Kiplinger – Texas Holdem Helps Your Investing – But Don’t Play “Free” Poker

There have been a number of articles about poker and investing since the start of 2010 which is always great reinforcement for the Texas Holdem Investing concept.

Kiplinger recently posted three articles about poker and investing which I felt were very comprehensive on the subject.  This post reviews the Kiplinger articles through the lense of the Texas Holdem Investing concept.

I will also expand on a couple of sections of the Kiplinger articles which discuss the merits of using “free” poker to learn to invest and how this is at odds with a core part of the Texas Holdem Investing thesis: learning to invest by playing poker with real money at risk.

“How Deepak Chopra Helped Me Play Poker Better”

Bob Frick describes how in 2005 he made the connection between poker and investing with a biofeedback tool promoted by Deepak Chopra.

In an effort to improve his Texas Holdem play Bob hooked himself up to the “Journey to Wild Divine” biofeedback that measures stress and discovered that when playing Texas Holdem poker his stress levels became elevated.  He then performed the same test when he was making financial decisions and found that the same stress elevation occurred.

This outcome is an interesting proof of the theme from Texas Holdem Investing that poker can be used to train your psyche to deal with the stress of making financial investment decisions where your money and capital is at risk of loss.

While an excellent article early in the piece Bob discusses how he learned to play Texas Holdem Poker through playing “free” games on America Online.  Apart from learning the basic rules, Texas Holdem Investing strongly advises against using free games to learn poker and to discover your emotions.  When no money is at risk you simply will not react the same was as when money could be lost, even if the amounts that could be lost are small.  After learning the rules you must start playing for real cash – even if it is at the 1c/2c limits.  Like any training regime you need to start off small, but playing free poker is like paper trading – of limited usefulness as an education tool for real investing.

“How Texas Hold’em Simulates Investing”

This article describes why Texas Holdem is the closest form of gambling games to investing because players with greater skill levels will generally “outperform the market” compared to less skilled players.  Frank Murtha states that the goal of Texas Holdem is “to accumulate capital based on decisions with imperfect information” – the part in quotes is an exact description of investing.

The article describes how the various phases of Texas Holdem are analogous to the phases of an investment decision.

• Evaluating starting hands is similar to reviewing the investment opportunities available to you.  The small and big blinds are an analogy for your costs of an information and investing platform.
• Making a bet is similar to making an actual investment
• Then the (investment) flop occurs and you must review the investment based on new information, which is still incomplete because you don’t know what your opponents hold.
• If you are still in an investment at the turn and river stage then it should be a very good security because you are likely to have committed a lot of capital

At each stage of Texas Holdem poker you must make the decision to put more capital at risk (or leave the same capital at risk) or to cut the investment based on new information.  Playing Texas Holdem can help you develop your own evaluation framework for your investment decisions.

The article closes with a statement that it is not necessary to play poker with real money to identify your psychological makeup that may affect your investing.  The article mentions various investment psychology experiments that did not use real rewards, but I would question the full value of such experiments in terms of simulating the real world.  However, as stated previously playing “free” poker to learn to invest is like “paper trading”.  It misses out a huge element of real like investing (and poker) – the fear of losing money and the elation of achieving gains, and how these raw emotions can affect your performance.

“How Poker Can Make You A Better Investor”

This piece focuses on a number of important issues that make poker an excellent tool for learning to invest and trade, with a focus on how poker teaches the emotional side of investing.

The article notes that a number of market practitioners such as Andrew Lo of MIT, Aaron Brown formerly of Prudential Securities, and Frank Murtha of MarketPsych state that poker can help investors develop the emotional stability necessary for investing.  This is a fundamental part of the theory of Texas Holdem Investing where Step 4 explains about managing emotions through the following steps:

• Understanding your emotions – when you play Texas Holdem with real money you will learn about how your emotions react to winning and losing and having to make decisions where real money is at risk
• Gradual emotional training – Texas Holdem allows you to start at low risk levels to gradually increase the intensity of your emotional training.  Investing generally has to start at much higher capital levels, where investors typically have no emotional frame of references, particularly for losses.
• Removing your emotions – Texas Holdem helps teach the development of rules-based systems that remove emotion from investing, and also the discipline of stopping activity in the face of a sequence of losses to take time to prevent your emotions from causing problems.

The first section of the article discusses about how poker can permit a learning investor through many financial decisions in a short space of time and so accelerate the learning curve while putting limited amounts (or no) money at risk.

Although playing a few hours, or an evening of poker can certainly help an investor learn more about their emotional make up I think that this is insufficient as a method of learning about your investing through poker.

The Texas Holdem Investing thesis is that poker should be played on an ongoing and rigorous basis with real money at risk for a long period before a new investor puts any investment capital at risk.  Further to this concept, a learning investor should be able to consistently win at poker for a reasonable period of time before committing capital to the investment markets.  Unfortunately not everyone is suited to the investing world and may be better off applying their skills elsewhere in the world of finance.  Following the Texas Holdem Investing concept can help a person to find out their suitability for investing without losing huge amounts of investment capital over a long period.

One of the advantages of playing a large number of poker hands is that it demonstrates how long it can take to get from a small starting capital amount to increase it.  A real life example carried out by one of the most well known poker professionals – Chris Ferguson – was where he tried to build up to a $10,000 bankroll starting off from zero.  The results of the experiment are described here, in addition to some rules that Ferguson developed for poker which are equally applicable to investing.  By building up your own poker bankroll to $5,000 or $10,000 you will learn the time and effort it takes to make money in the investing markets.

Play Real Poker To Learn Investing

Playing poker casually and for free, like “paper trading”, can help shed some light on your investing capabilities and emotional composition.  However, it is only by playing it with rigour and over a long period of time that it can help to teach and improve your skills at investing with real capital at risk.

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