The differences and parallels between poker and investing

In the investing world people love to draw parallels between poker and investing, and rightly so since there is a strong link between the two activities. For example risk taking, risk management and being process oriented all play a crucial roll in both. But most of the parallels are drawn by investment professionals that try to project wisdom from a field they understand to a game they don’t know a whole lot about. So as a poker professional I thought it would be a nice idea to explain some of the more subtle differences, and tell you some of the lessons that I learned from poker.

Random outcomes and knowledge inequality

I basically know nothing about chess besides the rules of the game, but I think that it isn’t hard for a novice to figure out who’s a good chess player and who isn’t. The amount of luck involved in chess is relative low, and you can simply check ELO-ratings to see how good someone is. I understand that Magnus Carlsen knows what he’s doing. When you add a significant random element to the game the evaluation of skill becomes a lot harder, and it becomes easier for mediocre players to pretend that they are better than they are.

In poker there is a vibrant market place for coaching. Poker is a complicated and evolving game: what you read in books is either outdated, never correct to begin with, or theoretically correct, but very general and not directly usable. Figuring everything out on your own isn’t doable, so hiring someone more knowledgeable to speed up your development as a player makes sense. But this is easier said than done, because how do you find a good coach? There are plenty of mediocre players that aren’t very good at poker, but good at marketing themselves (disclosure: I also offer poker coaching and I like to think I’m bad at marketing and good at poker).

You can’t simply look up an ELO-ranking and determine someones skill level, and if you are not an expert level poker player evaluating how good the advice is that you get isn’t trivial. For those that know something about poker, take for example this spot: you are out of position in early position at a six handed table with ace-queen offsuit and you get re-raised by the button (an expert level player). What should you do? I could easily create a convincing argument for folding, calling and re-raising. You are out of position with a hand that is dominated by ace-king and premium pocket pairs, so fold? It’s one of the better starting hands in your range and you don’t want to be exploited by bluffs, so call? You have blockers in your hand that reduce the probability that your opponent has aces, ace-king or queens,  so re-raise as a bluff? If you are a novice poker player there is absolutely no way that you can pick the right option with the correct argument, but feel free to take a stab at the problem in the comments :).

In the investment world the inequality in knowledge is an even bigger problem. You have a huge number of people that know nothing about investing, don’t want to educate themselves, but they do have money and they do want to do something with it. So you can basically sell them anything if you have the right sales pitch, and it’s even harder to evaluate the skills of an investment manager than the skills of a poker player. If you carefully analyze the last one or two years of someone’s play you can determine with a reasonable narrow confidence interval someone’s winrate. Getting a sufficiently big sample size for an investment manager is a lot more problematic, and once you have a big sample size odds are that the historical sample is not representative anymore for the current situation.

Sad news is that it’s probably a problem that can’t be fixed, but that’s a good thing for active investors. You cannot outperform without someone else under-performing.

Playing tight

Buffett is known for saying that there are no strikes in investing, implying that an investor will do best if he is extremely selective with the stocks he buys. On the surface a similar principle seems to be true for poker since most winning poker players play tight: meaning they are selective with the hands they play as well. Problem is that this is where the comparison breaks down: in poker there are ‘strikes’ for not playing because you are forced to put money in the pot through antes and blinds. You have to be selective with the hands you play, but you can’t wait for a fat pitch.

As a matter of fact, it’s even more extreme. If you don’t want to leave money on the table you should play hands when you expect to make zero profit! The reason for this is that a hand with an expected value of zero on it’s own adds value to the better hands that you play. As an extreme example: if you would play only aces (the best starting hand in holdem) an intelligent opponent wouldn’t give you a lot of action, if any at all. But if you also add some crappy hands to your range that individually don’t make (but also don’t lose) any money he is suddenly forced to give action to your aces because otherwise he could be bluffed all the time by the weak hands. So the expected value of your best hands are improved by adding very marginal hands to your range. I don’t think anyone would advocate investing in stocks when you don’t expect to make money.

Pick your own style

Another difference is that there are probably a lot of things that can work when investing. You can buy NCAV bargains, distressed debt, buy growth at a reasonable price, high quality moat companies and that’s just the tip of the iceberg of potential profitable strategies. Common investment advice is that you should stick to a strategy that you are comfortable with. How good that advice is for investment is another discussion, but it certainly isn’t good poker advice.

In poker there is no big selection of different viable long-term strategies. Against bad players there are a lot of winning strategies, but against each other some strategies are better than others. A strategy in Tic-Tac-Toe that would start at the edge of the playing field would be an example of a dominated strategy, and it wouldn’t be successful unless your opponent is really bad. In poker you also can’t really choose how you want to play if you want to make money because playing a dominated strategy gives your opponents room to exploit you. With knowledge about the game increasing strategies are slowly converging to a game theory optimal solution. People unable or unwilling to adapt ‘their style’ drop out.

Wrapping it up

Enough rambling, time to wrap it up before this post gets even longer. Hopefully you learned something new, and if not: sorry for wasting your time ;).

20 thoughts on “The differences and parallels between poker and investing

  1. Adam

    From someone who grinded out mid-stakes NL for 5-6 years while in college (doing pretty well), I really enjoyed this post. I played up my poker experience quite a bit during investing interviews, mostly around dealing with variance. Learning how to control emotions and not tilt – say, after losing a huge hand to a terrible player despite a 95%+ probability of winning – is good preparation for market swings. At least in the stock market bankroll swings take months or years, not seconds!

    Haven’t studied poker strategy in years, but I’d fold AQo in your theoretical situation the majority of the time. The opponent has to put you on a good hand (given your raise from early position), and likely only re-raises hands that have you dominated or behind. Plus it sucks trying to play AQo out of position into an aggressive player, as very few flops are going to be monsters for you. With little ‘monster’ flop potential, I’d never call and only consider a re-raise if the button has been laggy and constantly 3-betting your raises. But even then, I’d prefer to do it with suited cards or even mid to high pairs.

    But like I said, I’m rusty (and was probably never good enough to be a coach anyways), but I enjoyed re-living my poker days 🙂

    1. Alpha Vulture Post author

      I actually think that the kind of mental strength that you need to deal with short term variance is quite different in poker and investing. In poker you take multiple decisions every second and you have a limited time to think about your options, it’s imo a lot easier to make mistakes when you encounter negative variance in such a scenario then when you are investing and you can take days time – if not more – to think about your decisions. Easier to go for the rational option with more time imo.

      And about the AQo hand, it’s a bit of a borderline spot, and that’s why it’s kinda easy to create arguments that sound good for every option, but your answer is reasonable correct. That said: your opponent – given the assumption that he is a very strong player – is not only re-raising you with hands that have you dominated or behind: he should have a reasonable amount of bluffs in his range. But if he’s not bluffing with too much hands AQo is still too hard to play out of position, and you are better of folding or re-raising it as a bluff. But if you fold every single time you could be exploited by someone re-raising you with a high frequency, because if you want to rebluff taking a hand like AQo or AJo is better than taking suited connectors or medium pairs. You can actually call medium pairs out of position profitably, so you don’t need to turn those hands in a bluff, and while suited connectors look playable they lack blockers against his premium range and they lack equity. It’s better to be in a though spot with the best hand than to be in an easy spot with the worst hand. What I would do: fold the majority of the time, but throw in some bluffs.

  2. pietje

    Sidetrack question: in investing, a lot of people think they can outperform the market yet few do. As a poker coach, how would you judge the average trainee? Do you think they have realistic expectations? Or let’s phrase it this way: if your students are getting coaching because they want to earn $$, do you think becoming an expert in online poker is a good option for them currently?

    Is this something you discuss with your pupils? How would you rate it vs other “careers”, both now and a couple of years ago?

    1. Alpha Vulture Post author

      My observation: the better the trainee, the more realistic their expectations are. The losing 25NL player that is dreaming of quitting his job and becoming a full-time pro is hopelessly unrealistic, and trying to become an expert in online poker would be a terrible option for him. Luckily I don’t get a lot of those trainees, but there are still a decent amount of players that are betting too heavily on poker. What I often see if that people become ‘poker professionals’ when they make enough to cover their living expenses, but that’s imo not a smart decision in the long-term. Poker isn’t getting easier, and you do burn bridges by quitting your job.

      And if it’s not already clear from the above, I think going for a ‘career’ as poker professional is now a significantly worse decision than a few years ago. In the past poker was basically too easy: with half a brain you could learn to make significant money, and that’s a market inefficiency that’s being corrected.

  3. Martin

    This depends on many factors. I wouldn’t always do the same to not give oponents an easy read. How much big blinds are in the pott? How high is the re-raise? How good is my read on the button? How many players have called before the button? What are the players stacks?

    By the way I would also look at the distribution of a player’s elo performance. Young players tend to be underrated and very old players could be overrated. Also watch for special situations like team matches. You could put your best player on table one, even when he is not there, and the rest has to play lower rated players. Your best player looses.

    1. Alpha Vulture Post author

      It depends is of course always the correct answer in poker ;). But lets say we have 100bb stacks, a pot size re-raise, and you don’t have a read on villain that allows you to deviate from game theory optimal play: villain is not bluffing you too much or too little. So you should basically just play your own range as best as you can.

      And interesting comment about elo performance. Shows that even in a game where random outcomes don’t play a big role a noob (like me) can be deceived by numbers because there are in fact relevant variables that I failed to consider.

  4. John

    Good post.

    – Are you aware of this post at The Brookyln Investor?

    – Apart from the rules I know nothing about poker. But I would think one key difference between poker and investing is, in poker you can bluff and you consistently engage in direct psychological/mental warfare. I think some fund managers do do this kind of stuff. But that’s arguably more in the domain of trading, not investing.

    – What’s the status of Edward Thorp among poker professionals? How much did he contribute to poker playing?

    1. Alpha Vulture Post author

      Yes, I did read the Brookyln Investor post: part of the reason why I wrote this post. And I think you are right that there is no good parallel between bluffing in poker, and something else in investing, but don’t overestimate the role that ‘metal warfare’ plays in poker. You are bluffing all the time in various degrees, and it’s all just a matter of expected value.

      And Edward who? Ok, I know who he is, but as far as I know he played black jack.

  5. krullebol

    Maybe there is an investment equivalent to playing zero EV hands in poker. Probably you will be investing in low EV opportunities early in your investment career, because you don’t have the knowledge yet to correctly assess the EV. So even though such an investment might not generate a financial return on your capital, it may lead to an increase in your human capital in the form of better skill in recognizing the EV of future investment opportunities. You just have to make sure you don’t lose too much financial capital in the process 🙂

    Another difference I would highlight is the fact that poker requires mostly time, not so much money. Successful investing does require a significant sum of money (maybe earned using poker 😉 ).

    Another parallel between the two is the attitude towards (losing) money. Many people see money as something that can buy stuff, but for both the investor and the poker player money also is an ingredient for generating money.

    1. Alpha Vulture Post author

      I’m not convinced by your parallel between playing zero EV hands and investing in low EV opportunities. The strategic rationale is completely different, and I think there is a much better comparison possible because when you start playing poker – just like when you start investing – you are going to make mistake and invest in low or even negative EV hands/stocks.

      I agree that poker is a game that requires a lot of time and not so much money. Case in point: I started playing poker with a $100 deposit, and managed to grow that to something like 10K the first year by putting a lot of time in the game. You can’t play more hands to increase your investment results, you have to be patient. Doesn’t mean that you can’t or shouldn’t put a lot of time in investing though: there is always something to learn or research.

  6. CantEatValue

    One thing that’s just occurred to me is that the two share a similarity in that the particular playing preferences of your opponents determine where the best opportunities lie. I’ll illustrate this best with an example for each.

    In poker, if everyone at the table is loose, this creates opportunity for a tight player to ‘fill the gap’ and capture the best opportunities. Conversely if everyone is tight the best strategy is to be much looser than normal.

    In investing, investor ‘fads’ tend to come and go and influence market prices away from equilibria. If the market has a fetish for dividend stocks, the better opportunity may lie in companies which can compound well internally. If the market loves tech stocks then the better opportunities may lie in old-economy stocks etc etc.

    I suppose the lesson is that in both cases your opponents determine where the mispricings occur and the best poker players & investors can learn to spot these opportunities and act in a contrarian manner to capture the excess profits.

    1. Alpha Vulture Post author

      What you provide is a great example of a parallel that sounds good from the investment perspective, but doesn’t quite hit the nail on the head if you think about the underlying poker strategy. Yes; if people play tight, you should play looser. But when people play loose you should actually also play loose! Think about it: if they play weaker hands every single hand you play will be more profitable than normal, and hands that ordinarily wouldn’t be profitable (or break-even) would become profitable.

      1. krullebol

        So now we have 3 statements from you about poker:
        1) winning play is generally tight (main post)
        2) if your opponents are tight, you should be looser (compared to what exactly? your opponents? your own defaults?)
        3) if your opponents are loose, you should be loose

        Statement 2 and 3 make you wonder, why 1 should be true… Can you elaborate?

        1. Alpha Vulture Post author

          I admit it can be a bit confusing because I failed to say if it’s on an absolute or relative basis. Let’s define our default strategy as your best approximation of a GTO strategy, and we only deviate from this base strategy to exploit mistakes that we identify in our opponents. This strategy is on an absolute basis tight compared to all possible strategies, but you should play relative loose compared to that default when your opponent plays either too tight or too loose to exploit those mistakes.

  7. Doop

    Depending on your stack and your opponents stack relative to size of pot, the correct answer is to either fold or (less likely) to re-raise all-in. Otherwise, in the absence of a freak flop, you are creating a more difficult decision for yourself at the turn/river. In poker I generally find that the fewer difficult decisions you commit yourself to making the greater your return. Great blog, by the way. I’m in with you on PV Crystalox and think we’ll do well there.

    1. Alpha Vulture Post author

      I think that mistakes often lead to difficult decisions and even bigger mistakes, but taking a certain line just because you will face less difficult decisions isn’t going to maximize your EV in the long run. And a question to think about: if it’s really a hard decision shouldn’t the EV of the two options be relative close? And if the EV is relative close does it matter if you have a hard picking the best option?

      About the hand: it’s a borderline spot, and that’s exactly the kind of spot were often multiple answers are correct at the same time, and the biggest question is actually with what frequency you should go for the different options. Re-raising all-in is with 100bb stacks (more or less the standard online) too aggressive, and you should fold the majority of the time. But this would be one of the very best hands that you would be folding (the only similar hand that is better is AK, and I guess you know that we aren’t folding that hand). And since that is the case you do want to re-raise this hand with a certain frequency as a bluff (or better said: a semi-bluff, you can obviously win postflop some percentage of the time when you get called).

  8. Tom Dwan

    “You have blockers in your hand that reduce the probability that your opponent has aces, ace-king or queens, so re-raise as a bluff?”

    If you are re-raising AQ in that situation, you are certainly not doing it as a bluff. Think about what hands that are better than AQ that you are trying to bluff (ie they will fold to your reraise). Pocket Js or Ts? They are not likely to 3bet those from the BTN vs your UTG unless you have an aggressive dynamic, which if that is the case the reason you are reraising AQ will certainly be for value and not as a bluff. Combinatorically, even with your AQ blockers, there are still more combos of AA, QQ, AK than JJ and TT.

    1. Alpha Vulture Post author

      Didn’t say that the example arguments for the various options were (fully) correct, only that they should sound reasonable. In this case thinking about your hand as being a bluff or as being a value hand is both not really correct. If you re-raise here it’s not a bluff in the traditional sense since I agree that it is unlikely that you get a fold from a better hand. But at the same time it isn’t a value reraise, because if you get called or re-raised it isn’t good news: you won’t be a favorite against those ranges. The majority of your value will be coming from villain folding if you re-raise, and because of that I usually call this play a semi-bluff even though the label doesn’t fit perfectly.


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