Home >Mint-lounge >Indulge >Do successful market traders have any advantage in poker?

Playing poker and trading on financial markets are assumed to be two sides of the same coin. The stereotypical trader logging on to poker websites as soon as he logs off his Bloomberg terminal may be an exaggeration but certainly contains a kernel of truth. It is hard to find traders who aren’t poker aficionados. This is not a surprise since the thrill of (financial) risktaking that attracts people to trading also attracts them to poker and other forms of gambling. Moreover, the game offers similar challenges—maths geeks bet on odds and intuitive traders bet on player psychology.

However, it is not clear if successful traders have any advantage in poker. Do you need to get up and change tables if you see a trader sitting next to you at poker? Conventional wisdom certainly seems to suggest so.

At first glance, there are quite a few similarities between poker and trading that support the link between success in trading and poker. Both involve assessing the odds of winning and betting accordingly. In addition, psychology plays a large role. In poker, winning requires understanding how one’s opponents play. Similarly, successful trading requires understanding the biases of investors and market sentiment. However, the big role that luck has to play would suggest otherwise. (Going off on a tangent, in an amusing parallel with finance, Americans and Swiss fail to see eye-to-eye in poker too—New York courts have decided poker is a game of skill while Swiss courts have ruled otherwise).

The role of chance means that even ‘‘skilled" traders may struggle to repeat their success in poker. Sure, there are famous finance whiz-kids who are poker superstars as well but isn’t it natural that if a hundred thousand traders play poker, there are likely to be a handful who achieve great success. If, instead of poker, they bet on coin tosses, there would be a few who would be feted as being able to ‘‘predict" the result of a toss.

In addition to luck, which may make it difficult to translate success in financial markets to the poker table (or vice versa), the risk-taking mindset required is also different. This is because the nature of risk in each is fundamentally different. In poker, the probability of winning can be precisely calculated at each stage.

In contrast, the probability of outcome in financial markets can only be estimated with a large margin of error (ever heard anyone say there is a 45% chance that the Nifty goes up by 36 points?). Therefore, success in poker is based on pressing home your advantage when the odds favour you, while in markets it is minimizing the margin of error associated with forecasts. The first requires focused ability to rapidly crunch numbers in your head while the second requires an appreciation of the haziness of politico-economic factors driving asset prices and the ability to pick the ones most relevant at any given time. To also win at poker, a trader needs to change from an inductive to a deductive mindset which requires training.

Probability calculations may require effort but surely it must be a cinch for traders to play the mindgames essential to winning in poker? There is superficial similarity to the extent that psychology is important to success in both games—trading and poker. But the way these games are played is very different. Poker requires outwitting known opponents seated across the table bound by the same rules and motivations.

In stark contrast, trading is against an amorphous “market" where other players may have very different rules and motivations. Who eventually wins depends on several factors, including general market sentiment. For example, while you sell a stock based on your analysis, a mutual fund may buy purely because the stock is part of a basket whose performance it needs to mirror. Unlike you, the mutual fund manager cares more about relative than absolute performance. Trying to induce him and others to fold and drive the stock price down based on bluffing or the strength of your analysis is unlikely to yield the same result that it may in poker (unless you’re a renowned short-seller like David Einhorn).

The trader needs to be aware of sentiment but cannot usually influence anyone else. Therefore, trading requires expertise in behavioural finance while poker requires individual psychology. Sure, there is an overlap but it is unlikely to provide an edge to the trader over others.

The third difference is that in poker, a player’s advantage increases as his pot size increases. Bigger bets can scare off opponents, allowing even lower probability hands to win. It is almost impossible to replicate these aggressive tactics in financial markets.

A case in point is the drubbing hedge fund guru Bill Ackman received on his $1 billion short position in Herbalife (a 49% loss) despite widely publicizing his analysis attacking the company’s business model. Further, the probability of loss in markets actually increases beyond a certain bet size. The London whale (which caused a loss of more than $6 billion to JPMorgan) was harpooned not because his trades were grossly wrong but because his bets were so big that it was impossible to get out of the position as the market moved against him.

Contrary to stereotype, a successful trader is risk averse (Warren Buffett is a prime example).

Therefore, to transition to poker, a trader has to adapt a style of play which does not come naturally.

Given these differences and the fact that a winning strategy in trading is not suited to poker, the odds are against a trader having an advantage on a poker table. Therefore, the next time you’re sat opposite a trader on a poker table don’t bow out. Take a chance and follow James Bond’s advice in Casino Royale—play the man across.

Shashank Khare is an investment professional and writer. After studying engineering at IIT-D and business administration at IIM-A, he entered the world of credit derivatives before CDS became a four-letter word. Having successfully batted through the crises, he now indulges his passion for economics, finance and policy through writing and trading.

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