What Investors Can Learn From the Best Poker Players -- Journal Report
By Nick Ravo
Some of the biggest investors on Wall Street are known to be ace
poker players. Are there things we small fish can learn from Texas
Hold 'em that will make us better investors?
Researchers on the subject say the answer is yes.
Kevin J.S. Zollman, an associate professor of philosophy at
Carnegie Mellon University who studies game theory, notes an oddity
of behavioral finance called the disposition effect, in which
investors tend to sell assets that have increased in value but hold
on to those that have decreased. Why? Investors dislike losing more
than they like winning.
This same behavior manifests itself in poker, Dr. Zollman says,
when players, to their detriment, more often walk away when they've
won money than when they are losing, or when they take too many
quick small gains and unrelentingly try to recoup losses. Small
investors, he says, often defeat themselves by doing the same
A similar behavior is referred to as hedonic framing, which is
thinking about one's money -- gains and losses in particular -- in
ways that maximize pleasure and minimize pain. In poker, this is
seen in players who fold often and quickly, and who play lots of
relatively low-risk, low-stakes hands, says best-selling author and
corporate-decision strategist Annie Duke. They might often win, she
says. But when they lose, they lose just a little bit more than
they win, and it adds up.
Likewise, traders, Ms. Duke says, can worry too much about how
often they have winning trades and not enough about how much profit
they are making overall. Ms. Duke was a Ph.D. candidate in
cognitive psychology at the University of Pennsylvania before
joining the professional poker circuit.
Luck, Ms. Duke says, plays a big role in both poker and
investing. Poker, she says, is a better proxy for investing than
chess, bridge or backgammon, because of the similar balance of
known and unknown information. To deal with uncertainty, she says,
traders and poker players must develop resilience and learn not to
be guided too much by "results-based behavior." Put another way,
they must learn that it is possible to do everything right and have
a bad outcome; and it is possible to do everything wrong -- maybe
by throwing a dart at a list of stocks -- and win big.
Dr. Zollman notes that a related cognitive bias, the
Dunning-Kruger Effect -- which is, essentially, extreme
overconfidence -- also tends to exist in small-time investors but
less so in high-level poker players. "You have to straddle this
line," says Dr. Zollman. "You don't want to react too strongly to
each individual hand, which would be like reacting too
strongly...to each trade."
Less esoteric criteria come into play as well when judging the
abilities of investors and poker pros. For example, experts say
that an ability to "read" people is found in both groups. To wit,
good poker players can sense a bluff; good investors know when an
investment pitch is mostly hyperbole.
Also, the player or trader with more knowledge -- enhanced by a
good memory and computational ability -- will usually win. Some
"day traders, " in other words, are at a distinct disadvantage to
pros with high-speed algorithms.
Other mathematical analogies found in poker and investing, Dr.
Zollman says, include the "gambler's ruin" problem, which, to
simplify, means that over-betting can cause a card player to run
out of chips. If that sounds obvious, there are obvious solutions
as well, at least in investing. "The gambler's ruin problem is why
people diversify portfolios," Dr. Zollman says.
A common trait in successful investors and poker players is an
ability to accept regrets. How often has a small trader muttered at
a cocktail party: I should have bought Microsoft in 1986 or ditched
Enron in 2001 or gone all-in on the S&P 500 ETF in March
It is no different in poker, where players sometimes miss an
opportunity by folding too soon. But, as Ms. Duke observes, the
only way to avoid those kinds of regrets is to play every hand
until the end.
"You would lose your money incredibly quickly," she adds.
Maybe the best investment lesson of all that can be learned by
playing poker is that it is hard to be a big, consistent winner in
Mr. Ravo is a writer in Seattle. He can be reached at
(END) Dow Jones Newswires
November 03, 2019 22:17 ET (03:17 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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