Insights from Annie Duke on Decision-Making in the VC World
Introduction
Hello, everyone. This is Zuijia.com. I'm Dafei. The VC (Venture Capital) circle is renowned for its high-risk and high-reward nature. Every decision can involve millions of dollars and even determine the fate of a startup. However, even seasoned investors are not immune to cognitive biases. Recently, I watched a podcast where Annie Duke was interviewed, sharing valuable insights on decision-making.
Annie Duke: A Legendary Figure
Annie Duke has an impressive resume. She's a former professional poker champion who won over $4 million in prize money and was included in the 2024 World Poker Series gold chain. Now, she's a full-fledged expert in decision-making, with works like "Thinking Bass" to her name.
Common Cognitive Traps in Project Evaluation
Intuitive Decision-Making
Annie Duke pointed out that intuitive decision-making is a big pitfall in the VC circle. The MEDAS list of Forbes' top risk investors creates an impression that some investors can rely on a hunch to find great projects. In reality, investment is a systematic process that requires a comprehensive evaluation method.
Lack of Decision-Making Records
When making decisions, various factors interact, and we often don't keep detailed records. Without proper records, memories are easily influenced by the outcome. For example, a successful project may make the founder seem more attractive, while a failed one may make them seem unworthy of investment. In the VC industry, where a few star projects drive most of the returns, investors may attribute failure to bad luck.
Long-Term Investment and Avoidance of Reflection
The long return period of VC investment, sometimes up to 10 years, is another cognitive trap. Investors may put off understanding certain aspects and use the long-term nature as an excuse to avoid reflecting on early mistakes.
Follow-Up Investment Considerations
Annie Duke divided follow-up investment into two types. One is for market reasons, such as maintaining relationships or the investment ecosystem, which is hard to evaluate. The other is real value investment, where investors are optimistic about a company's potential and want to increase their stake for higher returns.
In high-return follow-up investments, the big boss often leads, and others follow. There are two common thinking traps:
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The Endowment Effect: People overvalue items they own. For example, when selling a used car, they think it's worth more, but when buying, they try to lower the price. In investment, partners who have put in a lot of effort may be overly confident in the projects they lead.
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Prospect Theory: People are risk-averse when facing potential gains but risk-seeking when facing potential losses. For example, given the choice between a sure $100 and a coin toss for $200, most choose the $100. But when owing $100, they may choose the coin toss to avoid paying. This explains why VCs may lock in profits on successful early projects and hold onto losing ones.
Psychological Accounts in Investment
VCs may give each investment project a separate psychological account, which can lead to irrational decisions. For example, when a stock falls, people may hold onto it, hoping it will recover. When a stock rises and then falls, they may feel like they've lost more than they actually have. This makes it difficult for investors to objectively compare projects and allocate resources.
Different Approaches for PE and VC
Private Equity (PE) investors focus on not losing money, so they can't tolerate false positives (investing in a losing project). They are willing to miss some good opportunities to ensure the safety of their investments.
Venture Capital (VC) investors, on the other hand, rely on the density effect, where a few star projects cover all losses. Their biggest mistake is missing a super - winner. So, they are willing to tolerate a higher failure rate in their investment portfolios to ensure they don't miss out on those game-changing projects.
Investment Amount in Early-Stage Projects
In early-stage investments, which are highly uncertain, Annie Duke suggests setting a goal, such as the amount of shares to take or a fixed investment amount. If several projects meet the "good enough" standard, it's not necessary to over - analyze which one is better. The investment amount can be adjusted in later rounds as the company develops and more information becomes available.
Making Difficult Decisions
When facing difficult choices between two good options, such as choosing between Paris and Rome for a trip or two great job offers, Annie Duke suggests using a coin toss. When a decision is hard, it's usually because both options are good, so either choice may lead to a satisfactory result.
Decision-Making Criteria
The key to making decisions is to evaluate two things: the cost of reversal and the long-term impact of bad consequences. For decisions with high reversal costs and significant negative impacts, like hiring a CFO, more time and evaluation are needed. But once an option meets the set standards, it's okay to make a decision without over - entangling.
Recruitment Strategy
The secretary problem, or the problem of finding an apartment, suggests interviewing about 37% of candidates without making a decision, then hiring the first one better than the previous 37. However, in real life, this model has limitations. Evaluation standards may change during the interview, and it's possible to re - contact previous candidates. Recruitment is a dynamic process that requires flexibility.
Reading Skills in Poker and Beyond
On the poker table, players build models of their opponents based on data and observation. Early signals are more reliable, and common physical signals like shaking legs or rubbing fingers can provide insights. However, these signals are not absolute, and opponents may use them to deceive.
Misleading Information
Most people tell the truth as they believe it, but what they believe may not be objective. Misleading information, which is more harmful than false information, often involves presenting only part of the data or omitting important background. For example, comparing murder rates without considering population size can be misleading. Decision-makers need to review information critically.
The Unreliability of Intuition
Annie Duke believes that "believe your intuition" is the most unreliable advice. Intuition can be useful for unimportant decisions with low reversal costs. But for important decisions like buying a house or making a major investment, relying on intuition without clear logic can lead to mistakes. A more reliable approach is to define decision criteria, do thorough analysis, and if something feels wrong, re-evaluate the decision process.
Conclusion
That's the main content of this interview. Thank you for watching this video. See you next time.
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