Focus. Patience. Attention to detail. Are we talking about the necessary skills for a game of poker or becoming a top investor? In recent years, many people have begun to uncover the similarities between the two.
Fresh research in the Journal of Financial Markets explained how hedge fund managers who excelled at poker outperform their peers in investment returns by as much as 5%.
Could it be that poker mirrors many of the toughest lessons of the stock market? Let’s take a look at some common themes they share.
1 – It Teaches You to Avoid Overleverage
Kevin J.S. Zollman, an associate professor of philosophy at Carnegie Mellon University notes the Dunning-Kruger Effect. A profound feeling of excessive overconfidence – it causes small-time investors and rookie poker players to overextend and act in a short-sighted way that generally harms their results. Recklessness can cost you big in the investment world, so be sure to respect your limits.
2 – You Learn Where You Can Win
Seasoned poker players are creatures of habit. They know which games, tournaments, platforms, and buy-ins work best for them and rarely deviate. Finding safer investment opportunities means choosing companies with products and business models you understand.
3 – You Learn to Trust Math Over Your Gut
Poker may have elements of psychology and luck, but it is, at its core, a numbers game. Players that learn to calculate the odds in poker for earning different hands, or winning individual bets, will outperform those who rely on their gut instinct alone.
Technical analysis and fundamentals are keys to unlocking success in the financial markets. Many newcomers, particularly in retail, will base their buy and sell decisions on however the wind is blowing that day. Buying in at a steep price, only to be caught by a sudden mass sell-off that leaves them in the red. Veteran traders use technical analysis to identify upcoming scenarios based on price chart action and fundamental analysis to determine the intrinsic value of a stock. In turn, this depreciates risk and helps them to make better decisions.
4 – Humility Triumphs
One of the worst things you can do in poker is to rest on your laurels and believe that you know it all. The best poker players will work hard at their craft and are always willing to take advice from others. So too, are the best investors.
5 – It Teaches You to Look at the Bigger Picture
Perspective is everything in poker. Another psychological phenomenon that plays a key part here is Hedonic Farming, explained by poker champion turned business consultant Annie Duke in her book Thinking In Bets.
This is when people try to maximize pleasure and minimize pain or regret. In poker, this is evident by players who fold too often or too early. Or by players who play lots of low-risk, low-steak hands. While this strategy may result in more wins in general, the total losses may outweigh the prize winnings. Equally, in trading, it’s not the volume of wins that is important. It is the overall profit from your trades compounding over time that you need to pay attention to.