#119 Todd Simkin: Making Better Decisions
Todd Simkin, Associate Director at Susquehanna International Group, shares insights on decision-making, from trading to interpersonal relationships. He discusses Bayesian thinking, overcoming biases, and teaching others to make better choices.
Deep Dive Analysis
17 Topic Outline
Susquehanna's Approach to Decision-Making and Information Asymmetry
Understanding and Applying Bayesian Thinking
Cognitive Biases and Tribalism in Decision-Making
Rules vs. Principles and Managing Cognitive Load
Fostering a Truth-Finding Culture for Better Decisions
Todd Simkin's Career Journey and Educational Background
Teaching Decision-Making: Growth Mindset and Vygotsky's ZPD
Calibrating Probabilistic Predictions and Avoiding Resulting
Poker as a Tool for Teaching Probabilistic Decision-Making
Top Three Ways to Improve Decision-Making Ability
Constructive Communication and Modeling Decision Processes
Reflective Listening and the Principle of Charity in Relationships
Hiring for Openness to Feedback and Learning
Lessons from Quitting Lacrosse: Deliberate Decision-Making
Coping with Depression and the Value of Mental Health Hygiene
Jeopardy Experience and Betting Strategy
Parental Lessons: Hard Work, Education, and Unconditional Love
8 Key Concepts
Information Asymmetry
This occurs when one party in a transaction or decision possesses more or superior information compared to another. Susquehanna addresses this by building internal research capabilities and continuously updating their opinions using a Bayesian approach, rather than relying solely on limited personal views.
Bayes' Theorem
A probabilistic method for updating the likelihood of an event based on new evidence. It allows individuals to adjust their initial beliefs (priors) with incoming information to form a more accurate, updated probability, which is crucial for decision-making under uncertainty.
Cognitive Biases
Systematic errors in thinking that affect the decisions and judgments people make. Examples like confirmation bias, hindsight bias, and attribution error can prevent individuals from accurately weighing new information or updating their existing beliefs, especially when ego or tribal alignment is involved.
Zone of Proximal Development (ZPD)
A concept by Lev Vygotsky that describes the difference between what a learner can achieve independently and what they can accomplish with guidance and encouragement from a more knowledgeable person. Education focuses on providing targeted support, or 'scaffolding,' to help individuals learn within this zone.
Scaffolding (Education)
In the context of learning, scaffolding refers to the minimal, temporary support provided by a more knowledgeable individual to help a learner master a new skill or concept within their Zone of Proximal Development. This support is gradually removed as the learner gains competence.
Resulting/Hindsight Bias
The tendency to judge the quality of a decision based on its eventual outcome, rather than evaluating it based on the information and context available at the time the decision was made. This bias can obscure the true quality of the decision-making process itself.
Principle of Charity
A principle in communication and negotiation that involves assuming the other person is sincere, well-intentioned, and intelligent, giving them the benefit of the doubt. This approach fosters constructive dialogue and helps align parties towards a common goal or resolution, both in trading and interpersonal contexts.
Real Option
A decision where one chooses to wait, incurring a small cost or maintaining a current state, to preserve the opportunity for a potentially larger future benefit or to gather more information. This strategy acknowledges that not all decisions need immediate action and that waiting can have value.
9 Questions Answered
Susquehanna builds internal research capabilities and uses Bayesian approaches to update their initial opinions, being willing to adjust their views based on new information from various market sources, especially when information becomes mutually exclusive.
People struggle due to cognitive biases like confirmation bias, hindsight bias, and attribution error, which cause them to discount new information, especially if it challenges their existing beliefs or ego-tied positions. Tribalism also plays a role, as people tend to accept information that comports with their group's beliefs and dismiss information that challenges it.
Individuals can improve by fostering a culture of open communication where they talk through their decisions with peers, allowing others to identify biases they might not see in themselves. It's crucial to reward truth-finding over mere action and to be open to feedback without feeling personally attacked.
Susquehanna operates with a growth mindset, believing traders are made, not born. They focus on hiring smart, educable, and vocal individuals willing to be wrong. Their teaching approach involves modeling the decision process, providing minimal support (scaffolding) within a learner's Zone of Proximal Development, and building understanding from smaller concepts to larger ones.
Calibration is best achieved by making many predictions, especially uncorrelated ones, to get frequent feedback. Super forecasters, for example, are measured by their ability to make numerous probability assessments and update them as information changes, allowing for continuous learning and improvement in prediction quality.
The top three ways are: 1) Talking more and communicating constructively with others to get diverse input, 2) Thinking probabilistically, and 3) Being open to being wrong and actively seeking out disconfirming information.
Parents can teach better decision-making by modeling their own decision processes, sharing their reasoning rather than just giving answers, and asking open-ended questions like 'Help me understand better' or 'How do you feel about that?' to encourage children to articulate their thoughts and feelings.
In an interview, one can identify openness to feedback by finding a candidate's 'zone of proximal development' and providing a little scaffolding. Ideal candidates embrace the feedback and use the tools provided to work towards a solution, rather than waiting for more answers or resisting the feedback.
Seeing a mental health professional regularly, like a therapist, can be considered part of mental health hygiene, similar to getting teeth cleaned or having an annual physical. It allows for proactive check-ins, helps maintain overall well-being, and can catch potential issues before they become significant problems.
31 Actionable Insights
1. Embrace Probabilistic Thinking
Recognize that the world is not binary (will/won’t happen) but probabilistic, and think in terms of probabilities rather than certainties. This allows for a more nuanced understanding of reality and better decision-making in uncertain environments.
2. Talk Through Decisions Constructively
Regularly discuss your decision-making process and rationale with peers, fostering a culture that rewards truth-finding over individual action. This allows others to identify your biases (e.g., anchoring) and improves collective decision processes without personal attack.
3. Actively Seek Disconfirming Information
Cultivate an openness to being wrong and actively search for information that challenges your existing beliefs or decision processes, even if uncomfortable. This prevents ‘falling in love with your decision process’ and enables more accurate updates to your views.
4. Update Opinions Bayesian-style
Be willing to update your initial opinions and probabilities based on new information, using approaches that are inclusive of all available data. This is crucial for navigating information asymmetry and making better decisions as new data emerges.
5. Seek Feedback on Process, Not Results
When asking for feedback, describe the information available and your decision process at the time, without revealing the outcome. This avoids hindsight bias (‘resulting’) and focuses feedback on the quality of the decision-making process itself, which is vital for learning.
6. Model Decision Process, Not Just Outcomes
When teaching or guiding, explain the ‘how’ and ‘why’ behind your decisions, detailing your thought process and information considered, rather than just stating the correct action. This equips others with the tools to make better independent decisions and fosters constructive conversations.
7. Treat Life as Experiments
Approach situations as experiments, running them, getting feedback, updating your approach, and running new experiments. Experiments fail, but finding ways they fail is how they eventually succeed, leading to continuous learning and improvement.
8. Create Personal Rules for Cognitive Ease
Establish clear personal rules for recurring decisions (e.g., ‘I don’t eat dessert,’ ‘I exercise daily’) to lighten your cognitive load. This reduces the mental effort of repeatedly evaluating similar choices, making consistent positive behavior easier.
9. Apply the Principle of Charity
Assume others are sincere, well-intentioned, and knowledgeable, giving them the benefit of the doubt in conversations and interactions. This protects you from being exploited by those with better information (in competitive contexts) and fosters alignment and collaboration in interpersonal situations.
10. Practice Reflective Listening
When someone shares a problem, simply reflect back what you heard them say without immediately problem-solving or reframing. This makes the person feel heard and seen, allowing them space to clarify their own thoughts and gain understanding.
11. Start with ‘How do you feel?’
When someone comes to you with an issue, begin by asking ‘How do you feel about that?’ This helps you understand their emotional state and perspective before offering advice, fostering empathy and preventing misinterpretations.
12. Deliberately Plan for Time Freed
Before quitting a significant commitment, clearly articulate your reasons beyond frustration and develop a concrete plan for how you will productively use the freed time and resources. This ensures the decision is well-thought-out, prevents rash choices, and leads to a genuinely better outcome.
13. Consider Waiting as Low-Cost Option
When faced with a decision to quit, evaluate ‘waiting’ as a real option, acknowledging its daily costs but also its potential long-term benefits and the opportunity for a more informed decision. This allows for a more deliberate decision-making process, avoiding irreversible choices and potentially revealing unforeseen upsides.
14. Respond Inquisitively, Not Emotionally
When someone shares a difficult decision or problem, respond with inquisitive, non-emotional questions like ‘Help me understand better’ or ‘Tell me more,’ framed with an underlying message of love and support. This encourages open communication, helps you understand their perspective, and allows you to provide more effective support without judgment.
15. Lead with Acknowledged Shortcomings
When seeking feedback, especially from those in subordinate positions, start by honestly acknowledging your own shortcomings or areas for improvement, then ask open-ended questions like ‘what else?’ This creates a constructive, open environment that challenges behaviors, not the person, and invites genuine feedback.
16. Act on Feedback to Encourage More
When you receive feedback, make a conscious effort to act on it and demonstrate that you’ve incorporated it into your behavior or thinking. Failing to act on feedback is not just unhelpful; it’s hurtful and will cause people to stop providing valuable input in the future.
17. Prioritize Mental Health Hygiene
Regularly check in with a mental health professional (e.g., therapist) as a proactive measure for mental health hygiene, similar to annual dental cleanings or physical check-ups. This helps catch potential issues early, ensures things stay on track, and normalizes mental health care as a preventative practice.
18. Cultivate Good Habits Through Small Choices
Recognize that your character in crucial moments is built by a multitude of small, seemingly unimportant choices made daily over time, and focus on developing habits of discipline, self-sacrifice, duty, honor, and integrity. These consistent small choices determine your character and behavior in significant situations.
19. Scrutinize Tribal Information
When evaluating information, especially that which aligns with or challenges your group’s beliefs, actively dig into the quality of the source and the information itself. This helps avoid tribalism’s pitfalls, where people uncritically accept agreeable information and dismiss disagreeable information, regardless of its quality.
20. Guard Against Ego-Driven Discounting
Be aware of how personal stake or ego can lead you to discount new, disconfirming information. This helps counteract biases like confirmation bias and hindsight bias, which prevent accurate updates to your beliefs.
21. Identify Mutually Exclusive Information
Look for information or signals that cannot coexist in the same universe to identify inconsistencies in your understanding or assumptions. This helps in recognizing when your understanding or assumptions are flawed, prompting a re-evaluation.
22. Embrace ‘It Depends’ Nuance
Recognize that in complex situations with imperfect information, the answer often ‘depends’ on various factors. Engage in discussions that explore these dependencies to foster nuanced understanding and prepare for real-world uncertainty.
23. Calibrate Predictions with Feedback
To improve the accuracy of your probabilistic predictions, make many predictions, especially on uncorrelated events, to get frequent feedback. This allows you to calibrate your probability assessments over time and learn from a wide range of outcomes.
24. Approach Negotiations as Collaborations
Recognize that every negotiation is inherently a collaborative effort because the other party has alternatives and will only engage if they expect a better outcome. This mindset encourages finding mutually favorable outcomes, ensuring continued engagement and positive future interactions.
25. Challenge Interviewees to ZPD
In interviews, aim to challenge candidates to the edge of their current competence (their Zone of Proximal Development) by providing minimal support. This reveals their potential for growth with support and their openness to feedback, which are key indicators of future success.
26. Seek Eager Feedback Users
When evaluating people (e.g., for hiring), identify those who are hungry and eager to use feedback and available tools to do the work themselves. These individuals are more likely to be successful and adaptable in challenging environments.
27. Value Hard Work and Dedication
Dedicate yourself to a purpose and be willing to work incredibly hard, recognizing that sustained effort often leads to long-term benefits and opportunities. Hard work provides payment in the long run and helps achieve important life goals.
28. Prioritize Quality Education
Make significant sacrifices, if necessary, to secure a high-quality education for yourself or your children. Education is highly valued and provides greater opportunity and a better foundation for life.
29. End Conversations with Genuine Affection
Make it a habit to end conversations with loved ones by genuinely expressing ‘I love you,’ ensuring it’s a real and purposeful closing. This reinforces a baseline understanding of unconditional love and support, regardless of disagreements or daily interactions.
30. Master the Rules of the Game
When engaging in any activity where outcomes depend on strategic decisions (like betting or investing), deeply understand and master the underlying rules and mechanics. This ensures you’re thinking clearly about risk allocation and decision-making within the specific context, preventing fundamental errors.
31. Cultivate Broad Knowledge
Actively engage in activities that broaden your general knowledge across various subjects, such as brushing up on history or literature. This allows you to quickly recall information and make connections, as demonstrated by the ability to answer diverse questions.
5 Key Quotes
The character that takes command in moments of crucial choices has already been determined. It has been determined by a thousand other choices made earlier in seemingly unimportant moments.
Ronald Reagan (as attributed by Todd Simkin)
If nobody feels personally attacked because of the, of somebody else pointing out their error, but instead feels like we together have now done more to, to get closer to, to some truth, to the better way to act or the, you know, the more accurate, fair value of this asset that we're trading, then everybody feels like it's a win and, and they'll, they will therefore encourage the, the involvement of the people around them.
Todd Simkin
Todd, nobody cares if you know anything about American history, but if you screw up the, the betting on, on the final jeopardy and daily doubles, don't even bother coming back.
Jeff Yass
I cannot reach a conclusion about what you're saying until I understand it better. So help me understand it better. Tell me more.
Todd Simkin (paraphrasing his father and co-teacher)
It sounds like you're really bothered when she doesn't put away her dishes.
Todd Simkin (example of reflective listening)
2 Protocols
Susquehanna's Approach to Improving Decision Process for Traders
Todd Simkin- Talk through decisions with peers, especially when market conditions change or new approaches are being considered.
- Encourage communication by asking open-ended questions like, 'Here's how I'm positioning for this trading. What do you guys think?'
- Shield the person giving feedback from knowing the results of the trade to avoid resulting or hindsight bias.
- Model the decision process by explaining the 'how' (the reasoning and information used) rather than just the 'what' (the action taken).
- Foster a culture that rewards truth-finding over immediate action, ensuring no one feels personally attacked for errors.
- Actively seek out disconfirming information, even if it feels uncomfortable or challenges existing beliefs.
- Actually change behavior based on the feedback received to demonstrate its value and encourage future input.
Parenting Protocol for Guiding Children's Decisions
Todd Simkin- Lead with an expression of unconditional love and support, stating, 'You know that I love and support you with whatever it is that you're doing.'
- Ask open-ended, non-judgmental questions to encourage children to articulate their thoughts and feelings, such as 'Help me understand better where you're coming from' or 'How do you feel about that?'
- Model your own decision-making process by sharing your reasoning, considering costs, benefits, and the reversibility of choices, rather than simply providing an answer.
- Allow space for children to finish their own thoughts and reach their own conclusions, rather than interrupting or problem-solving prematurely.
- Apply the Principle of Charity, assuming your child is sincere and well-intentioned in their communication and decision-making.