Investing on Wall Street and playing poker are fairly similar occupations. Both have unpredictable outcomes, both have an element of risk, and both involve making a series of decisions. Despite the variables, it is often the case that the same investors make money time and time again. Likewise, good poker players also show a profit on a regular basis.
It is impossible to remove the elements of unpredictability and risk from either occupation, so the factor that sets apart profitable investors – and profitable poker players – is the decision making process. This doesn´t mean the rest of us are making bad decisions, it is just that profitable investors and poker players are making better decisions more often.
How to Make Better Decisions More Often
Advice about the decision making process is fairly standard no matter what source of investment or poker strategy you read. In relation to poker, a commonly-advocated process is “Player-Position-Cards” – meaning that your opponents´ actions (or lack of actions) are more important than your position, which in turn is more important that the cards you have been dealt.
Understanding your opponents´ actions – and why they might have made them – is very similar to Behavioral Economics Theory. This is a theory many investors will be familiar with, in which you accept that mathematical models of finance and investment are useful (the equivalent of knowing your odds), but only to a degree.
What is more important is identifying any irrationalities that deviate from logic and reason (for example, a typically timid player over-betting the pot), and understanding why they happen (to give the impression they have a stronger hand than they actually have). You then use this “intelligence” to influence your own investments/betting actions.
Further Examples of Behavioral Economics Theory
Further research into Behavioral Economics Theory throws up a number of parallels between investing and poker. These are worth making a note of in order to help you identify irrationalities that deviate from logic and reason at the poker table:
- “Trend-chasing” – or the practice of using past performance as an indicator of future growth – can be likened to players repeating actions that have worked for them in the past.
- “Familiarity-bias” – exclusively investing in brands or funds familiar to the investor – is similar to betting exclusively on premium hole cards or when connecting with the flop.
- “Self-attribution bias” – making investment decisions based on a run of good or bad luck – is self-explanatory, but could also be applied to players going on tilt.
- “Herd behavior” – following actions advocated by others regardless of the circumstances – is the equivalent of raising from the dealer button just because that is what everybody else does.
Inasmuch as Behavioral Economics Theory can help you make better decisions more often against other poker players, it is important the concept is also applied to your own game. Regardless of whether or not they enjoy a successful session, good poker players analyze their game to identify traits, biases and default betting actions in order to eliminate them from their game and make them harder to read.
Good Decision Making Alone Won´t Make You a Good Poker Player
Although good decision making can help tip the scales between a break even poker player and a profitable poker player, good decision making alone won´t make you a consistently good poker player. There are six attributes of a good poker player, which many investors will acknowledge are also the fundamentals of successful investing:
- Nerves of Steel.
- Game Selection.
- A Knowledge of Odds.
- A Sensible Betting Strategy.
It is no accident that “Intelligence” appears at the top of the list, and the application of Behavioral Economics Theory forms a significant part of gathering intelligence. You can find out more about Behavioral Economics Theory in the excellent article “How Biases Affect Investor Behavior”, but it is important the pursuit of good decision making does not overshadow your efforts to improve other areas of your game.