Researchers on game theory say that poker strategies can translate into lessons for investors, according to a recent article in The Wall Street Journal.
Carnegie Mellon professor of philosophy Kevin Zollman says that investors dislike losing more than winning and are prone to what behavioral finance refers to as the disposition effect, which leads them to sell assets that have increased in value but hold onto those that have decreased in value. The same behavior manifests in poker, says Zollman, where players more often walk away when they’ve won than when they’re losing. Small investors, he says, often behave similarly.
Professional poker player and best-selling author Annie Duke says that poker players are also prone to hedonic framing, which is thinking about money in ways that maximize pleasure and minimize pain—i.e. folding often and quickly, or playing a lot of low-risk, low-stakes hands. They might win often, says Duke, but the cumulative losses often exceed the wins. She adds that in the markets, this can translate into traders who excessively worry about how often they have winning trades and not enough about overall profits.
Duke argues that luck plays a big role in both poker and investing, adding that both traders and poker players need resilience to deal with uncertainty, to learn that it is possible to do everything correctly and still get a bad outcome and, conversely, to do everything wrong and win big.
Zollman notes that extreme overconfidence tends to exist in small-time investors but less so in top poker players. “You don’t want to react too strongly to each individual hand,” he says, “which would be like reacting too strongly…to each trade.”
“A common trait in successful investors and poker players,” the article concludes, “is an ability to accept regrets,” adding, “it is not different in poker, where players sometimes miss an opportunity by folding too soon.”
According to Duke, it says, the only way to avoid such regrets is to play every hand to the end. The problem with that, she says, is that “you would lose your money incredibly quickly.”