How poker theory can help you become a better investor
Mon Aug 17 2020

How poker theory can help you become a better investor

Poker is highly regarded as a strategy game rather than a game of chance. For this reason, knowing how to play poker is an invaluable resource for making more informed investment decisions. In fact, many professional traders have a deep interest in the concepts behind this popular game of chance.

For instance, David Einhorn from Greenlight Capital participates in high stakes poker tournaments, including ESPN televised events such as “The Big One for Drop,” with 1 million dollar buy-in.

Another great example is Susquehanna International Group, a renowned brokerage firm that has embedded poker in their office culture. The company organizes internal poker tournaments, and they use poker in their recruiting process. On top of that, Bill Chen, the head of Statistical Arbitrage, won over $2 million from live tournaments and also wrote a book on the subject called “The Mathematics of Poker.”

From my point of view, anyone who wants to become financially literate and succeed in areas that imply advanced decision making and an increased level of risk should have a thorough knowledge of poker theory. Of course, being good at poker can be a daunting task, as it requires a lot of training and hundreds of hours of playtime.

I’m not necessarily saying that if you’re not a poker pro, you won’t be successful in investing. Anyhow, having a working knowledge of fundamental poker theory will improve your thinking even outside the casino table. In his best-seller “Theory of Poker,” David Sklansky teaches us that having the poker mindset is your key to success, even if you’re not a great player. Necessarily, seeing these mathematical concepts in action should suffice.

After analyzing thousands of poker games and interviewing some of the most influential players in the game, we’ve concluded that there are three fundamental poker concepts that you should take into consideration if you want to improve your investment skills:

1.      Risk is more important than the reward

In poker, even if you’re dealt a premium hand and make efficient decisions, you must still be careful not to bet way too much, because short-term bad luck might occur and surviving is it crucial if you want to succeed in the long run.

In essence, you shouldn’t bet too much from your bankroll in a single game, because poker is a long-term game, meaning that the ROI is usually calculated based on thousands of hand, and not just a lucky draw you get from time to time.

Of course, mastering the art of risk-reward decision making takes a lot of practice. Luckily, there is a secret that you could start using right away. Playing poker online is a great learning resource because most casino operators offer promotional codes that will get you extended gaming sessions. If you want to improve your risk-reward knowledge, grab a special deal from this website, and begin your training today.

In the world of investing, taking control of the downside loss is more valuable than winning. For instance, if you lose 50% of your balance, you will need a return of 100% to break even. As the legendary investor Warren Buffet said, “Rule 1 is to never lose money. Rule 2 is to never forget rule 1.”

2.      Controlling your emotions outweighs intellectual knowledge

Having a thorough understanding of poker theory is crucial for becoming successful at the poker table. However, if you’re unable to control your emotion(also referred to as being on “tilt”), all your knowledge is absolutely irrelevant, because poker is 80% emotional and mental strength and 20% mathematical and risk-reward decision-oriented.

To put things into perspective, think of that psychological experiment where subjects are asked to sit in a room where there is a button which will send electric shocks if it is pressed. While the end goal of the experiment is not pushing it, many of the participants eventually get so bored that they will do it, even if it is harmful.

In our situation, the button is the inner desire to renounce any well-defined strategy and simply gamble all your chips away. Refraining from pressing it represents the main difference between amateurs from pros – game discipline.

In general, not being able to control yourself from impulsively betting on any hand or simply make stupid plays that result in you losing the pot means that you should leave the table for the night and come back whenever you’re feeling fresh.

As a trader, you want to decide what is your maximum loss threshold every day and go flat. If you’re investing, you should understand that you can’t always win. Just take the realized loss and stop following the markets if you’re doing the buy-and-hold investment strategy and take the unrealized loss.

Mainly, you want to avoid getting in a position in which you would keep making bad decisions. Take note of your state of mind, and if you feel that it is weaker than usual, you should stop investing for a little while. Otherwise, you risk making awful calls and get deeper into the pit, eventually losing your entire balance.

3.      Learn to be patient and understand the position

Every poker player knows that position is one of the most crucial concepts that determines if you win a hand or not. If you’re in position, you have the luxury of acting last, which allows you to collect more information on your opponents and make a more informed decision.

After getting accommodated with position, you will begin to understand that sometimes you should fold even if you’re having a decent hand because there will be a better opening for you later, where you will have a bigger pot and lower risk. In poker, there are some hands which are called “premium,” and waiting for them should be part of your general strategy. Some examples of such hands are big connectors like Ace-Queen or Ace-King or big pairs such as Ace-Ace or King-King.

The lesson here is that you should never invest in the market carelessly. If you want to be a profitable trader, make sure that you wait for high probability bets and know precisely why you’re choosing to make that investment. This trading strategy requires you to find market opportunities with the highest “Margin of Safety” possible. As Warren Buffet said, “The trick with investing is to just sit there and watch pitch after pitch go by and wait for the one right in the sweet spot.”

The bottom line

This marks the end of the article on how to use poker concepts to improve your trading skills. While the information mentioned here barely scratched the surface of the topic, you can still use it to find better market opportunities. Keep learning and improving your mindset!



Nick Jason is our Europe based Correspondent. He covers news related to Stock Market Commodities & Currencies. He currently lives in London.


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