The best books on Making Good Decisions

How do you make good decisions?

Decision-making is even more difficult than people realize. In the academic sphere, we talk about how we’re breaking out the decision: we assume no variance in the system, and then we say, ‘What’s one plus one?’ We say it’s two, and we’re all happy with that. That’s not how the world works! In the real world, everything operates with imperfect information. We don’t know what we don’t know.

Additionally, things constantly change. What may have been a great investment decision in 2021 may make no sense in 2023, simply because of fluctuating interest rates. We have an idea about how the current interest rates affect our business, but we may have no idea how different the business should look if the interest rates were to rise by an additional five or six per cent.

All of this makes decision-making difficult. That’s even before we consider the effects of bias, the impact of noise, the fact that we don’t control our destiny, or the possibility that all our basic assumptions are wrong. The combination of these factors impedes our ability to make the perfect decision.

Therefore, our goal is not to make the perfect decision. It’s to make the best decision possible at any given moment, based on what we know at that time, how we know it, and why we know it.

It’s not a question of whether we regret a decision in retrospect; it’s a question of whether, knowing what we knew then, it was a good decision or a bad one.

Your first recommendation for us is Noise by Daniel Kahneman, Olivier Sibony, and Cass R. Sunstein — quite the star team. Can you tell us a little bit about this book?

The central theme of this book is super cool for anyone who has learned about bias. Much of Daniel Kahneman’s work, along with that of Amos Tversky and the start of behavioral economics, is centered around the idea of cognitive bias — systemic errors in our thinking that change our judgment in a specific way, usually caused by incorrect applications of heuristics.

His most well-known book, Thinking, Fast and Slow, as well as his seminal work in the field, explore these ideas and how we can recognize our biases and go from there. Noise is a really cool sequel. It’s what the second book of Dune (Dune Messiah) was to the first book of Dune. The first book of Dune depicts an omniscient, omnipotent figure becoming a leader, and the second book of Dune is about how that’s not a good system of governance for anyone involved.

Noise is about the fact that while we have a lot of cognitive biases, in many cases the world is random. It’s what gamers call RNG or random number generator — a fun shorthand way to describe all the randomness in a game’s world, randomness that’s mirrored in ours. It creates this variability in our observation of the world and makes it even harder to make good decisions, because not only do we have to fix for all our biases and get all the systematic priors out of the way, but even accounting for all of that, testing the same samples six times may sometimes yield very different results.

In practice, how do you distinguish these cases? Do you have any useful rules of thumb for figuring out when the variation you face is random and when it might be predictable?

The book has two particularly useful sections. The first describes what noise is, and the second does a noise audit to reflect upon that and figure it out. I would recommend the book just from the noise audit perspective. The way I’ve done it, which I find easiest, is to spend a lot of time upfront writing down my priors.  ‘Priors’ is a term in probability and Bayesian inference, which can be thought of as our background knowledge or assumptions about a subject before we gather any new information. I write down my priors and why they are my priors.

Then, when I observe the outcome of a decision, I don’t ever grade it at 100 or 0. I don’t guarantee that it’s right or that it’s wrong. I’m thinking probabilistically: ‘We can assume this is 70 per cent right. There’s probably enough noise that I could be wrong.’ When making decisions in my personal life, in my professional life, and in investing and business, I echo Paul Saffo’s philosophy of having a lot of strong opinions, weakly held. In part, that’s because I don’t know what noise was involved in that decision-making.

That’s a good segue to your next recommendation: But What If We’re Wrong? by Chuck Klosterman, the best book for thinking about mistakes. Can you introduce us to this book?

I believe that the best books on a topic aren’t necessarily academic. You have to intermingle academic work with examples from the real world and hear from various decision-makers. Chuck Klosterman, who wouldn’t be considered an academic decision theorist, is a great writer who provides that viewpoint.

But What If We’re Wrong? asks what it would mean if your priors were wrong. The central theme of the book is the human tendency to think that our current belief systems and worldviews are correct, which sounds tautologically true. No one would say, ‘My view of the world today is incorrect.’

But we should be saying that more often. Klosterman cites a few great examples of this. William Thomson, Baron Kelvin of Largs, also called Lord Kelvin, believed that the world was between 20 million and 400 million years old. This was considered a revolutionary insight at the time and entire scientific communities adopted this ‘fact’ as a basis to build their theories on. We now know it’s wrong.

“Decision-making is even more difficult than people realize”

Another quintessential example is the geocentric model of the universe. There were entire physics models and entire learning models based on the indisputable truth that the Earth was the center of the universe. If you have that view and assume that to be true, you can generate your own laws of physics based upon that. That’s scary.

While Noise explores the idea that there are variations in the world, But What If We’re Wrong? explores the possibility that your priors are wrong. If so, you may have to reevaluate your priors and question the assumptions underlying your world.

The quintessential example provided in the book is our current inability to merge quantum and Newtonian physics. Anyone who has studied physics knows the laws of gravity and has likely heard of quantum physics. The rules that govern each of these fields work, but they don’t interact with each other. That means something is wrong. A cohesive theory of physics requires merging these two that do not merge right now. We’re basing our understanding on these two different models that don’t work together. At some point, when one of these models is likely to be proved incorrect, that could mean an entire branch of physics will simply disappear. That’s crazy.

There’s a strange balance to live with — you know that a significant share of your overall beliefs must be wrong, but for each individual belief, you almost necessarily think it’s true, or at least the most likely option. How do you deal with that tension?

It boils down to living with uncertainty and being okay with that. I think it’s perfectly reasonable and rational to be uncertain about things. It’s important for us to live our lives according to the best of our knowledge at that moment in time while recognizing that it may be wrong.

Consider our changing attitudes towards health and nutrition. American perceptions of nutrition have changed dramatically over the last forty years and even in the years preceding that. First, fats were bad for you. Then trans-fats, then sugar, then carbs. Now who knows? People form very strong beliefs with regard to food. They believe absolutely in Atkins or keto, or whatever other diet.

We must learn to live with the fact that we’re doing the best we can. We try to eat as healthily as possible. When the science changes and the experts tell us something else is better, we pivot.

The Public Health Agency of Canada currently says that no amount of alcohol is safe to consume. Based on our current understanding of science, this is probably true. But from the 2000s until about six months ago, the guideline for an adult male was that as long as you’re consuming fewer than ten to fourteen drinks, you’re probably fine. Now the recommendation is that any amount above zero is bad for you.

How do you logically equate the two? Should we consider the previous recommendation to be wrong and the current recommendation canon? Is it somewhere in between? The answer is that we’re uncertain. We’re going to keep learning new things and receiving new information. As we learn, we’ll go from there. When you were drinking fourteen drinks a week, if you started feeling really bad, perhaps you should have asked yourself whether the guidelines were wrong and go from there.

Your next recommendation applies those concepts in a very practical concept: The Biggest Bluff by Maria Konnikova, an outstanding book about making good decisions through the lens of poker. Can you tell us a little bit about it?

Maria Konnikova is arguably the best writer of the group. This is a bold claim, considering that the group includes Chuck Klosterman and Ted Chiang. Her writing is great. I highly recommend the book to any person because it excels at telling stories about three things I love: self-improvement, poker, and decision-making under imperfect information conditions.

The Biggest Bluff details her journey from being a journalist to being a professional poker player. That’s an accrual of divergent skills. She explores the role of luck and the importance of differentiating it from skill. That’s so hard; part of the challenge of becoming a professional poker player is balancing your confidence in your playing ability with understanding how much variance and luck are involved with your life. Despite all the noise and variance happening in one’s poker journey, you have to temper your highs so as not to become overconfident and downplay luck,  while also avoiding getting so beaten down that you doubt your own abilities, as this will prevent you from improving.

Here’s a fun fact — even the best poker players in the world only make money from 10 to 20 per cent of the tournaments they play. They win less than one per cent of the tournaments they enter! If you play a full World Series of Poker events schedule, out of thirty events, you may cash zero and most likely you win zero. With the knowledge of this likely outcome, how do you improve?

You have to be systematic in your approach. You have to recognize that when you win, there’s luck involved. Figure out where you got lucky, where you applied skill, see what spots you missed that could have been done better, even when you win. When you lose, you have to recognize there’s luck involved. Don’t let it beat you down.

I’ve heard it said that if you’re playing one-dollar or two-dollar poker and you lose $10,000, there is a chance you got unlucky but there’s no chance you’re good. I think it works both ways. If you’re up $100,000 from playing one-dollar or two-dollar poker, there’s a chance you got lucky, but there’s no chance you’re horrendous. You’re better than average and you should go off that affirmation.

In many ways, poker is a toy game. It’s a game about imperfect information, but its principles apply to all of life. This is how you improve things. You have to recognize the noise in the world. You have to recognize your bias. You have to recognize that the things that you knew to be true may not always be true.

There’s a great book by Dara O’Kearney about playing something called satellite-style poker. Basically, instead of having a tournament where the winners take the majority of the money, or cash games where everyone walks away with what’s in front of them, in a satellite event, you play until there’s a certain number of people left, and they all split the prize pool equally, no matter if you were the chip leader or barely squeaked in. This prize structure completely warps how the toy game is played. It’s the book on satellites and talks about folding aces.

Everyone who plays poker has been told their entire life to never fold pocket aces. O’Kearney lists a bunch of reasons why you should fold aces in specific situations. If you take that heuristic and apply it incorrectly, you will likely lose lots of money. But if you take the heuristic and apply it correctly, you will have certainly gained an edge on your opponents.

On a larger canvas, your next recommendation for us is Money Games: The Inside Story of How American Dealmakers Saved Korea’s Most Iconic Bank by Weijian Shan, which you’re recommending as the best book about decision-making in business. Please tell us a little more about this work.

Weijian Shan is a great investor and writer. This is someone who’s actively challenging their priors and evaluating their norms. In my opinion, this book is a must-read for anyone who wants to understand private equity. It recounts how Newbridge Capital acquired what was formerly Korea’s largest bank during the IMF crisis in the 1990s.

It tells a crazy story about people who do not fully understand each other’s culture, do not have control of their situation, and despite all of that, persevere to understand and try to make the best decision possible, at every moment in time.

There are three things I want to call out. First, during the 1997 Asian financial crisis, no one knew what was happening. In retrospect, it’s easy for us in 2023, seeing the economic powerhouse South Korea has become, to observe, ‘Oh, of course you should buy a bank in Korea.’

No one knew at the time that Korea would become an economic superpower. I’m Korean-American, and I grew up not knowing about the powerhouse nature of Korea because it wasn’t a powerhouse at the time. It became one at around the time I became a teenager. Now people around the world know about BTS and Blackpink; in the 1990s Korea certainly didn’t have that cultural cachet. The norms and assumptions of Korean culture were different from those of American culture at the time. It’s super cool to read about an American-trained Chinese economist, based out of Hong Kong, working with an American private equity firm, heading to South Korea to navigate those differences.

Second, the regulatory climate was constantly changing. If you were basing your entire investment decision on what you knew at the beginning of the IMF crisis versus when they got the deal done, you would be lost. They had to challenge their priors, and they had to work with imperfect information, some of which was completely out of their control and included circumstances completely hidden from their view (such as the inner workings of the government, interpersonal politics, etc.). The noise of the situation was such that they would be working with someone who understood what they were trying to achieve, the situation would change, and then they would be working with someone else. It wasn’t their fault. Sometimes things just happen that way.

The third interesting topic is the art of improving. Within this is embedded the art of learning. This is a guy who’s learning how to do private equity deals, learning how to improve those deals, and making deals in real time. Becoming an expert requires you to recognize the amount of luck involved.

You’re also an investor; can you tell us how you apply these ideas about good decision-making to your own investments?

I spend a lot of time thinking about time horizons, about how I might be wrong and which competitive advantages I have. When I discuss this book with my investor friends, I ask them, “At which point would you have quit?”

There are lots of points in this book when I don’t know how this guy keeps going. He’s vacationing in Jeju Island with his family when the deal blows up for the umpteenth time. He takes a deep breath and gets in the call and starts working on the deal. That’s a really great example.

Specifically, I love the ability to reflect upon whether the deal succeeded. Can the deal be considered successful ten years later? It’s an important point to consider. Mostly, I do venture-style investing at pre-seed, seed, and series A — early-stage companies. It’s hard to obtain feedback.

At times, I will not know for a decade if the bets I’ve made are going to turn out to be right. It is sometimes the case that they are right for reasons that are different from my reasons for investing in them. It is important to reflect on that constantly.

David Hornik, a GP at August Capital and Lobby Capital, told me that it took him about ten years to figure out if he was lucky, and another ten years to figure out if he was good. He is now about twenty years in, so I think he can say that he’s good. For the rest of us, it’s a question of how we can improve in an environment where we don’t know what we’re doing.

On a very different note: your last selection for us is Exhalation by Ted Chiang. Can you tell us a little bit about this book and why you chose it?

I think this is an important book. Decision-making becomes even more difficult if you look at it only from one perspective. I wanted to select five books that approach the same problem from a lot of different angles. Noise is an incredibly academic take on making decisions despite inconsistency in observed phenomena. But What If We’re Wrong? contains Chuck Klosterman’s essays about historically inaccurate ideas viewed from his perspective. The Biggest Bluff depicts Maria Konnikova tracking her own self-improvement in understanding the imperfect-information game of poker. In Money Games, Weijian Shan is doing it on a private equity scale with banks.

In my opinion, Ted Chiang is the best science fiction writer of his generation. Exhalation is one of my favorite books by him — incidentally, this book was recommended to me by my now-fiancée on our first date.

The thing I love most about it is how it approaches decision-making conundrums both from a science fiction perspective and through a literary fiction lens. It’s a series of short stories, and I just want to point out the two stories that really gripped me.

“Anxiety Is the Dizziness of Freedom” is a story about free will. In it, people can buy devices that let them see into alternate versions of themselves, and by observing their alternate selves they change their decision-making in their own world. If we could see how our lives pan out under different choices and reflect that, we would greatly improve our decision-making. However, we don’t need a science fiction device to have this introspection. This is how we work all the time, and it would be awesome to be more explicit about it.

As an entrepreneur, one thing I always recommend to other entrepreneurs is not to take on any project for which the end outcome is not something you want. If you want to be a sponsorship sales team that does agency work on behalf of clients, like the WME/IMGs of the world, that’s a good thing to go after. But if you don’t want to do that, don’t build your business in approaching agency work, and then realize ten years down the line that you don’t like being an agent. That’s not a good way to live your life.

I was talking to a former high-stakes poker player, Jay Rosenkrantz, who used to make millions of dollars a year. He even had a show called 2 Months, $2 Million. After the poker crash, he became an entrepreneur and has done all sorts of cool and interesting work on the cutting edge of entertainment. But at the end of the day, if money was his only objective, if he had stayed playing online poker, he would have made more money, and if he had become a trader, he certainly would have made more money.

Would he make the same decision, knowing what he knows now? Who knows. But would he have made the same decision, knowing what he knew then? 100 per cent. That’s how we know he’s a good decision-maker. The way he thinks about the world accounts for the opportunity costs of pursuing different actions and he’s thinking the same way as he would if he had a device that showed alternate versions of himself.

Another Chiang story from this collection I love to talk about is called “The Truth of Fact, the Truth of Feeling.” It’s about a journalist living in a society where everyone has a chip implanted in their brains to record everything that has happened, and how the observed reality is different from how we feel about it.

This is very much a case of uncertainty. What’s actually true may not be true to us in a lot of ways. “The Truth of Fact, the Truth of Feeling” explores our perception of reality, because our perception is subjective. If we recognize this, it allows us to do better on breaking out of the mold, on questioning our perceptions and our priors, and on seeing what’s happening in the world.

This comes up all the time in my favorite poker books — not just The Biggest Bluff but also Play Optimal Poker by Andrew Brooks and Modern Poker Theory by Michael Acevedo: we know what the reality should be, but the next step is recognizing that you’re not a robot. And the next step after that is adapting heuristics since you know you’re not a robot.

I love Exhalation. There are a lot of great stories in this collection, and I can talk endlessly about them. I think it’s important to read fiction. It’s such an important contribution to this discussion because it forces us to see the world as it could be, and helps us break out of our preexisting molds.