How To Invest

How playing poker taught me to be a better investor

Annie Duke is a former professional poker player who has written a book called Thinking in Bets. She is a World Series of Poker champion and has made over US$4 million in lifetime poker winnings.

Now as a professional speaker, author, and decision strategist, Duke argues that the best way to make decisions is to consider them as bets. You should weigh the potential upside against the downside and only make a bet if you believe the odds are in your favour. Duke has applied this thinking to her own life with great success.

In Thinking in Bets, Duke gives readers an inside look at how she approaches making decisions in her life, both personal and professional. She also shares stories of how her thinking has led her to success in various fields, including poker and investing.

Why poker is a good training ground for investing

Poker is a game of skill, not luck, requiring players to make decisions based on incomplete information. Similar to investing, you have to make decisions based on limited data, and you don’t always know what the other person is thinking.

Poker also teaches you to be patient and disciplined. You must control your emotions, stay calm when losing, and make rational decisions. These are all qualities that are important for investors. So if you want to become a better investor, Annie Duke suggests that playing poker is an excellent way to practice.

Understanding outcome attribution

Annie Duke’s book has some great insights on how to interpret outcomes. Two of the most important factors that she discusses are skill and luck. Most investors associate the success or failure of a given investment with its outcome, but in reality, the result can be completely unrelated to the quality of the decision.

Investing is all about making the best possible decisions with your information. However, even if you make the best decision possible, luck is still involved. You might make a great investment that just happens to underperform because of factors beyond your control. Conversely, you might make a bad investment decision but get lucky, and it still ends up being successful. When accessing investment outcomes, you should think critically about how much an outcome is attributed to luck or skill.

How betting forces your thinking 

Annie Duke has provided some interesting insights on how betting can force you to think. According to Annie, when you have skin in the game, you’re more likely to think carefully about your decision and its implications.

Picture yourself discussing with a friend whether or not Donald Trump will contest and win the next U.S. presidential election. Suddenly, your friend asks, ‘Are you sure? Do you want to bet on that?

This question usually gives you a lot of reasons to pause and think more carefully. Why? Because by betting, you are risking something — you have skin in the game — and you are more emotionally invested in the outcome. When you have money on the line, you’re more likely to do your research and think carefully about your decisions. This can help you avoid making impulsive or rash decisions.

So, the next time you’re facing a big decision, consider placing a sum that is significant enough (but not too large) to put you on the line, and it might just help you make a better decision.

Event-driven cognitive bias

In her book, Annie demonstrates how the order in which events occur can affect how we interpret the outcomes.

Just imagine going out to the casino one evening with your friends. You’re in high spirits in the first hour, a thousand dollars ahead! But over the next couple of hours, you steadily lose that money back, and in the end, you are right back where you started.

In another scenario, envision that same gambling night; you’re just unlucky to start out and down $1,000 in the first hour. You decide to hang around because your friends are still there having fun. Then, over time, your profits gradually come back, and by the end of the night, you are right where you started.

How would you usually feel in each scenario?

Perhaps you would feel sad and upset after losing all your early gains in the first situation. In the second scenario, however, you might be joyful and relieved to have broken even and perhaps even buy something to drink to celebrate! While the outcome was the same in both scenarios, the order in which the events occurred significantly influenced how you perceived each outcome.

This same example can easily be applied to your investment decisions. For example, an investment takes off for a short period before crashing down or vice versa. You end up at the same spot in both scenarios, but the order is which the events happened could skew your perception of your decisions and affect your future decision-making process. By understanding how an outcome (and the order of events) can influence our behaviour, we can set guardrails and triggers to protect ourselves from these biases.

Setting up guardrails for behaviour bias

Annie talks about ‘triggers’ she uses during poker competitions, such as checklists and getting up from the table. These triggers improve her mindfulness to help her make better decisions in high-pressure situations and avoid emotional reactions.

Similarly, for investing, you could set up guardrails in the form of automatic monthly investments (i.e., dollar-cost averaging) or keep an investment log documenting your decision-making process. Establishing a log can help you keep track of your investment choices objectively and draw up expectations or conditions for better outcome evaluation.

The fifth perspective

Source: Visual Synopsis

Annie Duke’s book, Thinking in Bets, is helpful tool in making better investment decisions. Her decision-making framework can help you better understand your biases, avoid bad investments, and steer clear of risky bets. There are more decision-making concepts and strategies explored in the book and I highly recommend it — especially if you’re an investor who also enjoys a good game of poker from time to time.

Wang Choon Leo, CFA

Choon Leo is a growth-focused investor with an interest in innovative platform businesses that can connect users and fix market inefficiencies. He believes that companies with the most competitive business models will compound in value over the long term. Choon Leo is a CFA charterholder.

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