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Welcome to the 46th edition of the Tech Financial Planning (TFP) newsletter.
I recently started the book Thinking In Bets by former pro poker player Annie Duke.
It’s not a book about poker, but about “how to get comfortable with uncertainty and make better decisions as a result.”
I love the sub title too - “Making Smarter Decisions When You Don’t Have All The Facts.”
Doesn’t that get down to the heart of financial planning?
We are trying to make good financial decisions today based on an unknown, uncertain future.
All the time we are asking ourselves questions like:
How much money should I save for kid’s college when we don’t know a) if they will go to college b) if they go, what school they’ll go to and c) how much financial aid / scholarship they’ll get
My company IPO’d and I’m sitting on a nice little nest egg. Should I sell it all, sell some of it, or hold it all? Is my company the next Apple or the next Enron?
I joined an exciting startup. Should I exercise my stock options?
Am I saving enough for retirement?
What will my career look like in 5-10 years? Will I want to take time off? If you’re married, will both spouses be working or only one? Where will we live?
And so much more.
Annie Duke argues that we tend to equate the quality of our decisions with the quality of the outcome, but that can be misleading, or as she calls it, “resulting.”
She says, “Thinking in bets starts with recognizing that there are exactly two things that determine how our lives turn out: the quality of our decisions and luck. Learning to recognize the difference between the two is what thinking in bets is all about.”
And this makes sense.
Two people with the exact same skill set and expertise can both make a lot of money in company stock and decide to hold on.
But one is Amazon and one is Enron (or some other proxy for both).
One skyrockets and one goes to 0.
Did the person at Amazon make a good decision, or did they just get lucky?
I’d argue they got lucky, because there’s a lot of people who feel (or felt) confident about their company stock and then got burned.
Duke further writes, “Decisions are bets on the future, and they aren’t “right” or “wrong” based on whether they turn out well on any particular iteration. An unwanted result doesn’t make our decision wrong if we thought about the alternatives and probabilities in advance and allocated our resources accordingly.”
And sometimes when there’s all this uncertainty and unknown, people don’t make any decisions at all.
But not making a decision is a decision in itself, or as Duke writes, “Not placing a bet on something is, itself, a bet.”
I see this all the time.
Particularly with company stock.
With your company stock, you have 1 of 3 choices to make.
Sell all of it.
Sell some of it
Sell none of it.
And people are often uncertain about what to sell, when to sell, how much, the taxes, and so much more, so they don’t do anything.
Spoiler alert: that’s choosing to sell none of it.
So what should you do?
Meg Bartelt, who I’ve referenced a bit recently, has a great blog on making financial decisions with so much uncertainty.
She argues that “in lieu of certainty, manage risks and build resilience.
“If we can’t know what will happen, and we’re afraid that we won’t be prepared for whatever does happen, it strikes me that we need to make ourselves generally resilient, in the spirit of preparing us for…whatever.
…financial planning is a combination of managing risks, building resilience, and planning for opportunities.”
Unfortunately, there’s not a 7 step checklist that can perfectly set you up for success and any future uncertainty.
That’s the whole point of this post - we can’t and won’t plan perfectly.
We will certainly get some things wrong.
And that’s ok.
Putting It All Together
I’ll end with a few lines from Meg’s blog:
“The way I see it, we make the best plan with what we can know now and with our best guesses for what will happen in the future.
And then we rely—we have to rely—on our ability to Figure It Out in the future when things inevitably change.”
And some from Annie Duke:
“What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty and, instead of focusing on being sure, they try to figure out how unsure they are, making their best guess at the chances that different outcomes will occur.”
If you’d like to work with a financial planner to help you make good financial decisions, schedule your free consultation.