Motley Fool Hidden Gems Investing - Knowing When To Quit

Episode Date: September 4, 2022

Annie Duke was a professional poker player before retiring in 2012. Now, she is a decision-making consultant for a venture capital firm and author of the upcoming book, “Quit: The Power of Knowing When to Walk Away.” Morgan Housel interviewed Duke in front of a live audience about: - Key differences between patience and stubbornness - How a quitter created Slack - Avoiding the sunk cost fallacy - How pre-mortems can make you a better investor Host: Morgan Housel Guest: Annie Duke Producer: Ricky Mulvey   Engineer: Tim Sparks Learn more about your ad choices. Visit megaphone.fm/adchoices

In Toronto, every arrival is a statement, and nothing says it better than this. Cadillac Optic was the number one selling luxury EV in Canada for 2025. Find your rhythm across a seamless 33-inch display and an immersive 19-speaker AKG surround audio system. This city demands agility, and Optic delivers with precision to make every drive extraordinary. Let's take the Cadillac. Find out more at cadillaccanada.ca. Luxury sales claim based on S&P Global Mobility Canadian New Vehicle Total Registrations for calendar year 2025 for the Cadillac Definition of Luxury. We just quit too late. We want to be much more sure that we need to take that loss because that moment we quit is when we go from

failing to having failed. When we go from a loss on paper to a realized loss. And as human beings, we hate that. I'm Chris Hill, and that's Annie Duke. Once upon a time, she was one of the best professional poker players in the world. She gave it up a decade ago and is now a decision strategist with a venture capital firm and an author. Her latest book is Quit, The Power of Knowing When to Walk Away. At our FoolFest investing conference last week, Morgan Housel talked with Annie Duke in front of a live audience about the differences between being stubborn and being patient, why we often quit too late, and how premortems can improve your investing. Morgan kicked things off by asking Annie how she got the idea for her new book.

The origin story is basically, I wrote my last book, which was How to Decide, and released it into a presidential election. Not the best decision. But there was about maybe a page, a half a page, on quitting and why having optionality, the option to be able to walk away from something is so valuable when you're making decisions under uncertainty so when we make decisions for most of them we know very little in comparison to all there is to be known and obviously there's just the influence of luck on the outcome so post-decision you start to find some things out how is the world turning out how is my decision turning out and having the option to be able to react to that it be able to sort of get out of the decision and get back to an option

you may have rejected before to a new option is really important for speeding your initial So that's kind of what that little sort of page in there was about. And when I was promoting the book and doing podcasts, they were asking me about all sorts of other things in the book, and I kept directing back to this one topic, which I really had started to think about. And so that sort of got me thinking, like, why am I so interested in this topic?

And then I just kind of realized that I think that somebody needs to have kind of the dialogue with grit. because, you know, grit, obviously, is amazing for getting you to stick to hard things that are worthwhile, but it also happens to be really amazing at getting you to stick at hard things that are not worthwhile. And as a poker player, I particularly value the option to quit, which is that ability to fold,

which is really one of the main skill elements, probably the most important skill elements of poker. So what happened after I kind of got that bug is I called my agent. At first, he didn't quite get it, At first, he didn't quite get it. He was like, quitting what, like drugs? And I was like, well, I mean, that would be good to quit, but no, depending on the drug, but no.

But no, but as a sort of, you know, grit isn't always good, that you need to understand the context about whether you're supposed to stick to something or not. He then got it. I then just started calling people, and I talked to you. And this was in like the fall of 2020. I started calling people, and I called up Danny Kahneman on Zoom, and I had a few conversations with him and a guy named Barry Stah and Richard Thaler, and I was really lucky to get to Michael Mobison,

actually, was my very first call, who was just on here. I always run all ideas by him first, and I would suggest you do, too, because that's a good strategy. And everybody seemed to be as energized by the topic as I was. And so that was in November of 2020. By February of 2020, I had already written a 60-page proposal and then got it sold. And that's the fastest I've ever gone through that process

because I just felt like I couldn't not write it. One of the things that I struggle with in investing is trying to figure out the difference between patience and stubbornness. Patience is so critical. You cannot have investing success without patience. True. But patience can really look like, or you can have stubbornness that you pass off as patience.

That's correct. And you're being so stubborn in your worldviews, but it feels fine to keep doing it because you're saying, no, I'm a long-term. How do I figure out the difference between patience and stubbornness? Yeah, so this is really the big problem, right? Like, I mean, it goes back to what I said about grit, right?

It's great for getting you to stick to things that are worthwhile, but it's also great at getting you to stick to things that aren't worthwhile. And when we have just very simple heuristics, like perseverance is good, which is what I would say that we think about in investing, like just hold. That's all fine, except when it's not.

And the question is, how do you figure out when it's not? So the first thing that I can tell you is that almost all the cognitive forces that are working inside of your head are going to get you to quit too late. In general, we want to be much more certain that quitting is the right choice than we actually should be. That's for lots and lots of reasons that have to do with, like, how are other people going to judge you, how do you judge yourself, the sunk cost fallacy, which is just, we take into account,

like, how do I get my money back in this stock if I sell it? That would be basically the sunk cost fallacy, which, of course, is a fallacy, because it should be, where should I put my next dollar, not, did I lose, like, $20 on this position? You don't need to get it back in that stock. But we do that with projects, relationships, jobs, anything like that. of being endowed to something like owning the position, but this idea of, like, you know,

how do we sort of, like, square our past actions and the resources that we've put into something with what our future actions might be, and we want those to match up. And so we rationalize, and we say, well, but, you know, I'm not being reactive, and I'm being patient, as opposed to, say, stubborn. So just understand that these things are really working against you.

That's sort of problem number one. And problem number two is, as Danny Kahneman says, the worst time to make a decision is when you're in it. What does that mean? Like, I decided to eat healthy, and there's a cupcake in front of me. I'm in it. Right? Like, okay.

There's, like, a big, yummy pizza. That's when it's hardest to do it. So after you've already gotten onto the losing course, right, after you're already in this position, and you've lost money on it, that's when it's going to be the hardest to make the decision about whether you should exit or whether it's a time for patience. So what we really need to do is step back and say, okay, if that's the problem, if the forces are working against us

and we're going to be worse at this after we're already on a losing path, because that's when these things really get activated, what we need to realize is that we need to get out of it. And there's only two ways to do it. One is to have done the work in advance. So what I do when I work with, for example, PMs is I say, okay, I understand that you've written down your thesis, what are the fundamentals, what are the expectations, so on and so forth.

but in companion to that, you have to also, when you get into the position, write down, like, if the fundamental moves out of a certain band, what am I going to do? And do that in advance. And they look at me a little bit confused, like, but isn't that already implied? And the answer is, of course it's already implied,

and you have the intuition that you'll react to those implications when you see them in the world, but you won't. So write it down in advance, say what you're going to do. This is something I call kill criteria. So these would be like, if it hits a certain benchmark, I'm going to sell, right? If these fundamentals move out of this band, I'm going to sell. Or actually, on the other side, if they move out of this band, maybe I'm going to press the position, right?

So we want to be doing that thinking in advance. So that's one way to get to it. The other way is to have the people making the decision to start something be different than the people making the decision to stop something. So this is essentially getting someone who isn't endowed to the decision as much, who isn't carrying all the sunk costs or the identity or those things that go along with it, and help them to make you the decision.

So as an example, if you have an IC that is big enough, one of the things that I've recommended with clients is the people on the IC who are deciding when you get into a position should be different than the people who recommend getting out of it. Or if a PM has a big enough team, you can sort of divide the labor in that way and have sort of, you know, people who enter and people who exit and those people be very different. But I could also just be a quitting coach for you, you know, as well. Yes. You know,

just to help you sort of see things more clearly, because I'm sure you've all had that situation where you see someone and from the outside looking in, you're like, oh, they should really get out of this relationship or they should have quit their job or they shouldn't be, they're sticking to this investment that they shouldn't be. And you can see it so clearly from but you're the person who's on the inside when it comes to your own decisions. So getting that person on the outside to help you with that is really important. And just so you know, Danny Kahneman has a quitting coach.

His name happens to be Richard Thaler. But he feels like he needs one. So I sort of like ... Both those people have a Nobel Prize. Yes, exactly. They're both Nobel laureates. So if Danny Kahneman, who wrote, you know, Thinking Fast and Slow and Noise, feels like he needs a quitting coach,

I'm all for it. I want one too. Speaking of Conlon, there's this great story that I heard one time where when Daniel Conlon was writing Thinking Fast and Slow, he was working very closely with Jason Zweig of the Wall Street Journal. It's kind of like a writing coach, not a ghost writer, but Jason was helping him write. And Jason said that he and Danny would work for a month or two on a chapter. And one morning, Jason would wake up and Danny had deleted all of it and was just starting over. And Jason would be like devastated. Like we've been working on this for two months. And Danny said to Jason one day, he said, you have to understand, I have no sunk costs.

And that is so rare. And he has this quote, I'm gonna butcher it, but it's like, the only way that you can become a good writer is to be completely devoted to killing everything that's not great. The quote is more elegant than that, but it's an interesting story, because it's so rare, the idea of having no sunk costs.

Yeah, and what I would guess is that he has fewer sunk costs than everybody else, but he probably, if he deleted it two months later, he probably should have deleted it a month earlier. No, for real. For real, because this is what the data shows you, is that we just quit too late. We want to be much more sure that we need to take that loss,

because that moment we quit is when we go from failing to having failed, when we go from a loss on paper to a realized loss. And as human beings, we hate that. As Richard Thaler says, we don't like to close mental accounts in the losses. That's that moment you have to close that account and just give it up, right? And it's why we barreled toward the summit of Everest

in the middle of a snowstorm. It's why Blockbuster won't give up its physical stores for streaming, and then Netflix eats it, and then now, you know, Netflix, right? So this is this issue that we have, and what I love is this one really fun thing that Stephen Levitt did that really shows this problem. So he just had people like,

okay, you're thinking about, do you want to quit your job? Do you want to quit your relationship? Do you want to move to a new town? These kind of big life decisions. Should I stay or should I go, right? And he puts up a website. He says, we're going to flip a virtual coin for you. Heads you quit, tails you stay.

Now, you'd say, like, nobody would ever do this, but 20,000 people did. And let's agree that if you're going to go flip a virtual coin for whether you should stay in your job or not, that you think it's 50-50. So you are so sure that this is like either-or, 50-50, because you're going to go do this. So they do that, and what he finds as he measures their happiness

two and six months later is something surprising, that if it were really a 50-50 decision, the quitters post-decision should be equally happy as the stickers. But that's not what he finds. What he finds is the quitters are happier. Why? Because by the time you think it's 50-50, it's like 90-10.

It's not even close. Because the decision to quit is also made under uncertainty, right? Like, we don't know what the future holds. We don't know whether, could we turn it around? Could we get our money back? Could we not have to shut this startup down and become the next Google? And the only way for us to know for sure is to keep going on the path. So what happens is, by the time we get to,

okay, I'm ready to quit, it's not really a decision anymore. because you're already at the bottom of the crevasse. Obviously, I shouldn't have continued, right? You're already at the point where you can't make the chapter work after two months, and so now you're throwing it out. So that's something I think we need to remember,

is that we get to quitting just way too late in general. Whether it's a person or a company, who has quit really well so much that their quitting was key to their eventual success? Stuart Butterfield. Of Slack? Well ... What became Slack?

So, Stuart Butterfield, I think, is like the best quitter in the world. So, he started a company way back during the sort of dot-com crash era that was trying to create an online multiplayer world-building game. So, he was creating that, and it was just a bad funding environment at the time. This was late 90s, early 2000s. He couldn't get any money for it. So, he shut that company down because he had to.

But there was a piece in it which had to do with photo sharing, which basically allowed you to sort of see pictures in my inventory, and that became Flickr, which was like a modest success, sold it to Yahoo. So then he quit Yahoo because he still had this dream of creating an online multiplayer cooperative world-building game. And so he rounded a bunch of people up. This was in the late aughts. His founders, you know, the co-founders,

and they started this new company called Glitch, and they created a game called Game Neverending, which was like a huge critical success. It was Monty Python meets Dr. Seuss, is the way it was described. The gaming community, like the core gaming community, seemed to really love it, at least the critics did. And, you know, through word of mouth and PR,

they started to build an audience, and they, you know, ways in, they had 5,000 really hardcore users who were using the game 20 hours or more a week. They had the backing of Andreessen Horowitz and Asel, so they had a lot of money. they had six million in the bank. But the problem was that in order to get those 5,000 users,

they needed to get basically for every 95 to 99 people who came to the game, you'd only get one hardcore user. And the rest of the people would be there for only about seven minutes. So this was sort of like a problem. And so along with the investors, they did a huge marketing push over six weeks, where they started going from PR and sort of word of mouth to traditional marketing, buying ads.

And they did that, and they actually experienced user growth of six to seven percent week over week for six weeks, up until the weekend of November 11th and 12th in 2012. And that was their biggest week ever. And that Monday morning, Stuart Butterfield wrote a note to his co-founders and investors saying, I woke up with the dead certainty this morning that Glitch was over. So that's weird, right?

So his investors were a little bit like, what? They kind of lost their minds. And he basically explained that he had figured out that they would have to maintain that exact same growth for 31 weeks just to get to break even, and that it was absurd to assume that you could, because they'd probably already reached the gaming community that was going to use the game,

and that ads were going to get more expensive, they were going to be going to the same eyeballs that had already seen them, and they were going to be getting outside of the core gaming community. So what he realized was that this wasn't a venture-scale business. So he shut it down. Not clear whether his co-founders or investors were kind of on board with it, but as he said, if he wasn't into it, that was it,

because he was really sort of the drive of the operation. And he even said, you know, the thing that I regret the most is that I feel like I was six weeks too late because I thought people would think I was insane. So even he said he quit too late, and he's like the best quitter I've ever heard of in my life. Okay, so this is a success story in itself, right? He realizes that this is not a venture-scale business.

He realizes that for his employees, the equity that they're working for is no longer worth their time. So he wants to free them, because this is something like, oh, I'm being patient, right, when I'm really being stubborn. I owe it to my employees. He realized he owed it to his employees to let them go, because they were mostly working for equity, very little cash comp, And that wasn't worth their while.

He didn't think that this was the best place for his investors' money. So he sort of frees everybody up to go and be brilliant somewhere else. But two days later, he says, you know, there's this internal communication tool that we developed, doesn't even have a name, that people seem to really like. Like, maybe I could develop that. And he gave it a name, which was searchable log of all company knowledge, which was Slack. And two days later, he founded Slack. And we know what happened with that.

So I think there's a temptation there to say, well, what makes that a really happy story is that Slack came out of it. But I think the thing that we need to remember is if he had quit that company, just shut it down and never founded Slack, that that in itself is a happy story. Because he quit maybe six weeks too late,

but somewhere around the point that he really realized that this was not venture scale and it wasn't worth everybody's time to be doing it. That's a great story. One other point that this all reminds me of is just the concept of having enough, of when to quit and when to pull back. Someone once asked John D. Rockefeller

how much money he needed to be happy, and his answer was just a little bit more. Yeah, right. I was going to say, was it all of it? All of it, all of it. Every dollar. But I think that it's so critical to happiness that you do have some sense of enough.

And enough doesn't mean that you have no ambition for more. It's just an idea of keeping your expectations in check relative to results. So whether it's, like, maybe it's not a full-blown quit, But how do individual people use what you've looked into and researched and your knowledge about this to have some sense of enough money, enough success, et cetera? Yeah, so, I mean, again, I think that the key here

is that you have to do the work in advance. And you have to say to yourself, at this moment in time, as I envision myself six months from now or a year from now, what is it that I'm trying to achieve? And then, given what I'm trying to achieve, what are the signals that should tell me that I've done it? What are the signals that should tell me that these goals are unrealistic or that this isn't actually the right way to achieve those goals

or I'm not on the right path to be able to do it? And do that in advance for yourself. Like, I do this all the time. And the thing is, what's really important to understand is that you don't need to do this. If you didn't do it when you first started something, you can do it at any time in between, right? So this is something I coach employers on all the time

when they're saying, oh, there's this employee, and I think I should let them go, which I happen to know is the moment they should let them go. But usually they're not ready for that. So what I say to them is, how long do you think is reasonable for this employee to turn it around? And we sort of figure out what that is. It's usually somewhere around a month to two months,

with feedback, obviously. And I say, okay, let's actually see, what are the key performance indicators? What are the benchmarks they might hit? You tell me what the criteria are that would tell you that they've actually turned it around. Sit down and actually work that with the employee so they're in on it, right?

And then you can have the conversation. What's interesting in that situation is the employee usually quits. Well, because I think they just realize that I can't actually achieve this. Like at some point, it does get them to realize it's not the right fit for them, which is better for them.

Because they get to go find a better fit for them. But you can do that with yourself as well. And so that's what I say, like don't try to figure out it in the moment, right? When you start to have those questions, sit down, and I think people should do this, you know, twice a year and say, what am I trying to achieve?

What does the next six months look for me? What are going to be the signs that I should exit? What are going to be the signs that I should consider exit? What are going to be the signs that I need to go gather more information about what is right for me? Because in the end, what we don't want to do is end up continuing, you know, when we ought not to.

We don't want to become, this is one of the things that I think to myself now all the time, I don't want to be Siobhan O'Keefe, who started experiencing pain in 2019 in the London Marathon on mile three. And on mile eight, she snapped her fibula, broke her leg. I know, right? Yeah, she finished it. Yeah, so you think that's bizarre, right?

There were four other people in that race who broke something and kept going. And if you look up just like broken leg or something in a marathon, finished race it's like pages of google results of people doing that and obviously that's putting the the rest of of their ability like their ability to run future marathons at risk and i think that we all share the intuition that if i broke my leg during a marathon i wouldn't keep going but what i realized from siobhan o'keefe is yes i would because it's one more mile it's your question about just a little bit more i'll just go a little bit more and not sort of being able to see past being in it because John Rockefeller was asked that when he was in it

that's the issue because if I'm in it I want a little more you have to step back from it and say what could happen in this marathon that would make me quit and write down breaking my leg and then tell your friends who are rooting you on if I break my leg tell me to stop Annie Duke's new book, The Power of Knowing When to Walk Away, comes out October 4th and is now available for pre-order. We are off on Monday for the Labor Day holiday, but we'll be back on Tuesday. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening,

We'll see you on Tuesday.