Can Poker Help You Invest Better?

An old article in the Chicago Tribune financial section dealt with how the game of poker can make you a better investor.

In fact, Aaron Brown, a former finance professor, hedge fund risk manager, and author of The Poker Face of Wall Street, goes so far as to say it is risky to invest without playing poker, and learning your psychological tendencies for mistakes.

As someone who both invests and plays poker, I agree that, due to financial risk, both activities cause people to make bad psychological decisions that cost them money.

Here are four psychological mistakes that are common to both investing and gambling:

1. Greed - this occurs when we start expecting a big win, counting our chickens before they hatch, and start ignoring evidence that indicates we may lose. The Tribune article gives the example of getting dealt two aces in Texas Hold 'em - the strongest opening hand, but one that causes a lot of losses. If you get the ace of diamonds and ace of spades, you might stay in expecting to win the hand, even if the three community cards are all hearts. You are ignoring the possibility that someone else might have a flush.

2. Overconfidence - after winning a big poker hand, or experiencing a booming stock market, the gambler or investor can get overconfident, and start making large reckless bets.

3. Regret - after losing a big poker hand, or losing on a large investment, the gambler or investor may try to break even on a reckless bet or be scared into playing too conservatively.

4. Seeing patterns - Humans are wired to see patterns. In poker, this can be seen in the "hot hand" fallacy. If you are holding a 10 or jack, and the flop has a queen or king, you may bet big by overestimating the odds of an ace. The investor may over-invest in past stock market winners.