme sense, if you're climbing up Everest and a snowstorm comes in and you decide not to quit, you're very likely to die. Right. And we know that that's actually what happens to people in those situations.

The fact is that we can all sort of from the outside looking in, you know, see when someone should have quit when they didn't. When they went too far, when they kept going too long, you know, when the person collapses in the middle of a marathon. in brutal heat because they refuse to give up. And they actually have permanent damage or sometimes even death. In theory, we kind of understand, look, when things are going really poorly, obviously we should walk away. And in theory, we get that. But I think that in practice, we just aren't very good at it.

What are some of the most common reasons why people stay too long? Well, I think in the broadest sense, quitting just having to be. a really bad reputation. So this is a 10,000 foot view. Think about all the aphorisms, right? Like quitters never win, winners never quit. We just feel like when it's in the battle between like grit and quit and quit and quit is a virtue and quit as a vice, right? Quit is doing something bad. It means you're weak willed or you're capricious that you couldn't take the heat. We think about it as like a character flaw to walk away from things. Whereas the, people who gridded out are heroes. And in fact, heroism is a synonym for grit. That's sort of from a 10,000 foot

view. And one of the things that we need to realize is whether to stick or whether to quit is actually the exact same decision. We think about them as opposing forces, one of virtue, one of vice. But actually at any moment that you decide to stick to something, you're not quitting it. And anytime you decide to quit, you're not sticking to it. So it's actually like the identical decision. It's just like we don't think about it that way. So I would say like that's the first really big reason that it's really hard for us to walk away is that we think about quitters as failures. The second thing is that there's this whole issue around what I would say is called fear of waste. Have you ever had this happen to you that like you're thinking about maybe like should I quit

my job or, you know, should I break up with the person that I'm dating or should I shut the project down or whatever it might be. Have you ever had it go through your head like, but then I'll have wasted my time. Right. The sunk cost fallacy. Yeah. So this is just, I think, a really common way that we think about waste is as this backward looking problem. We sort of look backward when we think about waste and we're worried that when we walk away, what that means is that we wasted all the time that we put into the project. We wasted all the time we put into the relationship. We wasted all the time we put into training for whatever the career path we're on is climbing a mountain, running a marathon, whatever. It's like we don't want those things

to go to waste. But this, as you just said, is really what the sunk cost fallacy is or the sunk cost effect, which was first identified as like a broad phenomenon by Richard Thaler, who's a Nobel laureate back in 1980. What you've already put into something should actually not affect the decision about whether you ought to continue. You can think about it if you were like perfectly rational, you would stick to things that you would only stick to things that you would start today. Okay. So if you're in a relationship that's toxic and you're sticking to it because you'll feel like I put so

much time and effort into this relationship and I don't want to walk away from it because I'll feel like I have wasted my time. What you ought to ask yourself is, would I start this relationship today? When you're holding onto a stock that's losing money and you don't want to sell it because you want to get your money back. What you should actually be asking is, would I buy this stock today? Because if you wouldn't buy the stock today, then you shouldn't be holding on to it because holding is the same as buying. You're making a decision not to let it go. And now what's happening is that if you wouldn't buy it today, then every dollar that you continue to keep in that stock is a dollar that's

going to waste in the sense that you can't go put it to something else. Every minute that you spend in a relationship that you wouldn't start today because you're worried that you'll have wasted all your time and you'll have failed to make it work. Like that's such a big thing in our heads. That is a minute that you can't go spend to go find a happier situation. And that's true, whether it's a job or a race you're running or a mountain you're climbing or a company that you've started or a project that you're pursuing. Whatever it is, waste is a forward-looking problem, not a backward looking problem. You don't want to waste time going forward.

You don't want to waste effort going forward. You don't want to raise money going forward. But we think about it as a backward looking problem. If I walk away now, I'll have wasted my time. And I think that's really like one of the biggest things that stop us from quitting among a variety of other biases. And then the third like really big thing that I would point to is I think that what ifs are really hard for us as human. And if you think about the decision to stick to something or quit, the only way for you to know how it would have turned out if you kept going is to keep going, right? Like if you're trying to summit Everest and you turn around before the top, you'll never know, could I have made it? And I think that's really hard for us. If you walk away from a relationship, you'll never know could I have made it work. If you walk away from a job, you don't know. Maybe I could have made it work. If you walk away from a job, you don't know. Maybe I could have made it work. And I could. have turned it around. If you stick with the project, you don't know. Maybe I could have successfully

completed it. And I think that those what ifs are really hard for us. So what that does is it pushes us into this sort of groove of we want to stick to it because we don't want to walk away until we know there's no other choice. Because when there's no other choice, we no longer have to wonder what if. right if you're already heading toward the summit and there's a snowstorm coming in and you can't see anything and you're at the edge of death when you turn around you're not for yourself going to say but what if i continued because you already know because you're right at the edge of death you're not going to worry about what other people are going to think about you right they're not going to criticize you for not sticking to it for not gritting it out because they're also going

to know, well, you obviously had no choice, right? You had to stick to it. And I think that's true, whether it's climbing Everest or a job or a relationship or even a stock that you're holding. Someone told me actually recently that they had bought Bitcoin at some price. I can't really say 50,000 or something. And then it had gone down to 30 and they were selling it and they told a friend of theirs, well, I'm going to sell it. And they said, you can't do that because now you can't get your money back, right? Like all this costs, but if you held it, maybe it would work out. And I think all of that is just like super duper hard for us as humans to deal with those what if. So I think the only time that we're really sure to walk away is when it really isn't a choice

anymore. Like you're out of money. You're out of time. There's a snowstorm. You're practically on the edge of death. Then we'll walk away because then we're sure of the decision and we don't have to worry about the what ifs anymore. To the idea of if you wouldn't start it today, then don't hold it.

how does that apply in cases where there are high transaction costs associated with getting out of it? So you would incur new costs, whether that's literal money or time costs or any limited resource. Basically, when you make a decision, you're calculating what's called expected value. Expected value is essentially just think about it if I invest a dollar, but that could also be a minute. You know, it could be a unit of effort, whatever. but let's talk about it in terms of a dollar because it's a little bit easier. If I invest a dollar today, will I be making money going forward? So that's the question you have to ask yourself.

So let's take a really simple example of how you might calculate expected value. If you have a coin and the coin lands heads 50% of the time entails 50% of the time, so you know it's a fair coin. And we say, let's bet on this coin. I'm going to bet a dollar and you get to call the coin. And if you call it correctly, you'll get $2. If you call it incorrectly, you're going to give me a dollar. So what that means is that 50% of the time you're going to call the coin correctly,

you'll get $2.50% of the time, you're going to call it incorrectly and you're going to have to give me a dollar. Between the two and one, that's minus a dollar. And then it's just 50% of the time that that's going to happen. So you would win 50 cents for every dollar. So the way you can think about it is it's just multiplying 50% by two. which is the winning side, which is a dollar, and then 50% by one, which is the losing side, which is 50 cents.

And then you subtract the winning side from the losing side and you get plus 50 cents. Notice that this is long run. Right. Because obviously on any given flip, you're either going to win $2 or lose a dollar. But in the long run, you'll win $0.50 for every dollar that you bet. So that's a pretty simple way to think about it. Obviously, if I flipped the equation and you had to pay me $2, then it would be a losing proposition for you'd be losing 50 cents.

Okay, so that's the simplest way to think about it. So it's basically saying what are my costs versus what are my gains in the long run. Now, in the simplest sense, when we say what I started today, we don't have to take into account any costs, right? Because there's no transaction costs in the simplest sense. But you're pointing out that sometimes there are transaction costs. So that just goes into the expected value situation. So we can take in our example again, let's say that there are transaction costs where even though you only have to pay me a dollar, because of past things that you've done, it's going to cost you 10 cents for every dollar in transaction costs to win the $2. Okay. So now that just changes the equation. It means that instead of losing a dollar, you're losing a dollar in $10 because there's transaction costs. 50% of that is $0.55. But you're still going to get that $2. win 50% of the time. So that's a dollar. And now a dollar minus 55 is 45 cents. So it's literally the

exact same thing. You're just now including the transaction costs and whether it makes sense to go forward. Does that make sense? Yeah, that absolutely makes sense. I think where it becomes hard to calculate in the real world is when choosing to quit incurs a transaction cost and then the consequence of quitting has a range of potential possibilities. And you don't know exactly where within that range the future will fall. Right. So I think that this goes back to where is our aversion to ambiguity? So we have ambiguity aversion.

We don't like to move into things that are unknown. Right. And you just actually gave a good statement of that because I could say the exact same thing about sticking. Right. Right. So if I stick, there's some range of possible outcomes. I actually don't know how it's going to turn out for sure. There's a range of possible outcomes.

Some of them are good and some of them are bad. And I'm making some educated guesses. at what that range of outcomes is and what the probability of each of those outcomes occurring is. From there, I have to make a guess about what the expected value of sticking is. So in either case, we have to make a guess. But what you just expressed is something called status quo bias, which is that we prefer the status quo. There's less uncertainty associated with it than we do switching to something that's unknown. And it's actually so incredibly strong that we'll prefer to stick with something that we already

kind of no because the world has told us. We'll stick to something that is negative expected value or low expected value as opposed to switching something that might have a better chance of working out because of just what you express, the ambiguity, right? That's really scary for us. And when we move into something that is not the status quo, Daniel Kahneman talks about loss aversion, which is not wanting to make decisions that could incur losses separate and apart from whether they're winning. We feel that much more strongly, right? We feel the regret more strongly when we do something new. I talked to a woman who I think like encompasses this bias like so well. So her name is Sarah Olsa-Martina. She was an ER doctor, loved emergency medicine, like totally in love with it for much of her career. I think it was

15 years that she was in the ER doc. But she's also like super capable and she got some promotions and she ended up being an administrator. You know, the reason that she had chosen the job in the first place was because she loved actually like being in the emergency room, you know, that fast-paced decision-making, dealing with the human side of patients, saving lives. That is what she really loved. And while she was really good at the administrative stuff, she didn't like it as much. And then on top of that, she found with the ER work that it was shift work, right? So she'd do her shift and then she'd go home. And there was no sort of like taking your work home with you in that sense. Like you're done because obviously patients aren't coming to your house. But with the administrative work, she was having to bring the work

home all the time. So she was getting texts and emails all the time for things that need to be answered. And particularly after she had children, what she found was that that particular tradeoff wasn't worthwhile to her. She was finding that it was really affecting her relationship with her kids. I think at the time they were like two N for her. Her kids were saying like, mommy, you're always on your phone. And that didn't feel good to her. So she knew that she wasn't happy in her her current position. So she wrote me and she just said that she wanted to talk to me about this, you know, would I be willing to talk to her about this decision? She just cold emailed me. I didn't know her. I tried to respond to readers who actually write in. So I did respond to her.

And on top of that, I was in the middle of writing this book quit. So I thought, oh, she would be really interesting to talk to anyway. And we arranged a Zoom. And this was what the most interesting thing was. So she described all this to me and she talked about how unhappy in her work she was. I also asked her, well, could you go back to just being an ER doc? She said, actually, for other reasons, that would be difficult at that time. This was during COVID. And I think there were just some issues with her being able to actually do that.

She had already actually been in the application process and interview process for another job. And she just couldn't decide whether she should quit and take the job. And she had been thinking for a year about leaving the work. is the administrator and also being an ER doc. When I'm listening to her, I was very confused because it was like super clear that she was really unhappy with the situation. It was negatively impacting her personal life, you know, relationship with her kids and she wasn't enjoying the work.

But she said, but I just don't know, like, I don't know if I can take this job because I don't know how it's going to turn out, which is exactly this problem. There's this whole range of outcomes that occur and I don't know which one I'm going to actually observe. So this is the way I put it to her. I wasn't going to make the decision for her. I just said, well, let me ask you this. So imagine it's a year from now and you chose to stay in your current situation.

What's the probability that you're going to be unhappy? And she said 100%. Right, because she knows, right? Right. The expected value is known. Right. So I said, okay. So imagine you take this new position and it's a year from now.

What's the probability you're going to be unhappy? She said, I don't know. And I said, well, is it less than 100%. She said, well, yeah, of course. I mean, it's probably like 50-50. And I said, well, is a 50% chance of unhappiness less than 100% chance of unhappiness? And you could see this light bulb go off. And she like, she quit immediately.

And all I did was frame it as an expected value equation, right? We're always deciding under uncertainty. And even the path that we're on, we think we know how it's going to go. But we don't necessarily. I mean, I hope that the pandemic has taught us that, that life can throw you some curveballs. But we'd prefer to stick with stuff that we know even when the chance of unhappiness is 100% or 80 or whatever, then switch to something that we don't know where maybe you're going to be unhappy, but maybe you're not.

Because we can anticipate when you actually are unhappy beating yourself up. But you can see for Sarah Olsen-Martinez how clear it was when she framed it that way that she's supposed to take the new job. Right. How would the severity of unhappiness impact that? So let's say that there was a 25% probability that she might be even more unhappy in her next job than she is in her current job. I think in the case where you're 100% of the time going to be unhappy, severity isn't going to matter if there's a 25% chance. Where that might matter is like if there's a 25% chance. where that might matter is like if there's a 98% chance you'll be unhappy should you shave off that 2% when the unhappiness that you'll experience would be much more severe than I would agree with you. So of course severity matters.

That's the payoff structure. So if we go back to the coin flip, we can change the payoff structure. I can design a situation for you where you're going to actually lose the flip 99% of the time. But if when you win, you win enough, you can make up for you. for it. Right. So if you lose, you lose a dollar, but if you win, you win a thousand dollars, you know, or $10,000, I can make that worth your while. Right. Actually, still flip the coin, even though you're mostly going to lose. So that's similar to the severity issue. You definitely should include that in your decision making. And basically, that's a question of your own values.

Would you rather have a 60% chance of a pretty good outcome and a 40% chance of a pretty bad outcome? or would you rather have a 80% chance of a pretty good outcome, but a 20% chance of a really, really bad outcome? That's going to be sort of to your own preferences and to your own personal taste, how much you can bear to risk. And with money, it's the same thing, right? Like some people could afford an investment where 10% of the time they're going to lose a million dollars. And other people can't afford that risk. So that's just a question. of, you know, some people are going to be able to say, I'm willing to do something where 90% of the time I'm going to have a fantastic outcome, but 10% of the time I'm going to lose a million

dollars. And some people are like, I'm fine with that trade. If the 90% of the time, I'm going to make $10 million, I'll do it. But other people couldn't afford. It would literally ruin their lives for that 10% of the time that they would lose the million. And that has to be included in the equation. So is this risk of ruin? Is that the concept that we're discussing right now? Yeah, it's risk of ruin. and then you can just ratchet it back because then you have these issues of preference. Right. So you may be somebody who prefers to have a pretty good outcome, but risking a pretty bad outcome. And I might be somebody who just cares about lowering the chances of a bad outcome,

even if the bad outcome is more severe. I just want to increase the probability of a good outcome, for example, as long as that equation works out for me. And so sometimes it's like mathematically obvious as long as you're taking into account risk of ruin. you know, in other cases, it's judgment about things like happiness. How do you approach these decisions given that we have incomplete information, and particularly the decision to quit given incomplete information? Oh, gosh, yeah.

Okay, so let me just roll it back a little bit. When you make a decision to do anything, in other words, the decision to start is made within complete information. For most decisions, we know very little in comparison to all there is to be known. and there's also luck involved. Let's say it's a case where I actually do have perfect decision making, like perfect information rather. So I have a situation where I have perfect information and I know that 95% I'm going

to get an amazing outcome and 5% of the time I'm going to get a bad one. By definition, that means that 5% in the time I'm going to get a bad outcome. And I don't have control over when I'm going to observe that 5%. So that's the influence of luck. But most of the time we actually don't know for sure if we're 95%, 5%. we're making judgments about that. So when we start something, we're basically looking and saying, given the facts that I know and my judgments about what those facts are, how I'm modeling those facts, I'm making my best subjective educated guess, which is just a forecast of what the probability is of a variety of outcomes that might occur from the option that I'm choosing. Okay, so that's how we do it when we enter into a decision. Now, why can we do that when we're so uncertain? So this is a little bit the irony is the reason why we can make decisions when we're uncertain is because we have the option to quit. So obviously you're making decisions when you don't have all the facts, but then post decision, you're going to learn more things.

You're making decisions when there's an influence of luck on the outcome, but post decision, you get to observe the way that luck is influencing the outcome. And when you learn that new information, then you have the option to actually walk away and change your mind. So in the most basic sense, this is what allows us to go on a date, for example. So when you go on a date, you obviously have very little information about the person that you're going on a date with. But why can you do it? Well, because if you don't like the date, you don't ever have to see them again. You have the option to quit. So now you asked, well, how do you decide to quit when you don't have all the facts?

And the answer is exactly the same. But this actually puts us in a little bit of a bind. So the decision to quit is also made under uncertainty. We have some idea about how things might turn out if we walk away. We have some idea of how things might turn out if we stick. We're making subjective guesses of what the probability of those different things are, what the payoffs of those different things are. But that is also made under uncertainty. So whatever you apply to your original decisions about whether you start, you should also apply to your decision about whether to quit.

The issue is twofold. One, when you're starting something, you're fresh to the decision. We don't carry with us all this cognitive debris about like some cost and what we've already put into it and the fear that we'll have wasted our time or maybe even having to endure that moment where we go from failing to having failed. And that's a really awful moment for human beings is to have that feeling. We're not carrying that with us when we're fresh to a decision. But we're, when we're making the decision about whether to walk away, we are carrying all that stuff into the decision with us. And that makes it really tough because we're so afraid that we'll have wasted our time. We're so afraid that people will judge the decision to have started in the first place as a

mistake. We're so afraid that we'll judge it as a mistake. Like all of these things go with it, right? Sometimes our identity is wrapped up into the decision like with a career, right? If we walk away from this who am I going to be? That doesn't happen when you're thinking about starting a career. So there's more debris that comes with that. How do I walk away when the decision is uncertain? Then what goes along with that is the what ifs, right? What if I had stuck with it? Maybe I would have succeeded. And again, living with those what ifs is just like really tough for us. That ambiguity aversion is really hard for us. And so we'll tend to stick to things too long because we need to get to a level of certainty that is not the same level of certainty that we would apply to

the decision to start because of all this debris. So the way that I like to say it is, and this actually comes from Richard Thaler, the only time we're sure that we have to quit is when it's not really a decision anymore because we're already out of money. We're already out of time. The situation we're in is literally unbearable. We're on the top of Everest and there's a huge snowstorm. Then everybody to turn around. But it takes that to get us to do it because we want that level of certainty so that we can say I had no choice. I'm not a whim. I'm not weak-willed. I don't have a character flaw. It was the only thing that I could do. In other words, it wasn't a choice anymore. So while the decision to start and the decision to stop are made under equal influences of

uncertainty, one requires more certainty, at least for us cognitively, for us to be willing to walk away. The goal is to try to treat it more like the decision to start. We'll come back to this episode after this word from our sponsors. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business. Fifth Third Bank has the big bank muscle to handle payments for businesses of any size. But they also have the FinTech hustle that got them named one of American, America's most innovative companies by Fortune Magazine.

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One thing that you observe is that we tend to poorly calibrate our quitting decisions in that when we get bad news, we tend to persevere too long, but when we get good news, we tend to quit too soon. Can you elaborate on that? Yeah, actually, I'm really happy that you ask me that question, because I don't want people to get the impression that we always stick to things too long. I think the word usually is really important here. So usually we stick to things too long. But sometimes we do actually quit things too early. When we quit things too early is when we're in what we would call the games. So there's in the losses and then the games. And then the games, you can think about this, like, in the simplest sense, if you bought a stock at 50,

and it's now at 25, you're in the losses. If you bought it stock at 50, and it's now at 75, you're in the game. What we find is that we quit too soon when we're in the gains in general, and we quit too late when we're in the losses in general. So I think there's a great experiment from Daniel Kahneman, also Nobel laureate, and Amos Tversky, which demonstrates this pretty well. Basically, they offered people a proposition. And the proposition was in either or a proposition. So some participants got this proposition. Would you rather, or what would you prefer, I can give you $100 or we can flip a coin. And if you win, you'll get $200. If you lose, you'll get $0. So if we think about the expected value equation, right, you can either take a sure win of $100.

or on a 50-50 proposition where you win 200 or lose zero, the expected value is exactly $100. Why? Because half the time you'll win $200, which is $100, and half the time you're going to lose zero, which is zero. So that puts you at an expected value of $100. So notice these propositions, at least from an expected value standpoint, are exactly the same. In one case, I can give you the sure 100. or in the second case, you can gamble to win 200 or lose zero, or win zero, rather. Think about that.

So tell me, like, if I were to ask you that question, which option do you think you would take? I would take the 100 because of the certainty. Right. Okay. So now let's, let me ask you a different preference. Preference A or B. You can choose whichever you want. Okay.

You owe me $100. Okay. So you've got to give me $100. Or we can flip a coin. and if you lose, you're going to owe me 200. But if you win, we're going to wipe that loss off the books and you're going to owe me zero. You know what? I think I would rather flip the coin.

Right. Yeah. Okay, so this is really interesting, right? Because in both cases, you're in identical situations. You can take either a sure win or sure loss or you can flip the coin for an expected value of plus 100 or minus 100 either way. Right. But notice that you have a different preference in the two situations.

So that's interesting. So this is giving us a little clue into this quitting behavior. Basically, in the first place, you just want to quit and take the money. So you want to lock up that sure win because you don't want to risk. You don't want to allow luck into the equation in a way that might wipe that gain off the books. Right. You do not want that. But in the second case, you don't want to take the sure loss. Right. Exactly. Because the only way for you to wipe the loss off the books is to take the gamble. So this is something I know a lot of people have heard about loss aversion, this is sure loss a virgin, right? Which is that we don't want to take sure losses. Now, this is so strong that I can actually make it so that you will pay for these opportunities. So if I were to say to you, okay, I can give you $100. You're going to get the $100 for sure. Or we can flip a coin. If you win, you'll get $220. If you'll lose, you'll get zero. it's hard because I know your rational mind is like oh but then I'll get 220 yeah exactly I kind of want the 220 I want the chance at the 220 yeah that's your rational mind right but your emotional mind is saying I want the hundred bucks and that's what participants do is they just take

the hundred there most do I mean obviously not every single participant but people are much more likely to just take the hundred dollars there even though they're giving up a payment in of 10 bucks because that $20 you have to divide in two, right? Because the coin's only going to land your way half the time. Exactly. So basically what that means is they're paying me $10 to just take the $100. Right. Now I say to them, okay, you owe me $100 and we'll flip a coin. If you win, you wipe that loss off the books. But if you lose, you're going to owe me $220. Yeah, that feels worse. I'd rather just pay you the $100. Right, except most people are not like you and they just flip the coin.

Yeah. When it's pure EV, I can see it play out. It makes it easier, right? But when you just present these propositions to people who don't, you know, who aren't like trying to give you the rational answer, they're just telling you which thing they would prefer. What happens is that the people want to take the $100 and not gamble for $220. And the people who are losing want to gamble even if it means they're going to lose more. Right. Okay. So this is a good example of that. Now, just in case you're saying, well, that's just a silly laboratory experiment. There was a really great study. There's two great studies that relate to this. The first has to do with cab drivers actually way back in the day before Uber. Cab drivers usually were renting their cabs and they would rent them in 12-hour shifts. And Colin Cameron, along with a bunch of colleagues, they had tickets that told them the trips that the people had taken during the

day. So what they found that was really interesting was that when the cab drivers were having a good day, they had the $100 on the books, they seemed to quit really early in the shift, so they didn't actually drive for the whole 12-hour shift. But when they were having a bad day, when the rides were really slow, they actually stayed in their cabs. Right. The idea of, well, I've made what I need to make today, so I'm going to cut out early. Right. So that was the heuristic that the cab drivers were losing. And this is where we can see. this different between in the gains and in the losses. So if you set a goal for yourself of I want to make $300 today, if you stop short of that, you're in the losses in comparison to the 300 that you want to

make. Okay. So what that means is that even though rides are slow, even though there aren't any fares to be picked up, you're still driving around in your car desperately trying to get to that 300, which is the same as continuing to gamble. Right. Right. It's like taking the gamble. And honestly, if you're If there's no rides around, you're kind of wasting your time because each hour is not worth very much if there aren't any rides to be picked up. But you'll keep going because you don't want to get out of your cab and have to take what feels like a loss, which is how much money did you fall short of this $300 that you were trying to make. It doesn't matter if you've made $100 because you aren't judging yourself from where you started. You're judging yourself by how far you are from where you wanted to go. But in the reverse case, when you hit the $300, now you can get out of your cab.

because you actually hit your goal. So in that sense, you're in the gains. And then they just quit. But what's interesting is that if you get to your 300 really quick, that means the next hour that you're driving actually rates to be a really good hour for you. Right. So notice that this causes them to stay in the cab when the driving isn't very good, but leave the cab when the driving actually rates to be pretty good.

So much so that the strategy that they were using cost them 15%. they would have made 15% more than they actually were if they stayed in the cab when things were good and got out of the cab when things were bad. And even it was interesting, they figured out even if they choose some random strategy, like I'm just going to drive for six hours a day or something. You know, just don't even think about whether the fares are good or bad.

I'm just going to stay in my cab for the exact same amount of time every day. They would still make 8% more than they were a strategy that caused them to quit too early. quit too late, depending on they had hit this target. So I think that's such a good example of that. And then the other example that I think is really good is just from retail traders. So retail traders usually set what's called a take gain and a stop loss. So a take gain would be, you know, if you buy a stock at 30, I'm going to sell it as soon as it hits to 40. So I'm going to take the gains. And the stop loss would be if I buy the stock at 50, I'm going to sell it as soon as it hits 40. In one case, you're saying, you know, once it goes up by a certain amount, right?

If I buy it at 50, if it goes to 60, I'm going to sell it. If it goes to 40, I'll also sell it. That's the- Exactly. Cut your losses. Yeah. Exactly. And what you find with retail traders is that they completely ignore their stop losses. You know, even after, you know, you said, I'm buying it at 50.

If it goes to 40, I'm going to let go of it. You still hold on to it. And they just ignore the stop loss. Why? Because how can you get your money back otherwise? It's like a coin flipping problem. The interesting thing is they also ignore the take gain. And by ignore, I mean, they sell the stock too early.

So they'll say like it's at 50, but as soon as it hits 60, I'm going to sell it. They'll sell it at 55. So they don't actually reach the benchmark before they sell it. So you can see they're behaving just like cab drivers. They're behaving just like the participants in Kahneman-Tiverski's studies, which is, well, I've got 55. I can lock up this $5 game. I don't want to keep the gamble on because what if I wipe the loss off? Right. They don't want to do that. And in the reverse scenario, I'm losing $10. But if I sell it, that means I have to turn that loss on paper into a realized loss. And I don't want to do that because if I keep holding, maybe I can get my money back. So now I want to keep gambling. So this great study that Connum and Tversky did, it shows up in so much human behavior where you can really see this problem with quitting and sticking it out.

When you say that they ignore their stop loss, I mean, if you put in a stop loss, the computer will automatically execute it. So do they go in and remove the stop loss right before it's executed? Alex EMS is the one who did the work. I believe that this was at a time when it didn't get executed automatically. But my understanding is that they'll go in and change it. They'll take it off. So as they're getting close, and please double check me on this because I'm not 100% sure of this.

But as they're getting close, they'll be like, no, I want to change it. Right. And that makes sense in terms of generally investor behavior often involves moving the goalposts. People will have some type of an idea at the outset. And then as they go down the road with a given investment, they change their mind. That's right. And look, there's a joke in trading. Right, which is you put on a position, it starts to lose.

There's a joke, which is, well, now it's really cheap. Right. You know, there's all sorts of cognitive gymnastics you can do to get yourself to hold onto a position that you wouldn't buy today. Right. That's really where this problem is. If you wouldn't buy it today, you shouldn't hold it today. And again, it's true whether it's a stock or a relationship or a job or a project

or climbing up a mountain. if I just parachuted you into that situation today, would you start in that state? And if the answer is no, you shouldn't continue, right? Now, obviously, you have to take into account the transaction costs for sure, but that's just part of the same equation. What are the costs that I'm willing to bear for the benefits that I think that I'm going to get out of the situation that I'm in? Obviously, part of those costs would be transaction costs.

And you know, there's transaction cost to anything. If you're in a relationship where you're living with someone, there are transaction cost to leaving. It doesn't just apply to like financial instruments. This is true of any calculation that you're making. When you determine that it's not worth your while to continue, you shouldn't continue. And we need to stop thinking backwards saying, but then I'll have wasted my time or what about all the effort that I put into it or if I sell now, I can't get my money back. Because the problem is that, you know, if you said you were going to sell at 40 and you don't, that's $40 that's $40 that you can't put into a stock that's more likely to win. And I think this is so important because we have the idea

that if you quit, it's going to stop your progress. Like it's going to make me stop in my tracks that's going to slow me down. But the fact is that if you're good at quitting, if you quit at the right time, when it's warranted, it's actually going to speed you up. It's going to get you to where you want to go faster. And the reason is that you're not going to have $40 in some crap stock that isn't an actually positive expected value and isn't going to cause you to move your portfolio ahead in the way that you wanted to. Because if you quit that stock by selling it and you can move that $40 into a better position, that's going to get you to where you want to go faster because there's huge opportunity costs that we don't see. When we have capital tied up in something, what's the opportunity

cost of having it tied up in there? What are the other things we could do with that capital? And I'm not talking just about money. I'm talking about your time. When we're doing something, that's time that we're devoting to something that we can't devote to other things. And if we're devoting that time to something that is not worth our time, that is slowing our progress down. And quitting will actually cause us to speed up and get to where we want to go faster. It's going to get us to achieve our goals faster because we can switch that investment of time into something that is more worthwhile. We'll return to the show in just a moment. This Giving Tuesday, Cam H is counting on your support.

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But don't wait. Like leftovers at midnight, our Black Friday offers won't last. Shop now at IKEA.ca.ca.com slash Black Friday. IKEA, bring home to life. So much of this sounds pretty bleak. We are bad at quitting for a variety of reasons. And by the way, you've used two phrases that I love, cognitive debris and cognitive gymnastics. Yes. Given that it sounds like we are bad at quitting, what do we do? How do we get better? Yeah. So I think the good news is that there are some things that you can do to get better, that science shows you can do to get better, and they'll actually help you with both sides of the equation. Because remember that whether to stick it out or whether to quit are the same

decision, right? So we have to remember that. So we do have problems with quitting too soon sometimes. So we want to be aware that we want to solve both problems at once. first let me say there's two things that aren't going to help you. One is knowing about the problem. I've heard like investors say to me, well, what I do is every morning I wake up and say, would I buy this position? If, you know, would I put this position on today if I refresh to it? And that solves the problem. And the science is pretty clear on this, particularly some science from Barry Staw, that shows that, nope, that doesn't help you. It just gives you more confidence that you're making the right choice. And the thing that I hate most in life is when the decision isn't better, but you're

more confident than it is. I do not like that combination. Okay, so put it out of your mind that you can somehow Jedi mind trick yourself into being fresh to a decision. You can't. The other thing that doesn't help is just knowing about it. I do think that we all have this idea that, well, if I know about overconfidence, I won't be overconfident. If I know about confirmation bias, then I won't do it. And the answer is no, these things are like super hardwired. They're just part of your mindware. So also let go of that idea. So that's the first step is, I guess, acceptance. Acceptance is who you are. But now, how can we actually solve the problem? And there's two main strategies to solving the problem. One is to make the decision about whether to quit or whether to stick ahead of time. How do you do that? So the issue is

that remember that I said that there's this moment where we have to go from failing to having failed, to having losses on paper, to realizing the loss. That's the moment's really true. tough for us. Okay, so that's when we do all the cognitive gymnastics that make it really hard for us to actually quit. If you actually make the decision in advance, it will improve your quitting behavior. So in the case of a stop loss, for example, are people perfect? No, do they blow through them? Sure. Do they cancel their stop loss orders? Of course. But they're more likely to follow it because they've made the decision in advance. That pre-commitment. That pre-commitment, right. So there are always going to be people who cancel the stop loss. Always. There are always going to be people who blow through them,

always. But by doing in advance, you just increase the chances that you won't do that and you'll quit at the right time. So this is something that I call kill criteria. So I can give you an example from like a sales force that I worked with for a company called M Particle, which is a SaaS company. They had a group of sellers and I just sent them out the sellers a prompt individually. I wanted them to answer it individually, imagine that you got a lead through an RFP or RFI. Six months later, you've lost the deal. Looking back, you realized there were early signals that you weren't going to win the deal. What were they?

So they all generated a huge list. I won't go into the whole list, but one of the examples was the first meeting, all that they wanted to talk about was price. Another one was we couldn't get a decision maker in the room, like early, like in the first few meetings. Okay, so now we can take those. So these are signals that we think that when we see them naturally will respond to, but we know we don't. So now we're asking about these things in advance.

And we say, so what would you do if you saw those signals? In the case of they only talk about price, they all agreed that it wasn't worth pursuing because they were clearly just using you as a stalking horse. In the case of we couldn't get a decision maker in the room, they felt that you shouldn't walk away right then, but you should try to get more information. And the way to do that was to say, we find the deal. work better when we have a decision maker from both sides in the meeting, we'd like to offer up executive alignment for the next meeting. Okay, so they would do that. And then if they said, yes,

we'll get a decision maker from our side, you know, then you would continue with the deal. If they said, no, then you would walk away. Right. So now we generated this list of kill criteria, which are kind of like stop losses. Now that is part of their sales processes that they're checking in with these kill criteria. And this makes it easier to walk away. Partly, I think, because not only are you pre-committing to it, which increases the chances that you'll follow through. But also because I think it helps you turn a loss into a win in the sense of if you have to, if you take the deal out of the funnel, that's when you realize the loss. But now you can say, but I followed the kill criteria. So that's a good thing. And then you go to leadership and you can say, look, I followed the kill criteria and then

you get pads on the back, right, as opposed to just I killed the deal. And then people saying to you, why? Why did you fail? Well, I didn't fail because I followed the kill criteria. So I saved everybody tons of time. Right. So, you know, I think stop losses are a really good example of kill criteria. I just gave you another, but you can do it for anything. And the other thing is just because you've already started a project so you don't have your kill criteria yet doesn't mean that you can't generate a list now because you can say, what do I need to see in the next six months? Right. You know, or the next two weeks or the next week, you know, whatever your time horizon is, what are the things that I could see that would tell me that I ought to walk away or you can send

benchmarks. You know, if I don't hit a particular benchmark, then I need to quit. If I do, then I should continue. So there's all sorts of different ways to generate these. But basically, it's thinking in advance about what would I see in the world that would make me think it was worth continuing. What would I see in the world that would make me think I would need to walk away? And you're going to get to a much more rational place that way. You are not going to be perfect, but you're going to be better. And that's going to make a lot of difference in the long run. It's going to save you a lot of time. So that's like strategy number one. Strategy number two is to find yourself a quitting coach. So what do I mean by that? Look, we've all watched people blow through

stop losses and think, what an idiot, right? We've all seen athletes who continue to compete well past their prime at risk to great injury, often incurring great injury, where we can all see clearly that they should be walking away. Muhammad Ali is one of those people. Most people would say the greatest boxer of all time. Continued boxing past the point where the doctor were telling him. His kidneys were failing. He was unable to get licensed, so and so forth. And all these people from the outside looking in could see that he needed to quit. But yet he continued and then developed Parkinson syndrome. Right. So I think when we're from the outside looking in, we can see that really clearly. We all know the friends who were like, why are you still in this

relationship? We all have the friends like, why are you still in this job? Like you can see it so clearly when you're watching from afar in a way that you can't when you're in it yourself. So go find someone to be that person for you that can see you from outside, right? And tell them, you know, share kill criteria with them, maybe develop the kill criteria with them, or at least give them permission that when they see that things aren't working out for you, that they're allowed to tell you and that you'll receive it. I'm sure this has happened to you. This has happened to me. You break up with someone and people are like, oh, yeah, man, I thought you should do that like two years ago. Right, right. And you're just like, yo, if you thought I should do that two years ago,

why didn't you tell me, I didn't want to hurt your feelings. Right. That's what you get all the time. But that's like, okay, you didn't want to hurt my feelings in the moment. But meanwhile, I wasted my time in a relationship that wasn't going to work out and wasn't healthy for me for a really long time because you wouldn't tell me until I'd actually quit. Then you told me how you felt. So tell me before.

Right. So give them permission to do that. And then you can see like within an organization how this can be a really good way for leaders to interact with their teams because the leadership with the team can develop like the set of kill criteria. And now, for example, at that company that I consult with in Particle, leadership is now working with the sellers to follow the kill criteria as well as to try to close deals. And what this is allowing is for them to be able to tell them, look, I'm looking at what your notes are and I'm seeing that they're talking about price, right? Or I'm seeing that the

RFP was written with a competitor in mind. I'm seeing that you've had four meetings with no decision maker in the room. And so they're allowed to help coach. them into abandoning the lead, walking away from the lead, and that frees the seller up to go spend their time on opportunities that are more worthwhile. So you can see how this combination of kill criteria and quitting coaches can be incredibly powerful. Right. The kill criteria sounds to me very much like having an investor policy statement where you write out in advance, here's exactly what I'm going to invest in, here's the criteria for the investment, and here's the criteria for walking away. It's interesting because I actually coach, I've coached quite a few people.

PMs. What I find is that when I come in and I'm working with PMs, they do have their policy statement and they have their thesis written down pretty clearly. Obviously, if they have their thesis, they're saying this is how I think the fundamentals are going to move or so on and so forth. And so they kind of know why they're investing in it. But it's that last piece that they're missing. Because I think that we all have the intuition is that if my thesis is X, it means that interest rates are going to be within a certain band. Right. And when interest rates move out of that band, I'll obviously react to it by getting off the position. But that's the thing that we're missing is that we don't do that.

So it's not enough to just have your thesis written with what, you know, obviously why you think that this is a reasonable investment. You also have to then take the extra step of saying, if I see this particular thing happen, this is obviously more complex than a stop loss, right? If I see this thing happen, then I must do something. So an example would be if your thesis relies on interest rates being within a and band, identify what that band is, what the lower bound and upper bound is for interest rates, and then say what you're going to do if interest rates go above or below.

Right. And actually write that out. And it's really helpful if you have a team to share that with members of the team so that you can get on a regular cadence where you're going through and looking at the kill criteria, right? And then obviously you can also refresh those kill criteria as you're holding that investment, right? And you can refresh them and say, well, now if we saw this or if interest rates were within this ban, this would be our action. That is the piece that I think that people miss. And it's because

it's so intuitively weird. If my thesis is based on interest rates being between, you know, 1.5 and 3% or whatever, then obviously I would sell it if they weren't. And I think that that just seems so intuitively clear if you're writing your thesis out quickly that obviously you'll, you know, execute when the world moves against your thesis. That's the thing that people need to realize is, No, no, you won't. So you need to actually take that thesis and then turn that into actionable items that you can observe in the world with action plans associated with them. Right.

And I can see how that would apply for the people who are listening to this, how an analog of that would apply to writing out their decision-making criteria for any major decision, including when to walk away from a job or a relationship. Exactly. Exactly. And again, you can update that. I work with a venture firm, an early stage venture firm. And, you know, obviously venture firms don't quit companies in the same way. Like you can't sell the company. Right. You have your position. I mean, when at IPO, you can, that's a whole different thing. You know, sometimes like, you know, after very, very late rounds, you might be able to trade some secondary. But like, you definitely have it all the way through D for sure. So it's not that, but you do have other decisions that are quinn. decisions, which are simply, do you follow on? Do you buy up? Or do you do nothing and just you have your stake and you allow it to get diluted? So these are all like, you know, these grit versus quit decisions just in a different form. Of course, the day that you invest in that company, particularly when you're

talking about a startup, that's very high uncertainty. So all sorts of stuff is going to reveal itself to you later on. So what happens is on a regular cadence when we're not actually in the middle of like an auction or a round, we say, what would we have to see by the next round to get conviction to buy up? Or what would we have to see at the next round to get to conviction that would be willing to follow on? Okay. So now we do that in advance, and that's happening every six months or three times a year. And that means that you always are generating basically a set of fresh kill criteria that tell you when that opportunity comes, that you can escalate your commitment to the company. is that something that you actually want to do or not.

Even in that situation where you would look and say, well, there's no decision to quit because it's venture, right? You have to hold the position. That's not true, right? Of course, there's always ways to quit. And that's true even when you have any investment instrument, because even for things that are supposed to be a long hold, you still have issues about should you buy up, should you get more?

And then even if there's no way for you to get off the position, sometimes there are hedges. You can hedge it and so that you can basically get to neutral on the position. You want to know whether to do that. So one thing to do is not accept, well, I'm in a world where there is no option to quit because that's very rare that there's no option to quit. Well, thank you for spending this time with us. Where can people find more about this topic and where can people find more of your work? Well, more about this topic, you should get my book, quit, the power of knowing when to walk away, which you can get in the normal, you know, the usual places that you might find a book like that.

I also have a newsletter, which has been focused on quitting lately, not surprisingly, because I've been writing about it. If people want to get into original research, I highly recommend you check out Barry Stott, Daniel Connaman, Richard Thaler, Colin Cameron, Alex Emus, gosh, I know I'm forgetting people, Richard Zekhouser, Maurice Schweitzer, Max Bezerman, Katie Milkman. You can also follow me on Twitter where I'm pretty active. Excellent. Well, thank you so much, Annie. It's great to you back on. Well, thank you for having me back. I appreciate it when someone thinks I made enough sense to invite me back. Thank you, Annie. What are three key takeaways that we got from this conversation? Number one, beware the sunk cost fallacy. Just because you've invested time,

money, effort into something doesn't mean that you should continue. One question that you should ask yourself when deciding whether to quit or whether to stick with it is the following. would I start this today? Would I start this job today? Would I start this relationship today? Would I buy this stock today? If you wouldn't start it today, then there may be a case that you shouldn't continue it.

Of course, that case also needs to take transaction costs into account. And you can do that by assessing how much it would cost you in terms of time, money, effort to get out of this thing, to quit this thing, and then compare that to the expected value of the benefit of getting out of that thing. Waste is a forward-looking problem, not a backward-looking problem. You don't want to waste time going forward. You don't want to waste effort going forward.

You don't want to waste money going forward. But we think about it as a backward-looking problem. If I walk away now, I'll have wasted my time. And I think that's really, like, one of the biggest things that stop us from quitting among a variety of other biases. And so that is the first key takeaway. Key takeaway number two. We make decisions with incomplete information. As Annie writes in her book, quote,

because we're not omniscient, we have to make decisions with only partial information, certainly far less than we'd need to have, to make a perfect choice. That being said, after you've set out on a particular course of action, new information will reveal itself to you. And that information is,

critical feedback. Sometimes, that new information will be new facts. Sometimes, it might be different ways to think about or model a problem. Sometimes, it will be a discovery about your own preferences. And, of course, some of that new information will be about which future you happen to observe. A good one or a bad one. Everyone has had the thought go through their head. If I had known then what I know now, I would have made a different choice. Quitting is the tool that allows you to make that different decision when you learn that new information. In the most basic sense, this is what allows us to go on a date, for example. So when you go on a date, you obviously have very little information about the person that you're going on a date with. But why can you do it? Well, because if you

don't like the date, you don't ever have to see them again. You have the option to quit. So now you asked, well, how do you decide to quit when you don't have all the facts? And the answer is exactly the same. But this actually puts us in a little bit of a bind. So the decision to quit is also made under uncertainty. We have some idea about how things might turn out if we walk away. We have some idea of how things might turn out if we stick. We're making subjective guesses of what the probability of those different things are, what the payoffs of those different things are. But that is also made under. uncertainty. So whatever you apply to your original decisions about whether you start, you should also apply to your decision about whether to quit. Changing course when new information comes to light is a crucial skill set. Quitting is not a character flaw, but rather sometimes the wisest choice to make given new information that comes to light. And that is the second key takeaway. Finally, key takeaway number three, given that everything has an opportunity cost, quitting when the time is right allows you to open up your limited resources, to open up your time,

your focus, your energy, your budget, to things that will have a higher payoff, to better investments, better jobs, better relationships. People often believe that quitting means slowing down or sacrificing. everything that you've invested up to this point, when the reality is everything that has happened in the past cannot be changed. The only decision to make is what to do in the present. And that decision is made when weighing all options on the table and determining which one has the highest expected value of a bright future. Part of those costs would be transaction costs. And you know there's transaction cost to anything. If you're in a relationship where you're

living with someone, there are transaction costs to leaving. It doesn't just apply to like financial instruments. This is true of any calculation that you're making. When you determine that it's not worth your while to continue, you shouldn't continue. And we need to stop thinking backwards saying, but then I'll have wasted my time or what about all the effort that I put into it or if I sell now, I can't get my money back. Because the problem is that, you know, if you said you were going to sell at 40 and you don't, that's $40 that you can't put into a stock that's $40.00 that you can't put into a stock that's more likely to win. And I think this is so important because we have the idea that if you quit, it's going to

stop your progress. Like it's going to make me stop in my tracks that's going to slow me down. But the fact is that if you're good at quitting, if you quit at the right time, when it's warranted, it's actually going to speed you up. It's going to get you to where you want to go faster. Those are three key takeaways from this conversation with Annie Duke. If you learned from today's episode, please share this episode with a friend or a family member. That's the single most important thing that you can do to spread the message of critical thinking, better decision making, and living a life that aligns with your values.

So please share this episode with someone who you think would be fascinated by what we've discussed. You can subscribe to the show notes for free at afford anything.com slash show notes, where you'll get a synopsis with timestamps. of these episodes. If you're enjoying what you're listening to, please open up whatever app you're using to listen to this show and leave us a review and make sure while you're there that you hit the follow button so that you don't miss any of our awesome upcoming shows. If you want to discuss this episode with members of the community, head to afford anything.com slash community. And you can find me on Instagram at Paula P-A-U-L-A, P-A-N-T. Thank you so much for tuning in.

My name is Paula Pia. This is the Afford Anything podcast, and I will catch you in the next episode.