Essentia Blog

What do poker and investing have in common? Our 7 favorite quotes

Peter Lynch, renowned former manager at Fidelity, once said that a good way to become a better investor was to “learn how to play poker”.

We agree. Indeed poker is such an interesting teacher of decision-making skill that we’ve invited Dr Maria Konnikova, New Yorker science writer, author and rising professional poker player, to speak at this year’s Behavioral Alpha conference.

Maria will also host the BA18 Poker Night, an exclusive workshop at which professional investors can explore what poker reveals about their own risk evaluation and decision-making biases.

BA18 is less than a month away, so don’t delay in reserving your ticket. In the meantime, here are our favorite quotes comparing poker and investing.

David Slansky

DAVID SKLANSKY

Professional poker player and author of numerous books on gambling, including The Theory of Poker: A Professional Poker Player Teaches You How To Think Like One. Below is his “Fundamental Theorem of Investing”:

“Before making any investment … you must be able to explain why the other party is willing to take the other side of the deal… if you cannot come up with a good explanation, your buy, sell or bet is almost certainly not as good as you think.”

Annie Duke

ANNIE DUKE

Annie Duke holds a World Series of Poker gold bracelet from 2004. She retired from the professional game in 2012 and now works as a coach, author and speaker.

“It was the game theorist John von Neumann who first made the distinction that chess is a form of computation, not a game. That’s because, in chess, there is always a right way forward at any point.

Poker and, for that matter, investing, are different as they are each characterized by incomplete information and a significant element of luck. What’s more, valuable information is often hidden from the participants – something that’s not so much the case for chess where each player can see where the other’s pieces are.

As a result, in both poker and investing, you can make the best possible decision at every turn – given what you know – but still lose the hand or the trade because of luck or information you didn’t have access to.”

Source: Annie Duke interview with Essentia CEO, Clare Flynn Levy: Why investing is like poker (but not chess)

Michael J. Mauboussin

MICHAEL MAUBOUSSIN

Author and Director of Research at BlueMountain Capital Management.

“…Active managers must believe in differential skill to justify their existence. Recall the poker metaphor. You want to join the game only if you are more skilled than some of the other players and hence can expect to take their money. In markets as in poker, excess gains and losses net to zero. For you to win, someone has to lose on the other side of the trade.”

Source: Mauboussin’s January 2017 research piece for Credit Suisse, Looking for Easy Games – How Passive Investing Shapes Active Management

Vanessa Selbst

VANESSA SELBST

Vanessa Selbst is the most successful woman ever to play tournament poker (so far!). She now works in trading research and strategy at Bridgewater Associates.

“Investment is just like poker because there are so many different strategies that you can take – some of the best players are the hyper-aggressive ones, some of them are tighter players who wait and pick their spots better; there’s no set strategy that’s the best possible strategy.”

David Einhorn

DAVID EINHORN

Avid poker player, co-founder of Greenlight Capital, and the value hedge fund manager who famously predicted the fall of Lehman Brothers in 2008:

“Both poker and investing are games of incomplete information. You have a certain set of facts and you are looking for situations where you have an edge, whether the edge is psychological or statistical.”

Puggy Pearson

BILL MILLER ON PUGGY PEARSON

Puggy Pearson came from an impoverished background, dropped out of school in fifth grade, but went onto become a poker legend, winning the 1973 World Series of Poker. He is famous for saying “There ain’t only three things to gambling. Knowin’ the 60-40 end of a proposition, money management, and knowin’ yourself.” 

Bill Miller, one of the iconic fund managers of his generation, noted that Pearson’s quote was “all you need to know about investing”. He added:

“If you translate [what Pearson said] into investing, knowing the 60/40 end of a proposition means knowing when you have some competitive advantage over somebody else. And you don’t bet, you don’t gamble, you don’t invest, unless you have some competitive advantage.

Second, money management means well, okay, if I’ve got a competitive advantage, how much do I invest? Do I invest 10 percent? 20 percent? 50 percent? Three percent? So knowing the proper money-management strategy, the proper amount of money to invest is the second thing.

And then knowing yourself, that means knowing how you react to stress, how you react to adverse outcomes, how you react when things go well. Do you get giddy and overconfident when things are going well? Do you get morose and difficult when things go badly? Do you make bad decisions at both extremes? Just understanding your own psychology, what your weaknesses and strengths may be, as it comes down to evaluating decisions when the markets are at extremes.

Those three things are really all that successful investing involves.”

Source: Jason Zweig interview, Bill Miller: What’s luck got to do with it? (CNN Money)

Dr Maria Konnikova

DR MARIA KONNIKOVA

Dr Konnikova is a science journalist and best-selling author. In 2018, while researching her next book, she learned to play poker from scratch and now has over $260,000 in tournament earnings. She is mentored by poker legend, Eric Seidel. Asked about the importance of balance of skill versus luck in poker, she said something which is as applicable to investment:

“I think it’s far more skill than luck. Skill is essential. You will be destroyed without it in the long-term, even if you manage to survive for a bit. Luck, of course, is also a part of the equation: you have to be good and play well, but you also have to get lucky.”

Only 10 seats remain for BA18 Poker Night on November 9th – (we’re not bluffing!). Reserve your place today and learn more from Dr Maria Konnikova about how bias and refining skill is important to both poker and investment decision-making.

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