You may not put poker and invest under the same category. However, a study by Yan Lu, Sandra Mortal, and Sugata Ray found that hedge fund managers who are also poker tournament winners outperform their peers by about 1% to 5% a year in investment returns. The researchers attribute this to specific poker skills and poker-based thinking that these managers have applied to invest.
Not only have they improved their investment returns, but they’ve also managed to hold on to portfolio positions longer and mitigate risks better. Here are the top poker skills that came in handy:
One of the main skills that Yan Lu and company identified is patience. A professional poker player gets an average hourly return of one big blind, equivalent to the minimum bet. Those who want to earn more than that over the same period will end up having too many hands without a clear strategy. This opens them up for more blunders.
Similarly, good investors know that doubling their money overnight is nowhere near possible. Or if they manage to do it, it’s not sustainable. Having a wide investment portfolio isn’t a bad thing. In fact, it’s the goal most investors are working towards. What’s important is that you pay attention to all the details and ensure that all your investments remain manageable.
Recognizing the Rake
Most poker games are organized by card rooms or operators who take a scaled commission fee, eating into your winnings, and this is called the “rake.” When calculating your earnings, this has to be taken into consideration. Just as there’s an inherent cost of joining an official poker game, there are also costs associated with being in the investment market.
Particularly when you’re collaborating with investment managers and other professionals, pay attention to how much you’re actually earning. Factor in the fees that will be deducted from your investment return and determine whether it’s a worthwhile investment or not.
Understanding Odds and Probabilities
Knowing when to fold is one of the most important skills in poker, just like it is with investing. The potential of gaining and losing money is a shared trait between the two. In poker, knowing how all of the poker hands stack up against each other – and how rare each hand is – is crucial to winning. For example, the odds against a royal flush are nearly 31,000-to-1, making it the rarest hand in poker. But it’s also the strongest.
Similarly, in investing, it’s vital to know not just the account you’re investing in, but also how it compares to the others in the market. You can’t just look at trends and projections in isolation, you need to look at the competition for the right benchmarks.
Seeing Losing as a Learning Opportunity
Chances are, everyone who’s ever sat at a poker table has been at the losing end of the game. Even tournament champions have lost. In Maria Konnikova’s in-depth analysis of how poker changes thinking, she says that if your first foray into any new area is a runaway success – you’ll have absolutely no idea to gauge if you’re really just that brilliant or it was a total fluke. It gives you a false and inflated sense of confidence.
Losing forces you to look back at the decisions you’ve made, and that can be a constructive experience. Many investors would often avoid risks at all costs, but one sure thing about going into investment is that there will always be risks, and managing them will be a continuous process. What’s important is that you take lessons from each dip and fall. Konnikova argues that embracing a losing experience – both in investments and poker – would heighten the element of skill and analytical thinking in decision-making.
If you want to improve your risk management skills, then playing poker may be an unconventional yet effective way to do it.