What Poker Can Teach You About Investing

This weekend’s Barron’s tips poker as the “hot thing” among stock market sorts. Along the way, it cites an excellent talk by David Nelson of Legg Mason Funds on “what poker can teach you about investing”.

Both, after all, are games of incomplete information where understanding probabilities is crucial. Both play to people’s worst instincts, including that we tend to avoid risk when it comes to making money (“it’s a sure thing!”), and we tend to like risk when losing money (“there’s a chance I might not lose!”).

Here is Nelson from his 2003 talk:

“… the key to winning in low stakes poker is folding. If you’re playing an eight-handed game and the luck of the draw is evenly distributed, you’re going to have the best hand about one in eight times. So seven out of eight times, if you’re playing only your good hands, you should be sitting on the sidelines. People don’t do that. When you play once a month or every couple of weeks, people want to mix it up. They want to be in the hands and get the action and see what the next card will bring. So they will not fold to the extent that you need to because it’s no fun and it requires discipline and patience.”