Quit by Annie Duke: Your Quitting Decisions

By Annie Duke

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    Quit: The Power of Knowing When to Walk Away by Annie Duke

    The following is an excerpt from Annie Duke’s newest book Quit: The Power of Knowing When to Walk Away. As a former professional poker player, Annie won more than $4 million in tournament poker before retiring from the game in 2012. Prior to becoming a professional player, Annie was awarded a National Science Foundation Fellowship to study Cognitive Psychology at the University of Pennsylvania. In Quit, Annie teaches you how to get good at quitting. Drawing on stories from elite athletes like Mount Everest climbers, founders of leading companies like Stewart Butterfield, the CEO of Slack, and top entertainers like Dave Chappelle, Duke explains why quitting is integral to success, as well as strategies for determining when to hold’em, and when to fold’em, that will save you time, energy, and money. The following is an excerpt from her book that Jordan Thibodeau has asked Annie to share with us.


    Thinking in Expected Value

    To get the stick- or- quit decision right, you make an educated guess at the probability that things will go your way and the probability that things will go against you, in order to figure out if the good stuff will occur enough of the time to warrant continuing on your path.

    Essentially, you need to think in expected value, which is what Stewart Butterfield was doing.

    Expected value (or EV) helps you answer two questions. First, it tells you whether any option you are considering is going to be, on balance, positive or negative for you in the long run. Second, it allows you to compare different options to figure out which is the better choice, the better choice being simply the one that carries the highest expected value.

    To determine the expected value for any course of action, you start with identifying the range of reasonable possible outcomes. Some of those outcomes will be good and some will be bad, to varying degrees, and each of those outcomes will have some probability of occurring. If you multiply the probability of each outcome occurring by how good or bad it might be and add all that together, that gets you the expected value.

    As a simple example, imagine that you are flipping a fair coin, meaning the coin has a 50% chance of landing heads and a 50% chance of landing tails. Let’s say for this example that if the coin lands heads, you will win $100, and if it lands tails, you will lose $50. If you multiply the $100 you will win by 50% (how often the coin lands heads), you get $50, which will be your expected long- run gains. Multiplying the $50 loss when the coin lands tails by 50% gets you negative $25, your expected losses in the long run. Subtracting $25 from $50 gets you a net gain of $25. So this coin flip proposition carries a positive expected value of $25.

    Notice that even though the probability of the coin landing tails is the same as the probability of the coin landing heads (both will happen 50% of the time), your expected value is positive because your profit is greater when you win than your loss is when the flip goes against you.

    You can also get a positive expected value even if what you can win is much less than what you can lose, as long as your chances of winning are great enough to make up for the losses. For example, if you can win $50 when the coin lands heads or lose $100 when the coin lands tails, but you will win the flip 90% of the time and lose just 10% of the time, your expected value is $35.

    That’s a bet you should take.

    Likewise, there are situations where your expected value can be positive despite having only a small chance of winning. Imagine flipping a coin that lands tails 99% of the time and heads 1% of the time. When the coin lands tails, you will lose $100, but when the coin lands heads, you will win $100,000. Even though you will win money only one out of one hundred times, the win is big enough to make the bet positive expected value, to the tune of $901!

    (Of course, that’s a much riskier bet than the other two bets. Managing risk is the subject of many other books, but not this one.)

    When thinking in expected value, the first step is to ask, “Does the course of action I’m considering (either a new course of action or continuing what you’re currently doing) have a positive expected value?”

    The second step is to compare that expected value with the expected value of other options you might be considering. Because time, attention, and money are limited resources, and we only have a limited number of things that we can do in our life, when we’re thinking about whether we should stick to something, we need to ask, “If I were to switch and do something else, would that have a higher expected value than the thing I’m currently doing?”

    If you figure out that another path carries a higher expected value, then walking away from the path you’re currently on and switching to the new one will get you to where you’re going faster.

    No matter whether you are thinking about flipping coins or buying stocks where wins and losses are measured in money, or you are thinking about who to marry or where to live, where wins and losses are measured in happiness and quality of life, expected value is a helpful concept for determining whether the path you are on is worth sticking to.

    Stewart Butterfield used expected value to decide whether to continue developing Glitch. As a cofounder of a start- up, he was dealing with an endeavor that had a low probability of success but a huge potential payoff.

    The vast majority of start- ups, obviously, don’t become Slack or Netflix or Twitter or Facebook. Most startups fail. Even so, the probability of success can still be just high enough to make pursuing that big idea worthwhile.

    This reveals what was bothering Stewart Butterfield. On his trip to the future during his sleepless night on November 11, 2012, he saw that Tiny Speck didn’t have a high enough probability of becoming a unicorn to make it worth persevering.

    There was some future world in which he could turn Glitch into a unicorn, but the likelihood was too remote to justify going for that billion- dollar- plus exit. He could see the writing on the wall, but when you are a good quitter, often you’re the only one able to read it. At the time when he told his cofounders and investors on November 12, he understood that quitting had a better expected value than continuing.

    In essence, Stewart Butterfield was thinking like a poker player. Winning poker players aren’t thinking about trying to win a single hand, come what may. They know that while any two cards can win, only some hands can win enough of the time to make them worth pursuing. Poker players are making decisions based on whether playing or folding will have the greater expected value. In other words, if they played the hand out over and over again, which choice (staying
    or folding) would be the more profitable decision in the long run?

    Obviously, we’re not omniscient and most of us aren’t going to be as good at doing this mental time travel as Stewart Butterfield, but every single one of us is capable of getting some peek into the future and that’s going to help you be better at your quitting decisions.


     

    If you like this excerpt, we highly recommend that you purchase this brilliant book, Quit: The Power of Knowing When to Walk Away by Annie Duke.

    Check out the other parts of this series in our blog:

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