Do you gamble when you invest?
moneyrelations :: Jan.18.2008
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I think I’ve mentioned before that I like watching poker on tv. Anytime I see it while channel surfing, I am likely to stop. There’s something compelling about seeing what cards the players hold, how they calculate their odds, and then throwing caution to the wind, go all in.
They win some days, and they lose some days. They just hope their skills at the table gets them more winning runs than losing ones.
However, according to this Bloomberg article entitled Top Poker Players Sometimes Short on Cash, it seems that perhaps, these poker players aren’t as successful as they seem.
Well-known players we see on TV can blow through millions of dollars a year. Some of them are broke or in debt. To finance their play and to offset some of the risks, they have financial backers in return for a stake in the prize money.
Others get sponsorship to pay their way in tournaments but when everyone thinks they are a “pro” there’s not enough money to go around.
And it’s not the fact that they lack skill. It’s just not many players have the discipline. They are poor money managers. Instead of taking their money off the table, they invariably bet on other things.
Does this sound in anyway familiar?
Perhaps we can see these bad habits in our own investment decisions. If so, then we are truly gambling.
Investing ::
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It is somewhat counterintuitive that professional poker players in the most part are better than the average person at Money management whilst playing poker. They need to calculate Pot odds, the odds of winning a particular hand and they need to ensure they have a positive expectation. They also need to manage their equity. Defined by Wikipedia as:
“A player’s equity in a pot is his expected share of the pot, expressed either as a percentage (probability of winning) or expected value (amount of pot * probability of winning). Negative equity, or loss in equity, occurs when contributing to a pot with a probability of winning less than 1 / (number of opponents matching the contribution).”
Yet when they leave the table they are not able to apply the same skills to real world decision making. I have always been of the opinion that trading and Poker have a lot in common.
Nice article, I think it’s true that a lot of the top tv pros are struggling financially, especially the true degenerates like Mike Matusow or T.J. Cloutier who have a hard time with money management and go chasing their losses betting on -EV games like craps etc. It’s ironic that some of the qualities that enable them to be a successful poker player can also lead to their downfall, such as the disregard for money and the lack of emotion needed to be a great player.
The smart ones in my opinion get into other business ventures using their poker fame i.e., the first gold rush millionaire wasn’t a miner, he sold pickaxes and shovels. In my eyes poker and trading have a huge amount of similarities especially in dealing with money management, lack of emotion and the variance that’s involved.
well… I think that’s stretching it a bit! I don’t know enough about gambling in general much less poker in particular to speak really directly to this, BUT, even at the riskiest of times, investors are still attempting to contribute to the economy by giving a company the cash it needs to develop. That is soooooo fundamentally different than participating in a game of (granted, skilled) chance that I’m hard-pressed to mention the two in the same breath.
Nancy
I think that you are missing the distinction between trading and investing. The two really are poles apart. Most good traders understand they need to have a positive expectation or expected value this is similar to Poker. Gambling is a negative sum game and some poker players as well as traders will gamble however good traders as well as poker players will only put their money on the line if there is a positive expectation.
Hi guys,
Yes, I do see a parallel between trading and poker and that’s why I put the article up.
The truth of the matter is, there are a lot of naysayers in both professions. That is understandable as not many people have the discipline to walk away and make good decisions. There is such a thing as trading too much and I’m thinking the same thing applies in poker.
A lot has been said about behavioral finance and the emotions behind it. In poker, I think there’s a term called “being on tilt”? Making bad decisions after a bad beat.
Very, very few people can match the skill without the emotions.
Like Chris said, the smart ones in poker can parlay their name in other business ventures. I think trading can be a good investment strategy along with the more traditional buy and hold or indexing strategies. At least, that’s all I’m capable of right now since I don’t want to be “dead money”.
Well, investors gamble in the sense that they cannot be 100% sure of the return on their investment, regardless of how much research they do.
Hey Leon,
Thanks for the comment.
True, nothing is ever guaranteed but you can diminish your risk. That was the only point I was trying to make - use your skill, manage your money, walk away with profits, and keep a cool head.
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