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Department of Connections

Poker and Markets, Part II

By Scott Haley
6/10/2004

A few lessons from poker and my attempt to relate them to speculation. I admittedly know little about poker and less about the markets, but perhaps a few of you will find some use of these.

1. Poker: It takes a stronger hand to call with than to bet with.
   Speculation: Trades based on solid research and statistical analysis are inevitably more profitable than rule of thumb trades based on reactions to news or the latest television ramblings.
2. Poker: Most starting hands are unplayable.
   Speculation: Pick your spots. Most trading ideas will prove unprofitable. You must have the patience to wait for a solid trading situation.
3. Poker: Strategies must be adapted to the skill level of each opponent.
   Speculation: Each market is different. What works in one will fail in another.
4. Poker: Position is critical. Decisions must be based on the order of action.
   Speculation: Those with superior insight and information will succeed. Understand the significance as conditions change in front of you.
5. Poker: The high percentage of luck in poker gives the weaker players the false sense of success that keeps them in the game long enough to give back their winnings to the house and the stronger players. You never know who's watching and waiting to head you off.
   Speculation: Catching a lucky trend or riding a temporary bubble gives the weaker participants the impetus to keep trading and throwing off money to the brokerages and stronger participants.
6. Poker: Mind your image. How your are perceived by your opponents (bets too much, folds too much, etc.) should affect your decisions when facing them. It is often best to be seen as opposite to your actual style of play.
   Speculation: A head fake is often good to keep the faster moving market participants guessing. A well placed limit order in one direction provides deception when intending to reverse position with a large market order the opposite way.
7. Poker: Celebrate bad beats. Getting beat by an improbable draw means that your opponents are playing incorrectly, which will ultimately lead to profits.
   Speculation: The quality of your decisions is more important than the outcome of any one trade. Go with the odds and you'll profit.
8. Poker: Never get pot committed. What you've already put into the pot is no longer yours. If the situation has changed and the odds are now against you, fold.
   Speculation: Don't fall in love with positions. If the trade has failed, exit.
9. Poker: Don't show your cards unless necessary. Everything you say and do will be used against you by your opponents in the future.
   Speculation: Keep your trading ideas to yourself. Everything you say and do will be used against you by your opponents in the future.
   

06/09/2004
Comment from Adam:

Scott, I want to suggest to you that it really takes a much much stronger hand to call with than to bet (or raise) with.  Consequently, calling in hold-em poker is very rarely the right move to make.

06/10/2004
Comment from Ari Siegel:

Showing one's cards can be a powerful tool to manipulate the opponent's ego.
However, as with all psychological manipulation, it can backfire. Also, others
at the table (and observers) see your hand, so you must factor in their
reactions. I have experimented with showing cards in the past, and have come to
the conclusion that it is not profitable for me. However, one man's hole in the
bucket is another man's water source. I am sure there are many who use this
technique masterfully. Important in poker is to understand what works for YOU,
and not try to do everything perfectly. Again, in the end, I believe it's a lot
about bankroll management (that doesn't apply to tournaments of course).

Ari Siegel is a Yale student and professional poker player. He is currently a summer intern at Vic's firm.
 

6/10/2004 
Comment by Ross Miller:

There appears to be general (well, two person) agreement
that one should never unnecessarily show ones card in
hold'em. Given that I've already defended mr e (not that he
needs it) and the I Ching today, though I generally agree
with this, I will present the merits of the other side.
First, there's getting caught bluffing as a form of
"advertisement," but this may not count as unnecessary.
Then, there's the intentionally pissing off your opponent
and acting like an idiot strategy. Flagrantly showing that
you bluffed someone out of a large pot can have a devasting
psychological effect (and physical effect, on you, if you
pick the wrong person to try this against). There's almost
nothing better than an opponent who's out to prove that he's
better than you or trying to exact revenge at any cost. Such
methods are not unheard of in racket/racquet sports and are
the bread and butter of the financial world.

Ross Miller is an economist, among other things. Read installments of his novel, "Rigged," on his Web site, www.millerrisk.com.

Poker, Part I