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Podcast 195

195: The Psychology of Making Financial Decisions with Maria Konnikova

Maria Konnikova has spent much of her life writing about psychology and how it applies to real life situations. With a B.A. in psychology and creative writing from Harvard and a Ph.D. in psychology from Columbia University, her work has been published in the New York Times, The New Yorker, Slate, and the Paris Review, to name just a few.

Her books include Mastermind, The Confidence Game, and The Biggest Bluff, where she tells the story of her journey into the world of professional poker with Hall of Famer Erik Seidel as her mentor. Her career has zigged and zagged in fascinating directions, but she remains astoundingly calm, cool, and controlled about all of it.

Today. Maria joins the podcast to talk about how she takes control of life (financial and otherwise), even as you take it one day at a time, the many different ways emotions affect our thought processes and decision making skills, and the mental habits common to the best poker players that can make you more effective in every aspect of your life.

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In this podcast interview, you’ll learn:
  • How Maria uses the financial lessons she learned from her parents despite having been freelance for almost her entire career.
  • Why poker is a perfect way to study decision-making and the role of chance in everyday life.
  • The core elements that should be part of anyone’s decision making process, whether investing, gambling, or simply having a conversation with someone you care about.
  • Why the most important lesson Maria learned from poker is to leave your ego at the door.
  • Why it’s absolutely impossible to work with someone who refuses to open their mind and takes a hard-line position after making mistakes.
Inspiring Quote
  • "“Poker is a perfect rubric for strategic decision making in everyday life.”" - John von Neumann
  • "“Real life consists of bluffing, of little tactics of deception, of asking yourself what is the other man going to think I mean to do, and that is what games are about in my theory.”" - John von Neumann
Interview Resources
Disclosure
Offer valid in the 50 United States and the District of Columbia, to first-time requestors. During the offer period, receive one (1) in-stock book per request. Limit (1) book per week per household. Limit three (3) books total each calendar year, between January 1 and December 31. Offer valid while supplies last. Howard Bailey Financial, Inc. reserves the right to cancel, terminate or modify this offer at any time. Void where restricted or otherwise prohibited.
Read the Transcript

Casey Weade: Maria, welcome to the podcast.

Maria Konnikova: Thank you so much for having me, Casey.

Casey Weade: Hey, I'm excited to have you here. You've got such a wide range of things that we could possibly discuss. You're originally introduced to me through Brad Johnson, our mutual friend. And I just love the conversation you had with him that largely was around poker and investing and con artists. And I wouldn't have a similar conversation with you here today. I wanted to focus a little bit more on the retiree demographic.

His podcast is a little bit more aimed at financial advisors. So, I wanted to have a little bit of a different conversation, but we'll just have to see where this goes because you've been in so many different things right now. You explained before we went live that you're in Vermont and you're writing a crime drama.

Maria Konnikova: This is correct. Yes, I'm now working on a TV show. So, few people know, well, I guess people who have listened to me might know that my actual background in terms of the writing I studied was fiction. So, I ended up becoming a nonfiction author. And that's how I made my name and that's been my career, but I'm actually now returning to the fiction a little bit and writing a TV series.

Casey Weade: How did you choose what you're going to focus on at any given time? How do you jump from poker to con artist to writing TV shows and authoring articles with wildly different topics along the way?

Maria Konnikova: This is true. I mean, I just stay constantly open minded and open to new opportunities. I had no idea that I'd be playing poker. The Biggest Bluff was a total surprise, I thought I wanted to write a book about chance, but I had no idea that I was actually going to leave the New Yorker and become a professional poker player, but I embraced it when it happened. I said, “Okay, this is the way and this is what I'm going to do.”

And with the current TV show, it was an old friend of mine from college who reached out and said, “Hey, do you want to do this?” And I said, “Timing’s right. My book’s out. I don't have anything right now, let's do it.” So, I'm always just very happy to see where life takes me. One of the things that I've learned in all of my endeavors and in poker, but just throughout everything, is the fallacy of planning too far ahead.

Of course, it's good to have goals, but at the end of the day, there's so much chance and so many things can happen, I think, it's very good to remain flexible because I could never have foreseen how my career went in any way when I was younger. And I think just staying open minded and being willing to zig and zag has served me well.

Casey Weade: Well, how do you plan for the future, then? Do you have any plan for the future? Or is it just one day at a time?

Maria Konnikova: These days, it's one day at a time. If this current pandemic has taught me anything, it's one day at a time, but I will say, especially kind of given the nature of this podcast, that I was taught from a very, very young age by my parents to plan ahead financially which is a really important lesson because, after my first two years out of college, I have never had a steady paycheck, I've never had a W-2 form or health insurance that I didn't pay for myself or benefits or anything like that. I've been in a freelance life my entire life, like I said, with the exception of two years, right out of college.

And I don't come from a wealthy family at all. We left the Soviet Union, were stripped of our citizenship, applied for political asylum to the United States. And I grew up quite poor. We lived in assisted housing at the beginning, all of my clothes were donations from local families. And now, my parents are comfortably middle class, everything's great, but it's not like they could ever give me money and they always taught me to never go into credit card debt and to make sure that you pay everything off as soon as you can and to always have several months planned and all of these types of things. And I think that served me well because I never know what my next month is going to look like.

My income goes up and down and all over the map. So, in that sense, I plan ahead. I always have a financial cushion, if that means that I have to make certain choices at a given point in time, I do because I think that that's crucial. But past that, past the fact that okay, for the next six months, if anything happens, I'll be okay, I'll be able to pay all of my bills. Past that, I think it's so important to be mentally flexible and to not tie yourself to okay, this is my career path. I'm going to graduate from college and then I'm going to work here for two years and then I'm going to apply to grad school and then I'm going to do this and then I'm going to do that. I think that that can limit you because sometimes that means that you have blinders on and that you don't actually see new opportunities, see new things that might be coming up, see that you're not happy, you stop, you forget to check in with yourself.

Something that I've learned is just how important it is to constantly check in with yourself and say, Hey, self, how am I doing? Am I happy? Am I fulfilled? Am I getting what I want out of life? If not, what are we going to change? What's going on? What can we do differently? Those are very important conversations that Maria and Maria have every so often.

Casey Weade: Well, that's good. And I think Casey and Casey need to have a conversation, too, because I'm one of those, I've always been a lifelong planner. I've always had a 10-year plan. When I was a kid, I was setting goals that were 10, 20 years into the future and I continue to do that to this day. I'm just naturally a planner, not just financially, but also just, what's that vision of the future? How am I going to get there? I need to do X, Y, and Z in order to accomplish that, but as you said, it's good to just take a pause and stop being a human doing and just be a human being for a while. And I think we can still have that plan, but we need to take those pauses.

Maria Konnikova: Absolutely. And I think that you have to figure out what works for you. Planning doesn't work for me. I mean, I don't even use outlines when I do my writing. And people always ask me, “Oh, what's your writing process?” And I say, “My writing process stresses me out.” I don't think you want my writing process. It's basically vomiting on a page and then kind of cleaning things up and figuring out what goes where. My organization system is a Word document.

So, whenever I'm working on anything new, everything interesting I find, I just plop into my important things word document. And then, the way I navigated is I just do, I find, I go, Apple, F or command F for whatever computer you use and try to figure out what I was thinking. And that's kind of how I've done everything. So, I've never been a planner.

Casey Weade: It's undoubtedly true that that comes from your past and your history and your life experiences as it does for all of us. And I want to talk a little bit more about those, you brought up a little bit about your youth and moving here. There were several life events that occurred before you started writing The Biggest Bluff, which sounds like they led you to writing that book, your mother lost her job, grandmother passed away, husband lost his job, dealing with an autoimmune illness, not getting answers. So, how did all of these different things line up and maybe missed a couple in there, as well? How did all of these things happening lead you to want to learn more about poker of all things, of which you weren't even interested in, in the least?

Maria Konnikova: I wasn't, I didn't really, I knew poker existed, obviously, but I'd never played. I literally did not know how many cards were in a deck, we did not have a deck of cards growing up. I thought there were 54 for some strange reason. Anyone listening, there are 52, do not think there are 54 cards in a deck.

Yeah, as you mentioned, a lot of things went wrong and they made me just stop and realized how big a role chance plays in our lives that we can plan all we want and to try as hard as we can and work really hard and just do all the right “things,” but we also have to get lucky. And when chance is on your side, it's invisible. It's kind of something that you just take for granted. You don't wake up every day and say, “I'm so lucky, everything's going well.” You notice it when suddenly, things aren't going well.

And with my health and death and all of these different things going on, I realized just how much it affects the direction that our lives take. And I realized that I wanted to write about that, that I wanted my next book to be about chance versus skill, the limits of control, how I can learn to tell the difference between the things that I control and the things that I don't control. And that's not a book, that's like this big question. So, I needed a book, I needed to figure out what's the book going to be. This is the idea, but what's the book?

And whenever I do anything new, I read a lot. And one of the areas that I started reading about was game theory because game theory is an interesting way of looking at chance and I'd never really read much about it. And so, I decided to go to the source and I read the Theory of Games and Economic Behavior, which is the foundational text of game theory. I highly recommend it as a door stopper, but it does have a few of you very good places, but it was very hard for me to read.

It's a brilliant book, obviously, but I'm not an economist, it was difficult. And I'm not a mathematician, that's not my strong suit. So, it was really hard for me. But what I learned from that was that John von Neumann, one of the fathers of game theory, was a poker player. And that game theory actually came out of the game of poker. And the way that von Neumann, this brilliant man, described poker really intrigued me. He said that poker is a perfect rubric for strategic decision making in everyday life because unlike chess which is a game of perfect information, you can see the board, you can see all the pieces, you can know how they move, and theoretically, there's always a right move.

So, if you have enough computing power, you can say this is the decision, this is the right answer. And he said, that's not life at all because in life, there's so many unknowns, there's never a right answer. Life is poker. It's a game of incomplete information. So, it's a game of knowns and unknowns, things I know, things you know, things we both know in common. And your goal is to make the best decision possible with limited information, knowing that you'll never have complete certainty about the outcome, knowing that chance will come into play, and that you have to act all the same. That life is a probabilistic endeavor. There's no such thing as 100% certainty when you're making decisions in life.

And he thought that if he could solve poker, he basically had the key to the most complex decisions in the world. He thought that poker would prevent nuclear war, literally, because he thought that he would build this kind of way of thinking that would help you outmaneuver your opponent and outthink them in a way that would help the world be more balanced. And he had this beautiful quote, which I think is what kind of really drew me in as a psychologist. He said, real life consists of bluffing, of little tactics of deception, of trying to figure out what does this man think, I mean to do. And that's what games are about in my theory.

And my little psychologist heart, just saying when I heard that and I thought, while a mathematician talking about the importance of people and the importance of psychology and saying that math isn't enough, it's not enough to kind of calculate all this stuff, you also need to figure out the human. And so, I decided to learn more about this poker thing. And something just clicked in my head, I thought, Oh, this can be my book. Why don't I learn this game? Why don't I use it, use that journey as kind of the metaphor for life and use poker to explore skill versus chance? And so, that was the genesis of The Biggest Bluff.

Casey Weade: Was that a big surprise for you? Did you have this idea? I think many people think about poker and they say, it's all chance, it's all luck, it's all gambling. And maybe you were having that same experience in your life, where it feels like everything that's happening to you is all by chance. And now, you assume poker is the same way. Was that a surprise to find out that it's not all chance?

Maria Konnikova: Well, I think that because I had no preconceptions about poker, I didn't know anything, literally, about the game. I didn't know whether it was chance or skill. I did not have that popular misconception that poker is gambling because I don't care, I hate casinos, I still hate casinos. And I hate that entire world. I was never interested in it. So, the first I ever really saw the description of poker was in John von Neumann’s words and he made it very, very clear that this is a game of skill, that yet has an element of chance, but so does everything in life. And that's why it's such a good rubric for life because it's mostly skill, but then there's that chance element in it. And so, that's how I came into the game. So, it was not a surprise because I didn't know what to expect. Everything would have been a surprise.

Casey Weade: Well, if you look back since you started this journey, you get to where you're at today, what have been some of the biggest changes that poker has created in your life?

Maria Konnikova: Oh, my God, where do I begin? I think the biggest changes have been twofold. On the one side, it's what we're talking about, kind of this decision-making process and the ability to think probabilistically, which is something that humans are really, really bad at doing. And it's really hard for our minds to wrap themselves around probability and what different probabilities mean. What's 2%? What's 70%? What's 60%? What's 90%? We don't think that way. We're like, Oh, yeah, this will happen, this won't happen. We think much more in absolutes. And we round up or we round down. It's very difficult for us to see those statistical nuances.

And that's fine, most of the time, but sometimes it's really, really important to actually realize that 2% is not the same thing as 10%. And poker actually teaches you to think correctly in terms of probabilities. And to put a probability, kind of a percentage on your own certainty, on your opinions, on your actions because in poker, you're constantly betting, you have skin in the game, you're putting your money where your mouth is. And so, it's not enough to say, Oh, I think he's bluffing or I think he's strong or I think I'm good here. You can't do that. Instead, you have to say, Okay, how sure am I? Why am I sure? What are the reasons that I'm using to reach this conclusion?

And that teaches you how to think through the process of decision making rather than focus on the outcome. Was I right or was I wrong? You realize that those two things are actually separate and that you need to get into the habit of saying, Okay, how sure am I? And why? Why am I sure? And that forces you to be much more mindful, much more aware of your own thought processes, of your own rationale for making a decision.

All of a sudden, you might realize, Oh, I'm about to do this because I'm mad at him, because he pissed me off. That's a bad, bad reason to act. And that means, Oh, I'm not at all sure that I'm what I'm doing is right, but I don't care. That's emotion. And so, you learn to tell the difference, you actually learn a degree of self-reflection and a degree of humility, I think, in terms of your opinions. And this is not something that, what I'm saying is far from unique, a lot of people have found this, including one of the great philosophers of any age, Immanuel Kant. And I write about the fact in his books and his critique of reason.

He writes about this notion of gambling and betting on outcomes as the best antidote to basically human hubris and to bad decisions. He has this beautiful example of a doctor. He says, go to a doctor's office and gives you a diagnosis. If he is above a certain threshold of certainty, he just tells you, what's wrong with you? He doesn't say, Well, here are the other options, maybe it's this, maybe it's that. He says, this is what's wrong. Our world is black and white. This or that. Everything has a label.

And he said, “Well, now, what if I told that doctor that he has to put money on what he's saying, would he be willing to bet $10 that what he's saying is right? How about 100? How about 1000? How about 10,000?” All of a sudden, you're forced to confront this thing that you said, “Oh, yeah, absolutely, I know.” He has to think, Oh, wait, how sure am I? Am I willing to risk $100? Well, okay, maybe I'm not as sure as I thought I was. Okay, $100, fine, but I'm not willing to risk 1000.

And this is, especially in the world of Twitter and social media, where everyone is just suddenly an expert on everything. I think that poker or that approach really teaches you to take a step back and to say, “Wait, why am I making these decisions? How sure am I?” And that's definitely something that I learned from the game and that I finally implemented in my life and I think I'd become much better at it. So, that's kind of the mathematical end.

And of course, something related that I touched on here was the emotional side. I think poker has made me much better at reading my own emotions, at managing them, and at figuring out, how do I take emotions out of my thought process? How do I acknowledge them and then take them out, kind of step back from them? That's an important but incredibly difficult skill to learn. And I say that as someone who has a PhD in psychology and who studied self-control. So, this is something I've been studying theoretically, for years. Practically speaking, poker is the best education I've had in figuring out how to actually do that.

Casey Weade: I'm smiling right now because I'm thinking about going back and having this conversation with my wife and asking her if she's willing to put $1000 on it. How about 5000? Are you willing to make that bet? It seems like there are some valid applications here to life, valid applications to marriage. This has probably strengthened your marriage. I don't want to derail the conversation too much, but would you say this has made for a stronger marriage?

Maria Konnikova: Yeah, absolutely. I don't think that's derailing the conversation, I think that this has had a direct impact on my life in a really good way because you are much more reflective, you are much more nuanced, you're much more willing to acknowledge that your partner might be right. It actually avoids a lot of conflict because you say, Wait, okay, how sure am I? Why am I sure? Could I be wrong? And if you're less emotional and if you don't take it personally and you just think, wait, let's look at this in a poker framework, let's look at it in terms of kind of a more logical, rational way of thinking. All of a sudden, you're in a much better place and I think you're in a much better emotional space.

And I'll say one more thing, why I think poker has made both my marriage but also my friendships and my personal relationships stronger because I think poker actually makes you more empathetic, it makes you a better listener because in poker, you constantly have to pay attention to other people, if you want to do well. You have to pay attention to what they're telling you and not just with their words, but with their bodies. You have to constantly read them to figure out. Now, for poker, the goal is to figure out, how do I beat them? Are they strong or not? So, the end goal is not so nice, it's to take their money, but the skills you're learning, actually can make you a much better human being in life because you become…

Casey Weade: The decision-making process.

Maria Konnikova: Yes, and the observation, the ability to see the world from other people's perspectives, the ability to get into their minds and think, Okay, what are they thinking? Why are they making this decision? That process of questioning makes you, I think, much less judgmental, much more open minded, and just a better listener all around.

Casey Weade: You said, removing emotion from the decision-making process, and I wonder if that's even possible. It's been said that every single decision we make, even if we think we're making a logical decision, is still based on a degree of emotion. Do you think it's truly possible to remove emotion from any decision?

Maria Konnikova: Yeah, I do. What do you say entirely? As I've been saying this entire time, there's no such thing as 100% certainty. So, no, not entirely, but mostly, yeah, because I'm not saying don't be human, don't feel emotion. I'm saying, learn to recognize your emotions, learn to figure out where they're coming from, what their sources, whether or not they're relevant to this decision and if not, learn to put them aside. And I think a lot of that has to do with implementing good decision processes.

So, trying to figure out, okay, what information am I going to be using? How am I going to wait it? What's important? What am I sure of? What am I less sure of? And having those rubrics really helps because then you can say, Oh, this is actually irrelevant. The fact that I like this person is irrelevant. The fact that I don't like this person is irrelevant. The fact that I'm really hungry right now is irrelevant. The fact that I didn't sleep well is irrelevant. And I'm saying the things like hungry and like sleep because that affects your emotions and your ability to process information.

It's so important to realize that you're not the same person when you've slept well than when you haven't slept well. Most people don't recognize that and they don't recognize, Wait, I'm getting angry, like I'm being a little snippy and a little nasty because I'm tired, because I'm hungry, because I'm uncomfortable, because I'm cold, because I'm hot. It's all about being more in touch with what's going on and learning to do that, so that then you can remove it and actually have a step in the process where you account for all of those things.

So, no, this doesn't remove emotion from you, but yes, it can help you be more objective when you're actually making the decision. And I will say one other thing. It's always helpful if you can get a third party involved. So, I had a coach who helped me through my poker journey. And I think it's really important in life and in decisions to have someone with no skin in the game because it's really, really difficult for us to be objective about ourselves.

And my last book was about con artists and one of the things that I recommend for people to avoid getting conned and I say, “You can’t avoid getting conned, you're going to get conned at some point if someone wants to con you,” but one thing that you can do to mitigate the danger is to have someone who you trust, whose opinion you value, who you will actually listen to and be able to have them look at your decisions objectively because we're very subjective about ourselves and we get defensive. We say, “Oh, no, no, no, I know I'm right,” and it's this blind spot.

So, insofar as you can have another party like someone who is actually not involved in this decision, someone who has no skin in the game, someone who's able to look at all the information, look at your thought process and evaluate it objectively, I think that that's a great thing.

Casey Weade: My next question was going to be, well, first, you said you had a coach and it wasn't just any coach, but you had eight times World Series of Poker bracelet winner, Erik Seidel, on your side. So, you had one heck of a good coach. But my next question was going to be how do you recognize emotional decisions versus logical decisions? And you've mentioned the process several times. So, there must be a process that you use and I'm wondering what that decision-making process looks like in poker. And then, what does that decision-making process look like in your life? I'm picturing a flowchart or A to B to C, this is a process. How rigid is this for you?

Maria Konnikova: I think it has to be unique to every person. So, this is something that you have to figure out for yourself. And in a way, it's just a habit of thought, as opposed to a rigid flowchart. And the flowchart, insofar as it exists, is a flowchart that's like a checklist, did I do this? Did I do this? Did I do this? But every decision is different. So, in poker, you have to figure out, Okay, what information is important? What have I been paying attention to? And there's so many variables, I don't want to get into poker strategy, but you know the variables ahead of time.

So, you do your homework and you actually say, okay, how aggressive is this person? What percentage of time have they been raising? What percentage of time have they been through betting? How have they been playing? What do I need to pay attention to? And then, you kind of evaluate your decision based on all of these different pieces of information and based on the work that you did ahead of time long before you sat down at the poker table. And you just have this little checklist, okay, did I remember to think of this? Did I remember to think of that? Did I remember to think of this? And, as I said, constantly ask yourself, how sure you are about all of these different things.

And then, you also have to figure out the emotional component and that comes from mindfulness, that comes from a mental habit of constantly checking in with yourself and figuring out, okay, what am I thinking and why? Just constantly asking why. And this is something I do both in poker and in life. Think of this as if you want a one-stop flowchart to making decisions, why? Always ask why, never just act and your why had better be good. Imagine that the why is going to be explained not to you, but to someone you really admire and maybe even are a little bit afraid of.

Imagine that they are going to ask you why did you do this? What are you going to tell them? That's the exercise that I always go through before any action. And it can be very, very quick because in poker, it's not like you have hours of time to think, but you can actually go through this. And then you realize, wait, the reason I'm doing this is because I always do this here, because I'm just used to doing that. Not a good reason. Anyone who's listening to that and who says that that makes no sense because I always do is not a reason. What are the specific reasons why you're doing this?

If you just develop that mental habit, that's such a huge step forward toward thinking logically and rationally and clearly because if you're asking why and if you're also asking why everyone is doing what they're doing, you become a much more nuanced decision maker and you become a much more thoughtful decision maker, you never just act. And you always have to take a pause before acting. That prevents you from making a lot of mistakes because a lot of times, we just want to act, we just want to dive in.

And I say, no, always stop and take that second, or if you have the time, take a little bit longer than a second to reflect and to think, okay, why? What are my reasons? And are they good reasons? How sure am I of these reasons? And am I going to be proud standing in front of this person or an audience and saying, justifying myself, saying, this is why I made this decision? These were the factors at play. And will I be able to answer criticism, if they said, Well, you know what? You just seemed like you were really angry or you seemed like you were ecstatic and euphoric because you just won a lot of money in poker or if you're a trader, you just made a lot of money, or whatever it is. And so, you took a risk that you shouldn't have taken because you were feeling invincible.

Can you actually answer challenges like that? Because that's something that also helps you figure out, Oh, wait, maybe they're right, maybe I'm not actually as objective as I think. So, I think, to me, one of the most powerful tools is kind of having those conversations in your head ahead of time before you act. Do I know why I did this? And will I be able to answer criticism that maybe I actually did something else?

Casey Weade: So, it seems like there's a couple core elements that should be part of everybody's decision-making process. That first one is why, why am I going to make this decision? Can I defend that? And how sure am I that this is a good decision? How much would I be willing to bet? And in investing, you're making a direct bet. People are making these big bets and they're still making big bets, maybe without asking why or can they defend that decision? I'm just wondering, how has this made you a better investor, specifically? How do we carry over into that?

Maria Konnikova: Well, I'm not an investor. And so, I think that I can't answer that honestly, but I know a lot of investors. And I think that I invest in a lot of different areas of my life, but I do want to make it clear that I do not invest in the stock market and I never have, not for any particular reason.

Casey Weade: Is that true neither you nor your husband…

Maria Konnikova: My husband's actually a professional investor. So, my husband is, this is his career.

Casey Weade: How has this helped him make better decisions?

Maria Konnikova: So, I'm caveating, but I think that it forces you to actually evaluate the bets that you're making much more thoroughly and to figure out. If my reason is good, if my decision process was good, if I actually was thinking through the things correctly, then the outcome, what's happening at any given moment shouldn't matter. If I'm still sure of my thesis, if I'm still sure of the elements that were my core elements that I should not change my decision because of what's happening right now in the markets, that's the equivalent of suffering a bad beat in poker and then saying, Oh, I'm never going to do that again. No, you have to do it again and again and again because if you were a 75% favorite, you're going to lose 25% of the time and you have to have the stomach to keep going because that 25% can hurt and it can happen over and over because probability does not follow a normal distribution. And so, what you have to do is just keep making that same decision.

So, in investing, it helps you from overtrading which is a huge, huge problem that investors have. So, Danny Kahneman who won the Nobel Prize for economics, the only psychologist to ever do that, has worked a lot with investors and has found that even though they think that they're poker players, they're really gamblers. So, they more resemble people who play roulette than people who play poker because they don't actually focus on the process, they instead are so anchored to the outcome that they end up locking in losses and not realizing all of the gains and just being way too emotional. If you tell them, they'll tell you to go to hell. They told Daniel Kahneman to go to hell and basically said, “Oh, great, thank you,” and never asked him to consult for them again because it's not something that's very pleasant to hear. You don't want to hear that you're a gambler, you want to hear that you're an intelligent investor.

So, I think that poker is very important for that. I think it's also very important for a big mistake that we make in investing and in life which is the sunk cost fallacy. So, you already invested time, money, and some resources in something. And so, you keep putting good money after bad, good time after bad because you think, Oh, well, but I've already done so much. What you have to learn to do is realize that's a sunk cost, don't do that, don't put good money after bad. Instead, cut your losses and walk away, always be willing to walk away. That is such an important lesson in poker that you can bring to investing, that you can bring to life. You can realize, you know what? It does not matter how much I've already invested, I can't change that. What I can change is my decision going forward.

And if the world has changed, if the information has changed, if the environment has changed, then walk away, forget that shit, and actually have a better decision plan going forward. That's really, really hard. And I think that that's a crucial lesson for any investor to learn.

Casey Weade: Yeah, I'm wondering how you get over some of these hurdles. How you go, I'm a gambler, I'm an investor, someone says you’re gambling, they prove to you that you're gambling and yet, you say, “No, I'm still an investor.” How you get over that hurdle where you you start to make shifts and I would also apply that to a lot of the families that will meet with, they've made horrible mistakes, so they've lost big in the past. Maybe they had a bad advisor that bought all the wrong stocks back during the tech bubble and they lost everything. And they never got back in and now, they can’t retire. And the only way they're going to be able to get through retirement is to get back in and start investing again, or they bought a bad product, real estate investment trusts, annuity and they say, “Well, I'm never doing that again,” even though those tools aren't necessarily bad, just that particular one that they had didn't work out for them. Is it possible to get over that hurdle? And what should that strategy be for the individual and say, the advisor that's sitting across the table?

Maria Konnikova: It is possible, but the thing that you need is something that has nothing to do with investing. It's humility, its intellectual humility, and realizing that it's okay to make mistakes and to be wrong and that doesn't make you a weak person and being willing to listen and to learn and to change. And that is really, really hard. And some people just do not want to do that because they feel threatened, they feel like it threatens their sense of self. That's why it's so hard to get victims of con artists, by the way, to realize that they've been conned because it threatens their ego.

So, if I could give you one lesson, it's forget about your ego, leave your ego at the door. Nothing is personal. Life is not personal. Probabilities are not personal. They don't give a damn about you. The world does not give a damn about you. You matter to yourself and to the people who know you and that's about it. So, your losses, what happened in the market, it is not personal, they didn't know. These are just elements out there, it's variance, it's noise. It doesn't care who you are. And if you realize that and if you realize this is business, it's not personal, my ego does not matter. Shut up, ego, go away.

Then, you can listen and you can learn and you can say, this doesn't threaten me because it's not personal. Instead, let me actually listen to this information and be objective about it. Let me go back to those bad decisions and say, Okay, why did this happen? Did I make a bad decision? Did I make a good decision, but I got unlucky? Did I look at the wrong information? Did I look at the wrong things? Is there something I can learn from this? How do I prevent that from happening again, and can I? Because if I made the right decision and I just got unlucky, then I should just make the same decision again. And realize that the only way for variance to even out is through volume. This is such an important lesson of poker.

Anyone can get lucky or unlucky in one hand, in one game, in one tournament, you can be terrible and win. So, if I played with my coach, Erik Seidel, who, as you said, eight bracelets, one of the best players of all time, if we played one heads up match, I might beat him. And that doesn't mean that I'm suddenly a player who's much better than he is, means I probably got lucky. We played 10, I could still maybe win more than my fair share. If we played 100, I'm broke and he has all my money, volume, over time, skill is going to win out. The skill edge is going to win out, but you need that volume. If Erik and I had just played one game and I won, Erik shouldn't walk away and say, Wow, I guess I've lost it. This girl who I've trained, just kicked my ass. And he never would, he'd say, okay, let's figure out what's happening. Let's play again, let's play again, let's play again.

And realizing that you have to keep making decisions in order for variance to even out is important and it's such an important way of getting back in there and realizing it's not about you, it's not about ego, it's not about any one outcome. It's about making good decisions over and over, understanding what was right and what was wrong, so that you keep honing your decision process. And realizing that the outcome does not matter, that the outcome is variance. The outcome is not a reflection of your decision. Too often, we use outcome as a proxy for decision. If it turns out well, the decision was good. If it turns out poorly, the decision was bad. That is not true. That is not the way the world works.

Poker just slams your face with that fact over and over and over because you can get lucky, you can get unlucky. And the best you can do is just keep making a good decision. And whatever happens, happens, it doesn't matter, the outcome does not matter.

Casey Weade: Now, what if you're on the other side of the table? So, let's say that someone has is taking a hard-line position, maybe they've made investment mistakes, maybe you know that they're wrong, maybe it's your spouse that you're having this conversation with, is it possible for someone to coach you into opening your mind, to coach you into a better decision if you don't have that other person's buy-in that humility? Is it possible to do anything without that person's buy-in?

Maria Konnikova: No, absolutely not. If the other person is not willing to listen and is not ready to listen, then no, it's not possible. Then, you might as well be talking to a wall. That other person has to be on board. So, then, your goal becomes not convincing them, but figuring out how do I make them open to this? How do I make them open to listening to advice, to open to seeking coaching, open to asking for help, open to admitting that they might need someone else's opinion? How do I do that? That becomes your goal because until you get there, nothing else matters.

Casey Weade: I wonder also where the variance is in the propensity of an individual to take risks. When you sit and you watch poker players, some of them are much more willing to take bigger bets or make bigger bets, take bigger risks, and others play against the odds. And the same thing is true with the investment world. Is there a source of that that you found?

Maria Konnikova: Yeah, so first of all, no good poker player will ever play against the odds. So, that means that this person is taking way too much risk and is actually going to eventually go broke. You always need to be on the side of the odds. Now, good poker players, sometimes, some will take risks, others won't because they'll be willing to take higher variance lines, lines that have bigger risks, bigger rewards, but it's still with the odds.

Casey Weade: Well, they may go against the odds.

Maria Konnikova: No good poker player will never know.

Casey Weade: If they're bluffing, right? If they think the other person is bluffing?

Maria Konnikova: Well, no, because there's always going to be an analysis. And they will think that the odds of that person folding are actually lower or higher, depending. They will have done an analysis of all of the possible cards that person holds. They will bet just the right amount, so that it's actually not financially reasonable for that person to call this bet. And they will put that person to the hard decision, so that they're the ones making a mistake,

Casey Weade: It's a different set of odds.

Maria Konnikova: It's a different set of odds, but the odds are always in your favor, if you're actually thinking closely. In some sense, it might not be that your cards are actually the odds on favorites, but in the full calculus of all the hands you could possibly hold and all the hands your opponent could possibly hold and the amounts that you're betting and the amount of risk that you're taking, you've actually made a play that theoretically, is a winning play; otherwise, you shouldn't make it. But in any case, I think that yes, there are people who just naturally take more risks than others, it's kind of part of their personality, so to speak.

I will say, though, that it's not the case that some individuals are just bigger risk takers and others throughout life. So, this is actually something that I studied as a psychologist. And it turns out that we really need to differentiate different types of risks. So, someone like me, I might be willing to take huge risks at the poker table, I might be willing to take huge career risks, I have. I might be able to risk my life and otherwise.

When I was in college, I went to a country, Georgia, where there was a civil war at the time and actually put myself in very dangerous situations because I was interested in the journalistic elements of that huge risk. I've never done any drugs, I've never smoked because I don't want to fuck with my health and I don't want to risk screwing up my brain. And I've done too much research on potential long-term damage, I will never do that. It's just not a risk that I'm willing to take.

I don't drive, I don't know how to drive. And to me, I would never go skydiving. These are not things that appeal to me in any way, shape, or form. My risk taking on that is zero. I have zero desire for it. So, does that mean I'm a risk seeking or a risk averse individual? It means, it depends. It depends on the context, it depends on the risks, it depends on what's going on. And I think that's true of all individuals.

That said, there are people who definitely have a different neural chemistry who need a higher threshold for thrills. And these are the people who do extreme sports, who end up going into those lines of work. And there are going to be the people taking insane risks and gambles at the poker table. And so, that's something that, I think, does have kind of a neural chemistry underlying it.

Casey Weade: Well, you wrote, if you win right away, if your first foray, and any new area is a runaway success, you'll have absolutely no idea to gauge if you're really just that brilliant or it was a total fluke, and you got incredibly lucky. I am thinking that someone that has early success and in the area of taking risk, they will inherently have a higher degree of risk tolerance.

Maria Konnikova: Absolutely. That's absolutely the case in this particular domain. So, all I mean is that it's domain specific. So, there are definitely poker players who take huge risks and much more risks than other poker players, but they might also be much less risk seeking in other situations, but yeah, if you get lucky right away, then probably, your ego gets overblown. I mean, it's huge.

Casey Weade: And I think I've done this while I’m still in poker. Well, I went all in, that worked, I'll do it again.

Maria Konnikova: Yeah, exactly, it's only human. And we do that in investments. We do that in so many different areas of our life. And we also have this fake idea that, if we're doing well, we're going to keep doing well, hot hand. This investor's hot, better give him money right now, maybe not.

Casey Weade: Well, then leads right into your other book, The Confidence Game, where you studied con artists, and is that one of the key elements that you saw the most cons is to give someone some early success so that they're more willing to continue to take risk?

Maria Konnikova: Yeah, absolutely. That is something that con artists are very good at doing. So, they'll get you emotionally involved and things will go well at first. And then, you'll be like, yeah, this is great. And then, things might actually go poorly. And that's another element of the con, but by that point, you're invested. And so, you think, oh, if this were actually a con, everything would keep going well. The fact that there are these red flags and certain things going wrong, that means it's legit because a real con artist would be smoother, because you've already had those early wins at the beginning that you're willing to kind of dismiss these later losses. It's a fascinating thing psychologically, but yeah, it's absolutely the case that letting people win at the beginning is a very powerful way of hooking them in.

A very easy example of this is one of the oldest and kind of simplest cons, but it has the elements of a lot of different cons, which is three-card monte. So, I don't know if you've ever seen a game of three-card monte. It's where someone's sitting on the street and has three cards and is asking you to find the lady, follow the lady. And one of the cards is usually a queen of spades. And they show you which card it is and then they do a shuffle and then you're supposed to find it and you can bet on it. And if you're right, you get to win all this money. And if you're wrong, they get to keep your money.

And usually, the way that they rope in a victim, and there are multiple people involved in this, there'll be someone in the audience who's a confederate, is to let them win. They'll say, oh, congratulations, you did so well. You just won 10 bucks. Do you want to double down? And then, obviously, they were letting them win a few times. And so, the person's like, this is good, I'm good, I'm going to bet 100 and then they lose. And the con artist gets all their money. And this is a very simple street con, but that's actually the same type of thing that happens on a much bigger scale in more complex cons.

Casey Weade: Well, I find that those same people will continue to go back to that same person and play the game over and over again, even though they know they were conned the first time. And I think you see the same thing in the investment world as well, someone gets conned, they tend to do it all over again. Even sometimes with the same individual, sometimes all over again with someone else. So, why is that?

Maria Konnikova: This is such an important point. People, ego, ego, keeps saying ego, our ego gets us into so much trouble. So, people refuse to believe that they could have been conned. And so, they go through so many logical, intellectual hoops to try to rationalize why it wasn't a con, that they just become prime, they think that they can see through it next time, they think that they can actually win. And so, it turns out that one of the best predictors of whether someone will be a victim of a con is whether they've already been a victim of a con. If the answer is yes, then you're golden, go ahead and con them, they're going to fall for it again.

In fact, con artists will have these things called sucker’s lists, where actually, you can pay money for lists of individuals who've fallen for telephone scams or IRS scams or this or that. And people will pay a lot of money for that list because these are the best victims because out of a different combination of factors, whether it's wounded ego or pride or just not wanting to admit that you could get conned or just all of these things that you've done to rationalize away what happened and convince yourself that either you can see through it or that it wasn't a con to begin with, you've already done all the hard work and all the heavy lifting for them. And so, you become the best victim because you think, Oh, I'm smarter than that. I won't let it happen again, if you think you've been conned or this time, I'll get luckier, if you think you haven't been conned.

One of my favorite stories is one I tell in The Confidence Game, but it's an older story that I stole from someone else's book. It happened, I think, in the early 1900s when there were a lot of these wire scams happening, Oh, I've got the results of the horse races. And there was this duo that made hundreds of thousands of dollars doing this. And they fleeced one victim for a lot of money. And a few years later, they're walking down the street in, I think, Florida or somewhere totally different. They see this guy and he sees them and they see him see them and they start running away and he starts chasing them. They're like, shit, this is not good. You know where he's going to, this is not good. And then, he finally catches up, Oh, my God, so glad I caught up with you guys. I have more money, let's try it again. I think this time I really feel my life changing. And that is a victim of a con artist in a nutshell.

Casey Weade: Well, I see people almost seeking con artists at a time. I don't think there's a week that goes by where we don't have someone come in and ask for something highly unrealistic. They'll say, “Hey, I want 8% guaranteed, I don't want to lose anything. And if you say you can't do it, I'm going to keep shopping until somebody tells me that they can do it.” What do you say to that? Because you want to rescue those people. You want to show that's not possible, you're going to get hurt.

Maria Konnikova: So, that's exactly what you’re trying to do. You say, look, the reason I'm saying that I can't guarantee this is because nobody can. And actually, be prepared, show them as much data in as compelling a way as you possibly can and try to explain it without condescending, not being like you're an idiot. Like, look, here's historically, let's look at the people who've guaranteed 8%, Bernie Madoff, Bernie Madoff, Bernie Madoff, and Bernie Madoff. That's the type of person who can guarantee that type of return.

Now, let's look at kind of these best funds. Yeah, this one sometimes went way over 8%, but you know what? It had years when it was negative. Actually, show them and talk through what you know, that they don't know. And then, I would also go a step further and say, and anyone who promises you otherwise is lying. And I hope you understand why. And I have your best interests at heart. If someone ever says I can guarantee you 8% every single year, run, run away. And if you don't run away and you end up getting taken advantage of, know that you can always come back here, I will not take this rejection personally. This is a safe space, I will never judge you for doing that because that also is kind of a gesture of good faith saying, if you want to go, go, but know that you're always welcome back here, no hard feelings, and I will help you recover from that scam because that's what it's going to be.

Casey Weade: I've got to imagine with all the research you've done into con artists in the financial world, that you're somewhat skeptical of individuals that you meet in the investment world or financial advisors for that matter. Maybe you're not really skeptical, but you are able to get a pretty good read on someone pretty quick and make sure that this person's acting in your best interest. Maybe you have some red flags to look out for, maybe you would have some questions for someone that you would always ask, could you share some of those things with us if you have them?

Maria Konnikova: Sure. I mean, I am very wary. And this is something that I think is not always the case, but I'm always very wary of people who are too confident, too smooth, and have too many promises because that, to me, that con artists are charismatic, they're confident, they're just oozing charm, and they're oozing certainty, and certainty scares me. And I've realized how important it is. I would much rather go to an advisor who says, look, here's the range of possible outcomes, here's kind of what we're hoping for, but this might also happen.

And someone who actually talks me through and makes it clear that they're not promising me the sun and that they can't promise me the sun, someone who says we're the best shot by far, there's no one better, here, look at this, we're going to make you rich and it's going to be no risk, someone who promises something for nothing who says no risk, the word, no risk, the phrase, no risk comes out of your mouth, I'm walking out the door. There's no such thing as no risk. Risk-free investment, risk-free returns, that does not exist, especially and I also want someone who listens to me and who actually hears my concerns because every single person…

Casey Weade: If I may interrupt you, you may go to a bank and not question the risk-free piece or would you still?

Maria Konnikova: No, I may go to a bank and not question…

Casey Weade: We’re talking about investing, specifically.

Maria Konnikova: So, I may go to a bank and not question the risk-free piece, although, I'd be wrong because we've seen that banks do fail. You have to think about kind of what bank it is. Not any bank, some banks, I will question it. So, what are the guarantees? What does my bank actually guarantee? What does it guarantee in terms of the safety of the money that I'm putting with them? So, I think that that's important, but also have someone who listens to you and who listens to your goals because everyone has different goals when it comes to investing.

Is my goal to retire in 10 years? Well, that's a very different investment strategy from, if I'm in my 20s and I have no desire to retire for 40 years, I can take much more risk if I'm in my 20s than I can when I'm in my 50s because bigger risks, bigger rewards, bigger gains. But if I'm someone who's looking who has a fixed date, this is when I retire, this is how long I have, all of a sudden, different strategies are going to be effective. And so, someone needs to listen to you. There's no one size fits all. And a lot of times, advisors don't truly listen because they think they know better than you. So, as an advisor, never think you know better than your client, what they want, listen to what they're actually trying to tell you.

Casey Weade: That's great stuff. Maria, I know we're running out of time. Do you have time for one last philosophical question?

Maria Konnikova: Sure. Let's see one final one.

Casey Weade: All right. So, how do you define purpose and meaning?

Maria Konnikova: I define it as fulfillment and happiness and that's different for every single person. It's figuring out, what makes you happy? To me, I've found that it's just trying to leave the world every single day a slightly better place than I found it the day before, whether it's in tiny ways through kind of kindness to friends, to family, to connections, whether it's through kind of trying to share some of the luck that I've had with others and trying to kind of make positive changes that way. That's my idea of fulfillment.

Casey Weade: That's great. I love how simple that is. I mean, sometimes we get overwhelmed by this. What's your purpose? Jeez, it feels like it has to be this big, grandiose thing, but it can be just as simple as taking it day by day, as you do in your own life and look to leave the world a better place at the end of the day. So, thank you so much for that.

And also, thank you for sending over a box of your books, The Biggest Bluff, and we're going to be giving it away. So, The Biggest Bluff: How I Learned to Pay Attention, Master Myself, and Win, New York Times bestselling book, if you'd like to get a free copy of this book, we're going to give this box away until they're all gone. And if you'd like to do that, all you have to do is leave an honest review and rating over on iTunes for the podcast, that's how we get noticed.

So, you can do that at retirewithpurpose.com, click on the podcast tab. It says leave a review there or just do it right there on your iPhone, your device that you're using, and then shoot us an email at info@howardbailey.com with your iTunes username and we will send you out a copy of The Biggest Bluff. Maria, thank you so much for joining us.

Maria Konnikova: Thank you, Casey. It's been a pleasure.


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