HOW INVESTING IS LIKE POKER
by Lou Gershman
There’s no doubt that investing feels like gambling – especially when the market is down. They both rely on mathematics and our emotions. However, from a gambling standpoint – investing is more like poker than any other game. If you want to be successful, you should have a systematic thought process for participating in either. You need to ask yourself, “How much am I willing to risk in order to potentially win a given amount?”
However, you also need to understand what the probability is for each outcome. What is the probability of me winning? What is the probability of me losing? You intentionally risk a certain percentage of your investments to earn an expected amount in return. Additionally, if things don’t work out the way you expect – you hope to minimize your losses.
As a matter of fact – most people would choose to avoid any loss at the expense of pursuing a potentially sound gain. This is referred to as loss aversion. It results in your emotions overshadowing your logic.
One of the worst attempts to recover a gambling loss is called chasing a loss. That’s when a gambler places a larger wager to recover his losses after losing a bet. Even though chasing a loss is considered a poor strategy, people tend to follow it. From an investor’s point of view, chasing a loss might manifest itself by trying to time the market.
A person continuously chasing their losses is undoubtedly filled with anxiety, frustration, and worry of not recovering the lost money. For them, playing poker (or investing) is no longer fun, as they focus on finding ways to rationalize the losses.
The key to being successful at investing or poker is:
1) Having a plan
2) Sticking with your plan
3) Staying rational
Following these steps will help you to become a successful investor and maybe even a better poker player. Enjoy your investing journey!