HARDBOUND

Embracing Uncertainty

Annie Duke draws on examples from poker and business to write about smart decision-making

|
Published 2 years ago on Aug 25, 2018 Read

The punch line of the John Hennigan–Des Moines story—“after two days, he begged to get out of it”—made it part of gambling folklore. That punch line, however, obscures how usual the underlying analysis about whether to move was. The only real difference between Johnny World’s decision to move to Des Moines and anyone else’s decision to relocate or take a job was that he and the poker players made explicit that the decision was a bet on what would most improve their quality of life (financial, emotional, and otherwise).

John considered two distinct and mutually exclusive alternative futures: taking the bet and living for a month in Des Moines, or not taking the bet and staying in Las Vegas. Any of us thinking about relocating for a new job has this same choice between moving, with the potential to earn the money being offered, or staying where we are and maintaining the status quo. How does the new job pay compared to what we have now? There are plenty of things we value in addition to money; we might be willing to make less money to move to a place we imagine we would like a lot better. Will the new job have better opportunities for advancement and future gains, independent of short-term gains in compensation? What are the differences in pay, benefits, security, work environment, and the kind of work we’d be doing? What are we giving up by leaving our city, colleagues, and friends for a new place?

We have to inventory the potential upside and downside of taking the bet just like Hennigan did. That his $30,000 wasn’t a sure thing doesn’t make his decision distinct from other job or relocation decisions. People take jobs all the time where a large portion of the compensation is contingent. In many businesses, compensation includes bonuses, stock options, or performance-based pay. Even though most people don’t have to consider losing $30,000 when they take a job, every decision has risks, regardless of whether we acknowledge them. Even a set salary is still not “guaranteed.” We could get laid off or hate the job and quit (as John Hennigan did), or the company could go out of business. When we take a job, especially one promising big financial rewards, the commitment to work can cost us time with our family and affect those relationships, a costly if not losing compromise.

In addition, whenever we choose an alternative (whether it is taking a new job or moving to Des Moines for a month), we are automatically rejecting every other possible choice. All those rejected alternatives are paths to possible futures where things could be better or worse than the path we chose. There is potential opportunity cost in any choice we forgo.

Likewise, the players on the other side of that bet, risking $30,000 to see if John would live a month in Des Moines, thought about similar factors that employers consider in making job offers or spending money to create enticing workplace environments. The poker players had to strike a fine balance in offering that bet to Hennigan: the proposition had to be good enough to entice him to take the bet but not so good that it would be guaranteed to cost them the $30,000.

Although employers aren’t trying to entice employees to quit, their goal is similar in arriving at a compensation package to get the prospect to accept the offer and stay in the job. They must balance offering attractive pay and benefits with going too far and impairing their ability to make a profit. Employers also want employees to be loyal, and work long, productive hours, and maintain morale. An employer might or might not offer on-premises child care. That could encourage someone to work more hours . . . or scare off a prospective employee because it implies they may be expected to sacrifice aspects of their non-work lives. Offering paid vacation leave makes a job more attractive but, unlike offering free dining and exercise facilities, encourages them to spend time away from work.

Hiring an employee, like offering a bet, is not a riskless choice. Betting on hiring the wrong person can have a huge cost (as the CEO who fired his president can attest). Recruitment costs can be substantial, and every job offer has an associated opportunity cost. This is the only person you can offer this opportunity. You might have dodged the cost of hiring Bernie Madoff, but you might have lost the benefit of hiring Bill Gates.

This is an extract from Annie Duke's Thinking In Bets published by Portfolio