Apparently only 12% of poker hands are actually won by the best cards. It’s not the cards you are dealt that determines your success, it’s how you play them …
That’s one of the central themes of the excellent book by journalist Maria Konnikova, The Biggest Bluff which charts her unlikely journey from psychology researcher, to journalist and then high-stakes poker-pro. I got really into this book over the summer and thoroughly enjoyed it, partly as I was playing poker online with friends during lockdown, but also there are so many thoughtful lessons applicable to life and investing (the book has been a big hit, entering the New York Times best seller list).
That’s the pemise of the book really – that poker, with it’s combination -and particular ratio of – shared and hidden information is a surprisingly useful metaphor for life. Konnikova debunks early on the myth of poker as essentially a gambler’s pursuit (although many top poker pros are “degenerate” gamblers too) – there’s probably a higher skill to luck ratio in poker than stock picking.
Poker has of course often been used as an analogy for investing, which I’ve tended to disagree with as I never saw the parrallels to the bluffing, head-to-head psychology and the high-stakes “all-in!” moments that are most pivotal in poker. However the book forced me to re-evaluate this idea and I recognise that on balance poker probably does contain a lot of lessons for investing. Here are five ideas that read across I think –
Reactions to big wins or losses –
In poker there is a neat expression for this: “on tilt” when a player is over-reacting to gains or losses and behaving emotionally. Surely you’ve seen this behavior in asset managers, being over defensive after a bad run or becoming either hubristic or paranoid following a good streak. The fact is it’s human nature to flex our riskaversion in response to circumstances even though this is probably not optimal behavior at the poker table or in life. The neat poker expression tilted at least gives a name to the idea to make it more easy to recognise and therefore control.
The process
Everyone knows that two aces are great and most players know that 7-2 is the worst hand. So most people think they have an idea what to do in these situations, and most poker beginners -and investors- look to set out some rules of thumb to govern their behavior in a slightly wider variety of situations. But the issue is, every situation is different, context matters, and parameters are never all the same. In poker that means you play the same hand very differently against a loose player early in a tournament when you have a lot of chips compared to facing a tight player when they are down to a smaller chip stack. Many investors are learning they can’t rely on price-earnings ratios from a hundred years ago to guide them in a world of zero rates and central bank support.
Quant process can give false confidence
In recent years poker (and investing), have become dominated more by quants: users of sophisticted mathematical models (“solver” programs have become widely available in poker over the last decade) which illustrate the probabilities in various situations. Konnikova urges that to be a good poker player you for sure need to be aware of the probabilities, but there’s a big caveat. Poker has not been “solved”. There is no strategy guaranteed to be optimal. The models are only as good as what you put in, and they don’t factor in all possible variables. Taken too far, the models can even give you a false sense of security in the outcomes (any of this sound familiar to investors…).
Less certainty, more inquiry …
Konnikova challenges us: should we really be as confident as we are about our strongy-held views about the world? Poker tournaments taught her the number of times she thought she had a situation totally figured out, no doubt at all, only to turn over the cards and find she was completely wrong. In life (or investing) we rarely have such a clean “turn the cards over” moment, which partly allows us to continue believing those comforting illusions. but poker provides a stark illustration of how wrong we often are.
Think about thinking
A big part of the book is Konnikova’s work with poker legend Eric Seidel in coaching her in the game. As well as bringing some great little anecdotes and stories this gets at one of the key lessons. Eric doesn’t believe in telling Maria how to play a certain hand. After all, the way he plays that hand should be different to the way she would play: other people play differently against him, he’ll react differently etc. He coaches her to think about the thought process of each hand (meta cognition), to work through the various possibilities, test different hypotheses and potential outcomes before weighing up the options in a logical fashion. He is adamant there are no “bad beats”: if you follow your process logically yet the cards come down against you, just move on and don’t complain about it.
Poker goes mainstream
This book follows close behind another broader book taking lessons from the poker table into wider fields: Thinking in Bets by Annie Duke. Annie has another book out shortly: How to Decide which looks like another one that could have great read across to investing.
If you’re interested in more from Maria you can find her in a couple of my favourite podcasts here (with Shane Parrish) and here (with Joe Weisenthal and Tracy Alloway of Bloomberg).
If you enjoyed this you might like some of my blogs with ideas from other fields –