While listening to the latest podcast episode of The Tim Ferriss Show featuring Safi Bahcall, I heard something that is so simple yet fundamental that I knew it would change my life if I applied it correctly.
In the interview, Safi Bahcall mentions reading a book by the chess grandmaster Garry Kasparov called “How Life Imitates Chess”, where Garry breaks down how he was able to become such a masterful chess player.
According to Garry, all great chess players analyse and study their games after playing them. But while most chess players try to learn from their individual decisions, for example, “I took the bishop with my pawn here, and it worked. I should do more of that”, Garry took a different approach of taking a step above that to study HOW he reached certain decisions. He analysed the systemrather than the outcome.
He asked himself questions such as “What was my decision making process?”, “What things did I consider, and in what order?” and “What kind of emotional state was I in when I made this decision?”
Once the process itself is improved, it can be applied across multiple variable scenarios.
He calls this “Outcome mindset vs. System mindset”.
There is an element of luck, serendipity and chaos surrounding any single outcome. For example, if a poker player has a weak hand but decides to bluff and ends up winning a really big hand, he might be tempted to say to himself “This decision paid off, so I should make more decisions like it and I’ll get similar outcomes”. This will most certainly not play out favourably for him.
Let’s call this “Outcome Affirmation Bias”.
On the other hand (no pun intended), just because the poker player makes a certain decision and loses money does not mean that he should not have made that decision. It could have been the right decision to make in that situation based on his ‘system’, but it just so happened that the element of luck was not on his side this time.
Next time he is in the same situation, he should still make the same decision even though he has lost money in this particular instance.
By dissecting HOW he came to a decision, Garry was able to improve on his ‘system’ of decision making overall. This does not necessarily mean that all of his decisions will pay off, but that he has a better and more organised framework from which he can make decisions across many scenarios.
This dramatically increases his chances of success over the long-term. Continuously improve your decision making systems like Garry did is the surest way of becoming a master at your craft one day.
The ‘System Mindset’ can be applied to literally anything. For example, Safi Bahcall gave an example of how he found his current wife through improving upon his decision making system around dating and relationships.
I immediately saw how this could apply to real estate investing.
Any one real estate investment decision could go either way. Just because an investor make a decision and made a ton of money in a hot market, does NOT mean that the system he used to arrive at that decision was correct.
But because the number of decisions an average person makes in his lifetime regarding real estate transactions are generally limited, ‘Outcome Affirmation Bias’ runs especially rampant.
I have come across many people who hold their real estate investing skills in very high esteem because one or two of the properties that they purchased in Hong Kong or Macau has appreciated so much in value. What they fail to mention is that this happened because of a plethora of factors completely outside of their control and even their consideration when they first bought the property.
Unless their decision was made on a solid decision making ‘system’, it’s just like the poker player patting himself on the back for his bluff paying off.
The real difference between the ‘System Mindset’ and ‘Decision Mindset’ only become apparent over the long term, across a series of decisions. For example, if Warren Buffet and I invested in the markets and compared our results over a one-week period, I might get lucky and achieve similar results as him. But over the long term and across many decisions, I stand no chance.
The most encouraging aspect of all of this is that decision making ‘systems’ are not partial to anybody. It can be learned and applied by anybody to produce the same results. If I learned exactly how Garry Kasparov makes his decisions in a game of chess, I can skip all of the trials and tribulations that he had to go through to discover the system and start playing like Kasparov straight from the get.
If I want to invest like Buffet, I simply need to study how he makes decisions and model after him.
If you think about it, this is exactly how the IBM computer Deep Blue was able to beat Garry Kasparov in 1997. The computer analysed millions of chess games, and learned the aggregated decision making systems of all of the combined chess grandmasters. The only difference is that it was able to do this in machine time.
The trick to beating Kasparov is simple: model after someone (or something) that beat him!
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