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No. of Recommendations: 107
Gambling, Investing, and Poker

There have been a couple of times that I have equated stock market investing and gambling to angry denunciations. This article is intended to show how they are related and how to leverage knowledge from games of chance into stock market success. This is a long read, so grab a cup of coffee and dig in. If you want to get to the nitty gritty, you can skip to the last section.

Definition of Game Types

Before we delve into the intricacies, it is important to understand what classes of games are out there – and yes, equity investing is a game. There are two basic types of games: logic based and trivia based. Logic games require only internal knowledge (i.e. read the rules, play the game) while trivia based games require external knowledge (Trivial Pursuit). Equity investing is a bit of both, however at its heart equities are a numbers game – a logic game. I offer this without proof and will backup with discussion below.

The subdivision goes further. What types of logic games are there? This is straightforward – there are four types of logic based games. Each requires its own set of critical thinking skills to master. Figure 1 shows the logic game matrix along with common examples of each. As can be seen the games are divided by whether or not they contain a random component and an informational component.

Figure 1: http://www.filespace.org/Sand101/logic-games.pdf

The top left are the most straightforward games – chess, go, etc. Not surprisingly these are the ones in which computers have become better than humans. Top right are those games that have an incomplete informational component, but no random component. Stratego is the most direct, recognizable example of this kind of game (Diplomacy is more fun, though). Bottom left are those games with randomness but complete information. Backgammon is the best example of this type (and the only popular one I can think of – of all the types I like this quadrant the least).

The bottom right contains the most interesting of logic games – those that have both incomplete information and randomness. The other three quadrants are additive into this quadrant and game theory used in the other three all apply here. Great examples of this include poker, many wargames (Advanced Squad Leader the prime example), and equity investing. (As a note I wanted to include women in this quadrant, but my wife whacked me over the head when she saw it. I offered that as proof of randomness and got whacked again. What’s a guy to do?)

What are the predominant skill sets needed in each quadrant?

Non-random/complete information: This type of game is all about building a logic train that is superior to your opponent. Construct the highest quality logic train and you will win every time.

Non-random/incomplete information: This type of game has as its main component inferring the most logical content of incomplete information. It also involves anticipating the moves of an opponent by their past actions (part of which is assessing incomplete information).

Random/complete information: This type of game has as its main component odds calculation. Combine odds calculation with a logic train to achieve success in the long run.

Random/incomplete information: The skillset required in this game is the combination of the other three.

There are those out there that proclaim there is no randomness in the stock market – all movements are influenced by real, definable external forces. I would argue that while this may be true for the most part, most of these forces aren’t easily knowable and that there are so many of them that, in effect, the short term movements of the market are indeed random. Some of the best work in this area was done by Benoit Mandelbrot, who found that the markets followed a definable chaotic walk and were able to be described using fractal analysis. He also found, however, that this fractal walk was describable once it occurred, but not predictable. That is random in my book.

The question remains, however, whether equity investing is “gambling”. By corollary, are the games that have a random component gambling?

Randomness and Gambling

Does randomness = gambling? From the dictionary definition of gambling: to stake or risk money, or anything of value, on the outcome of something involving chance. By that definition any activity with a random component is gambling. For fun, let’s see how the government views gambling:

State governments are very varied in their treatment of what is gambling and what isn’t. A book could be written on this one. Some look at the amount of skill/randomness mix and some don’t. California has many poker halls – it has defined poker, a game with a significant random component, as a game that is predominantly skillful and thus not gambling. New York, on the other hand, has found that those games with any random component are gambling and prohibit them. It, of course, blesses all stock market activities.

Federal government? Probably even more interesting. Congress in recent history has tackled the “problem” of internet gambling by passing a law that tried to strangle off funding mechanisms. It maintains that internet casinos, poker rooms, and sportsbooks are illegal. The area is actually pretty gray with the exception of sportsbooks. Those were expressly made illegal by the 1961 Wire Act. Their efforts at prohibition were aimed at internet bingo halls, casinos, sportsbooks, and poker rooms. It, however, made exceptions for horse racing, interstate casino jackpots (mostly Indian casinos), fantasy football, and (of course) lotteries. So according to the Feds gambling is bad unless you have a highly paid lobby – the NFL, pari-mutuels, casinos, etc. And, of course, the most regressive, destructive form of gambling - the lottery (50% profit cut with a near infinite variance) - is exempt. But this is evidently OK since the government runs that business.

So the government is no help – no surprise. But I digress.

The dictionary definition is accurate but it is incomplete. As with most things in real life, the issue much more nuanced. Games with a mixture of skill and randomness are not so easily pinned down. We’ll talk about this more.

The Intricacies of Skill/Randomness

Now we need to define the nuances of games that combine randomness and skill. First let’s look at how one can make money in a typical casino – the bastion of winning the randomness game:

1. Be the casino. Set the rules, make the money. In terms of equities, this is the NYSE or CBOE. These guys make money no matter the ups and downs. Making the game = profit.
2. Cheat. Always profitable, cheating and insider information will never go away. The downside is pretty harsh, though.
3. Play games in which the casino only arbitrates the action, rather than makes the rules. If you play a game that the casino doesn’t have a direct interest in and if your skill set is better than other participants, there is an opportunity to make money. Equity investing naturally falls into this category, as does poker and backgammon. All have a skill/randomness mix and all can be beaten for a profit.

Casino games have two qualities: the profit curve and variance around that curve. Let’s take the most common casino game as an example – blackjack. A typical good blackjack game has a fixed advantage for the casino of ~2%. If you play perfect blackjack the best you can do is -2%. Therefore, the profit curve for a player will be a -2% CAGR over the long haul. Blackjack also has a significant variance around that curve, however. Players who play over the short term may very well ride that variance to a win. That player is simply hoping to ride the lovely side of randomness to a profit. The casino wants to keep you playing over the long haul. The more hands the player partakes in, the closer to the true CAGR curve that player will get (casino = \$\$cha-ching\$\$). Thus the reason for the lack of clocks in casinos, betting limits, free drinks, etc.

Poker players and equity investors, done correctly, are the opposite. In these, if the skill sets are good enough, the CAGR is positive. However, both of these carry significant variance as we all know. Adherents of the BMW method know that many companies that have been around for a while tend to revert to an inherent CAGR and exhibit a variance around this natural return. In poker the same is true. In both if the game is played over the long haul and enough good decisions are made the return will conform to an innate growth rate. Investors and poker players (good ones) look to take the variance out of the equation by playing for the long haul.

So now we can get a bit better definition inside the category of gambling. Those players who attempt to ride variance are speculators. In the long run they have no expectation of having a positive expectation. This includes any casino game played against the casino, short term forex players, daytraders, etc. Those players playing in such a way to minimize the effects of variance are investors. These include long term investors and skillful players in games that have a skill/randomness combination (poker, backgammon, bridge, etc.).

One famous poker player, Phil Gordon, remarked in the introduction of his Little Blue Book: “Nearly every day people email me or stop me on the street and ask me: ‘What’s it like to be a professional gambler?’ I invariable answer the same way each time: ‘I’ve never gambled a day in my life.’ I consider myself a strategic investor. For every \$100 I put in the pot, I expect to take more than \$100 back out. If I can succeed more times than not, hand after hand, tournament after tournament, year after year, I ensure a long term positive expectation. That positive expectation applied over thousands of trials is what makes me a winning player.”

I quoted this because it simply can’t be said any better. Technically every time someone puts money at risk (i.e. not a government backed treasury) they are gambling. Played properly over the long haul, however, a skilled player can overcome the variance and ensure a long term positive expectation.

Poker and Equity Investing

Now that we have defined what equity investing is and isn’t, it remains to define why I believe the skill sets in poker and investing are pretty much the same. We know many of the mathematics around investing and gambling are the same (the Kelly Formula, for example). So how are poker and investing similar and dissimilar?

Similarities:

1. Most importantly, both games involve incomplete information and randomness. The skill sets developed in one apply directly over to the other. Developing a logic train, calculating odds, and accurately inferring conclusions from incomplete information are exactly what is needed to be successful in both.
2. Both are beatable over the long term. Poker is equivalent to playing one game of chess along with a couple die rolls. Over the short term the die rolls rule – over the long term the chess matches determine the expectation. Equity investing is essentially the same.
3. Both have inherent costs. Poker has rake (5% of each pot, give or take), investing has transaction and frictional costs.
4. Both see black swans occur. No matter the skill set, sometimes the incredibly unusual occurs. Knowing how to recover from these setbacks is a very valuable skill set.

Dissimilarities:

1. By its nature, poker is a negative expectation game if no players are better than one another (due to the rake). Investing naturally has a long term ~10% positive tilt due to the nature of the markets.
2. The inherent costs in investing are lower. As long as the investor doesn’t have huge turnover, transaction costs and frictional costs are well under the cost of rake in poker.
3. More often than not, choosing to do nothing in investing is the right choice. Poker typically requires more risk taking events.
4. The variance in investing is lower than poker. For every \$1 I have made in poker over the long haul there has been a ~\$10 standard deviation in those results (i.e. for every \$1 there is a 67% chance my result will actually be from -\$4 to \$6 and a 95% chance it will actually be from -\$9 to \$11.) This type of variance isn’t typical of the equity markets.
5. In poker, to win in the long term a player simply tries to ride out the variance. An investor, however, can use variance to their benefit. BMW has talked about this extensively. Figuring out to what price an equity is likely to jog down to in the short term can greatly juice overall returns.

Lessons Learned:

As a person who has played over 1,000,000 hands of poker in the last few years and been involved in the markets for 15+ years, there are some things that I have learned that I hope folks will find useful.

Pretty much in the order I think they are important, these are lessons I think provide for success in both poker and equity investing:

1. Emotional control. Yep, after all the talk about logic trains and odds, I firmly believe emotional control has the most effect on long term results. This is multifaceted. The primary emotion one needs to regulate is tilt (“fear”). Selling in panic is very, very often the exact wrong thing to do. Yet even very experienced investors have it happen. It can’t be stomped out completely – however minimizing it will do wonders for an investor’s return. On the flip side of the coin boredom can be almost as damaging. Playing a hand one shouldn’t or making a trade just because you haven’t had anything enticing float by in a while is usually a mistake. Coincidentally, Whatismyoption has just posted an excellent thread on this subject: http://boards.fool.com/Message.asp?mid=25872875&sort=whole#25876516
2. Recognize that once you buy and equity or put your money into the pot, that money should be treated as if it is no longer yours (in poker it actually is no longer yours). Most people base decisions on selling an equity based on whether or not it has been performing for them. This is wrong! It doesn’t matter if the equity has lost a bunch or gained a bunch since ownership – it is the prospects for the future, the odds that one will see a rise from that price point, that count. In a game sense, when you buy an equity you give your money to Mr. Market. He then takes it and walks around with it – you have no direct control over that walk at all. You are simply betting on the overall direction of his travels. All decisions should be based on that premise. Since most investors feel the loss of money as near physical pain (lots of studies out there on investor psychology), they watch their returns like a hawk and decide to sell based on past performance. Sell decisions should be based on changes in how speculative a stock is, changes in fundamentals, tax loss harvesting, finding a better opportunity, etc. Price by itself, and your buy point relative to that price, is irrelevant.
3. Recognition of high probability situations. Dhandho, in other words. Figure out how to get your money into play with a 60-40 advantage over and over and riches will follow. In investing there are choices every day to hold, buy or sell. Most of the time this will be to hold, but when the high probability situations roll by, grab on and get a piece.
4. The corollary to #3. Don’t bet unless you have lopsided odds. Taking those 51-49 bets, though positive, leads to very high variance. Leave that to the institutional investor who has the bankroll to spread those bets around in enough places to get to the long term. Most individual investors will never get there.
5. Playing games, chess, poker, etc keep the mind agile and greatly assist in both business and investing. Mental cross training. Learning emotional control. Recognizing that both poker, investing, business, and other difficult-but-satisfying-activities are lifelong pursuits and ones in which there is always something new to learn and improvements to be made.

I have been thinking about this subject for a while. Hopefully the article makes sense and adds to the group. It is a bit long, for which I apologize. I wanted to get this down on paper for myself as much as to put out there, though. I truly enjoy both the game of poker and investing (as well as wargames like ASL). Having two out of three hobbies actually make money keeps me off the streets and the wife happy – a great combination. It is my ambition and goal to parlay these two hobbies into a 10 year decrease in my time to retirement. A lofty goal, for sure. Even if that doesn’t work out, it will be a fun journey.

Take care.
No. of Recommendations: 17
Very interesting! I have been thinking about investing vs. gambling for a long time and I too was planing on writing about it. There is just one nit I would pick with your post:

1. Be the casino. Set the rules, make the money. In terms of equities, this is the NYSE or CBOE. These guys make money no matter the ups and downs. Making the game = profit.

The NYSE and the CBOE are not the casino even if they operate the tables. Casinos put their own money at risk while the NYSE and the CBOE just charge for operating the tables. In investing, like in poker, the players put up all the money. With games where you are betting against the house, the casino has to put up some risk money.

My thinking about this subject is along different lines. The stock market is not one game but two or three simultaneous games.

One game is Investors vs. Mr. Market. In the long run, this is a win for investors because the market is growing at a positive CAGR and, in this sense, it is the exact opposite of putting money on the gambling table where the casino has the odds rigged in their favor.

A second game is Investor vs. Investor. This is a zero sum game where one player's win is another one's loss. All option plays fall in this category.

A third game could be called Banking. The stock market has the same kind of money creating and money destroying properties as banks do. When a bank lends out money on deposit with them, the money "in circulation" grows. If the bank keeps a 20% fractional reserve, it can multiply the original money on deposit five times. In the market this is called the 'wealth effect." If you own 1000 shares of MRK and the price goes up \$1, you are \$1,000 richer even if this is an "unrealized" gain. Most of Buffett's wealth is likely of this type and it comes from his ownership of BRK shares. Should he sell them he becomes poorer by the amount Uncle Sam take away from him. The Banking game should not be confused with the Investors vs. Mr. Market game which represents net money that actually went to the companies plus their net retained earnings. The way to win at the Banking game is to sell during "irrational" exuberance and to buy during "irrational" pessimism. On a shorter time scale it would be selling on the way up and buying on the way down.

There might be more games but the first two are the most important to us. The buy-and-forget investor is playing a pure game of Investors vs. Mr. Market. The day trader and the options trader is playing a pure game of Investor vs. Investor. The BMW investor is playing a mixed set of both games. How is this important?

The pure Investors vs. Mr. Market players should, as a group, just match the market less their small trading costs. The pure Investor vs. Investor players should, as a group, lose the rake of their trading costs. The BMW Method players, as a group, should be no better off than a combination of the previous two players unless there is something in the Method that allows them to be better Investor vs. Investor players than the day trader or the options trader. But the BMW Method players do have an advantage over the other two pure players, they can take advantage of the Banking game that is not available to the other players.

At the end of the day, the Banking game is the same as the Investor vs. Investor game played on a longer time frame.

Denny Schlesinger
No. of Recommendations: 3
You might be interested in a book called "Black Swan" by Nassim Nicholas Taleb.

He argues (among other things) that the market and gambling couldn't be more dissimilar. Gambling outcomes are completely predictable, i.e. not at all random. Over a million spins, every number on a roulette wheel will win nearly exactly the same number of times. A casino can predict very accurately how much money it will make from a slot machine every year. The market, on the other hand, is influenced by an enormous number of unpredictable and unknowable events and forces like, say, the weather, terrorist attacks or inventions.
No. of Recommendations: 3
You might be interested in a book called "Black Swan" by Nassim Nicholas Taleb.

He argues (among other things) that the market and gambling couldn't be more dissimilar. Gambling outcomes are completely predictable, i.e. not at all random. Over a million spins, every number on a roulette wheel will win nearly exactly the same number of times.

Whoa, hold on.... while I have not read The Black Swan, I have read Taleb's Fooled by Randomness and many others along a similar vein. I would be very surprised if that is what Taleb said.

A random process is one where the next outcome does not depend on any previous outcomes. A random process also holds to a certain *distribution* of outcomes, and the more trials, the closer its observed distribution should match the theoretical distribution.

Gambling fits that definition, and it most definitely is random. You cannot predict the next outcome, but as your casino example illustrates, over a very large number of trials, the distribution of outcomes is quite accurately predictable, and is how the casino makes its money.

-Mike
No. of Recommendations: 1
"Lessons Learned:" 1. Emotional control ..2... 3..
Sand105

Interesting review. To elaborate on the lessons learned:

1. Emotions: It is very easy to articulate emotional control but difficult to practice. By maintaining an emotional distance from investing (ie staying away from analysts opinions, market rhetoric etc), and only following market data, news etc, one can try to bring "objective" decision making into play.
2. Improving odds in one's favor: This along with some type of consistent non-emotional tools eg BMW method, fundamental company metrics, information from investment boards one can try to influence the odds in one's favor, hopefully >60%.

The above two help me enter volitile markets, stay fully invested and buy/sell issues as necessary. They also, keep me out of boring stable markets. Obviously I have to find other pursuits in boring markets which at times is difficult. More importantly, it improves my odds in protecting my capital while making money. While I put this down in print to primarily serve as a self remainder, I hope others will also reassess their approach.

Cheers,
Aprilsun
No. of Recommendations: 1
The NYSE and the CBOE are not the casino even if they operate the tables. Casinos put their own money at risk while the NYSE and the CBOE just charge for operating the tables.

Technically true (though for poker they do simple charge to operate the tables). I would argue, however, that since they do such a huge volume and control the odds on their games they get to the long term very quickly and pretty much are assured their 3% (or whatever it is) every day. So in essence they do simply collect their cut for making the games.

Otherwise great points.

You might be interested in a book called "Black Swan" by Nassim Nicholas Taleb.

He argues (among other things) that the market and gambling couldn't be more dissimilar. Gambling outcomes are completely predictable, i.e. not at all random. Over a million spins, every number on a roulette wheel will win nearly exactly the same number of times. A casino can predict very accurately how much money it will make from a slot machine every year. The market, on the other hand, is influenced by an enormous number of unpredictable and unknowable events and forces like, say, the weather, terrorist attacks or inventions.

I agree with Taleb (see above). He is right, markets don't have the same bounds as a typical casino game. Casino games for the most part fall nicely into a normal (or other easy) distribution of results. They are easily definable and get the casino to the long term very quickly. I do actually mention that above, so we don't disagree.

Markets definitely do NOT fall into an easily definable distribution. There was a discussion on another board a while ago that commented on the "25 sigma events several days in a row" comment made by a hedge fund manager. MKlein made some very salient points in that. Whatever distribution they were using, it simply doesn't describe the market very well. I personally would say the market best conforms to a Weibull distribution, but that would be simply be a mental equivalence on my part and certainly not backed up with any rigorous math.

The article is much more about games like poker that mix skill and luck compared to equity investing. So the focus is different and I stand by what I wrote. Taleb is writing from a macro approach - from the overall view of the casino, etc. I speak from a player's point of view. Simply different from what you are talking about.
No. of Recommendations: 1
Whoa, hold on.... while I have not read The Black Swan, I have read Taleb's Fooled by Randomness and many others along a similar vein. I would be very surprised if that is what Taleb said.

You're right. That's not quite what he said. I'll quote from the book where he talks about a symposium he attended at a casino and how it was exactly the wrong venue for a meeting about improbablity.

"The casino is the only human venture I know where the probablities are known, Gaussian (i.e. bell-curve), and almost computable." You cannot expect the casion to pay out a million times your bet, or to change the rles abrubtly on you during the game -- there are never days in which "36 black" is designed to pop up 95-percent of the time.

In real life you do not know the odds, you need to discover them, and the sources of uncertainty are not defined.

For example, the weather doesn't affect the roulette wheel. A myriad of sources of uncertainty affect investors.

A random process is one where the next outcome does not depend on any previous outcomes. A random process also holds to a certain *distribution* of outcomes, and the more trials, the closer its observed distribution should match the theoretical distribution.

That's only one kind of randomness. Taleb describes two kinds of randomness, "Mediocristan "and "Extremistan." An example of "Mediocristan" randomness is the distribution of people's height. Investors live in Extremistan, where Black Swans (highly improbable events of enormous impact) also live. Taleb rails against the inappropriate use of bell-curves to "predict" economic or investment outcomes.
No. of Recommendations: 1
A random process is one where the next outcome does not depend on any previous outcomes. A random process also holds to a certain *distribution* of outcomes, and the more trials, the closer its observed distribution should match the theoretical distribution.

That's only one kind of randomness. Taleb describes two kinds of randomness, "Mediocristan "and "Extremistan."

Even the Extremistan type of randomness (as I understand from your description, not having read The Black Swan) holds to a distribution -- some kind of distribution. Not a normal distribution, but some other kind. These distributions don't even need to have a defined mean.

Take for example the charts I produce for special requests that include a Power Law Distribution chart on them, for example http://invest.kleinnet.com/bmw1/special/DJIA.html#distr . This is a probability distribution, yet it allows extreme events within its distribution. It also does not have a defined mean and variance. It describes a random process and, given enough trials, this random process comes close to this distribution. The incidence of earthquakes, floods, hurricanes, etc., follow a similar distribution. Flood probabilities are usually given as something like a "hundred year flood" (1% change of occurring in a given year). These phenomena can have extreme events occur that are within this type of distribution and the probability of those events can be calculated.

Taleb rails against the inappropriate use of bell-curves to "predict" economic or investment outcomes.

Totally agree.

-Mike
No. of Recommendations: 0
For example, the weather doesn't affect the roulette wheel. A myriad of sources of uncertainty affect investors.

Roulette is not really relevant to the OP's point, because there is no skill required to play roulette. You simply put down your money and pick up, on average, 5.26% less than you put down.

Poker on the other hand is a game of skill, you can win big or lose big depending on the delta between your skill and the skill of your opponents.

In fact, other than the sports book poker is not like any other casino game, and isn't going to fit into any points made about typical casino games.
No. of Recommendations: 1
A bit more from Taleb on casinos, uncertainty and probablity.

He writes about how a casinos risk management team focuses on in-the-building risks -- lucky high-rollers, cheaters, theives, etc. -- despite the fact that most of the casino's risks are non-gambling risks.

First, they lost around \$100 million when an irreplacable performer in their main show was maimed by a tiger... Second, a disgruntled contractor... made an attempt to dynamite the casino... Third, they ended up paying a monstrous fine (an undisclosed amount) [because the employee responsible for filing IRS forms documenting gamblers' profits unaccountably didn't.] Fourth, there was a spate of other dangerous scenes, such as the kidnapping of the casino owner's daughter, which caused him, in order to secure cash for the ransom, to violate gambling laws by dipping into the casinos coffers.

Conclusion: A back-of-the-envelope calculation shows that the dollar value of these Black Swans, the off-model hits and potential hits I've outlined, swamp the on-model risks by a facor of 1,000 to 1...

All this, and yet the rest of the world still learns about the uncertainty and improbability from gambling examples.

I'd argue that investing's not at all like gambling. It's much, much more risky. We deceive ourselves into thinking that investment outcomes are predictable, given enough information and investing skill.
No. of Recommendations: 4
I'd argue that investing's not at all like gambling. It's much, much more risky. We deceive ourselves into thinking that investment outcomes are predictable, given enough information and investing skill.

So you're 100% Treasuries, I take it?
No. of Recommendations: 0
For example, the weather doesn't affect the roulette wheel. A myriad of sources of uncertainty affect investors.
---
Roulette is not really relevant to the OP's point, because there is no skill required to play roulette. You simply put down your money and pick up, on average, 5.26% less than you put down.

Poker on the other hand is a game of skill, you can win big or lose big depending on the delta between your skill and the skill of your opponents.

True, but the weather doesn't affect a poker hand either.

I'm not a game theorist, but I'd say there are two types of games: coin flips, where it's you against probablity, and "rock-paper-scissors," where it's you against probablity and an opponent. Roulette is a complicated version of the first type, poker the second.

I keep using weather as an example of an unpredictable influence on investment decisions and why investing is not like a game or gambling because it's easily understandable. The weather is notoriously unpredictable. But weather is just one of an uncountable number of unpredictable influences on investments.

How's this for a metaphor? Investing is like playing poker on the deck of a small boat at sea. You've got to consider not only your hand, your opponents' probable hands and their betting habits. You also have to consider the wind and the rain, the size of the waves, the proximity of the shoals... and pirates.
No. of Recommendations: 1
So you're 100% Treasuries, I take it?

No. About 15% treasuries. But even the "certainty" of treasuries is illusory if you take into account currency risk. You can predict the yield of a 30-year bond, but you can't accurately predict the value of the dollar 30 years out.
No. of Recommendations: 2
Has Taleb given up on investing? He used to be an options trader. I got the idea that he now only works at several colleges but does not trade anymore. Am I correct in this perception?

BTW, this interview with Taleb will tell you a lot more useful stuff about black swans than both this books:

http://itc.conversationsnetwork.org/shows/detail1814.html

Denny Schlesinger
No. of Recommendations: 8
How's this for a metaphor? Investing is like playing poker on the deck of a small boat at sea. You've got to consider not only your hand, your opponents' probable hands and their betting habits. You also have to consider the wind and the rain, the size of the waves, the proximity of the shoals... and pirates.

Except.....

You're not forced to bet until you get a hand that *you* like

You can pick the time and place and weather conditions to play, as well as the size of the boat

You can scout out reasonably far for pirates and other hazards

You can study your hand and any other conditions around you for as long as you want before making a commitment

You can end the game anytime you want

So, what's left to compare with this metaphor? Two things: the things you didn't think about, and the psychological aspect. Do you objectively analyze the conditions, or are you too eager to play? Do you see when conditions change and do you react objectively, or do you feel you have to stay in, or you can't give up because you lost something, or you're on a hot streak, or ...? To address the things you didn't think about -- only play games where you know them inside and out.

-Mike
No. of Recommendations: 2
Except.....

You're not forced to bet until you get a hand that *you* like.

That's not true within the system of the metaphor. Not betting is still a "bet." In investing, a decision to do nothing is still a decision. Your "unbet" cash is still subject to external effects. Those effects may be generally less volitile, but are not necessarily so. A German investor in the '30s who declined to "gamble" in the stock and currency markets would have had her savings wiped out.

You can pick the time and place and weather conditions to play, as well as the size of the boat.

True, but you're not reducing uncertainty. You're just adding variables. Large boats may be better at weathering storms, but they're more prone to run into icebergs and pirates.

You can scout out reasonably far for pirates and other hazards.

Yes you can be alert for known risks. You cannot, by definition, be on alert for unkown risks. If you on alert for them, then they're not unkown.

You can study your hand and any other conditions around you for as long as you want before making a commitment.

See my first answer. There's no such thing as not making a committment.

You can end the game anytime you want.

Suicide isn't a good long-term investing strategy.
No. of Recommendations: 8
"I'd argue that investing's not at all like gambling. It's much, much more risky. We deceive ourselves into thinking that investment outcomes are predictable, given enough information and investing skill." - TaoFelix

Since the BMW Method is designed to prove your argument wrong, I will take the opposite side. I would argue that investing is far less risky than gambling.

First, if you are talking about gambling in any cassino, I win the argument hands down. The cassino takes their cut from each and every spin of the wheel or each hand of poker. You are losing your 2% to 6% of your "investment" every second you are inside of that cassino.

But, let's say we are in a poker game or flipping coins on the street. No one is taking their cut, but over the long haul, the coin flip will make everyone even. In poker, there is skill involved and the better players should win over the long haul. But, this is still risky because you are spending your time to make that money. Can you make more playing poker than investing in the stock market?

I would argue that the stock market has returned approximately 8 to 10% to the investor for over 150 years. Prior to 1900, it returned a dividiend of 5-1/2% plus a CAGR of 2-1/2%...the total return was about 8%. Today, the return is slightly higher except the CAGR is about 7-1/2 to 8% and the dividend is closer to 2 to 2-1/2%. The roles of the dividend and the CAGR have reversed, but the return to the investor is still there.

In the old days, the Capitalist took his 5-1/2% cut right back off of the top and the market still gave him a return. The return was riskier, but the total return was always there to be had. Today, the Capitalist's "cut" is 2%, but the total return is higher. That is what compound annual growth does for the investor.

Now, that is the "game" as I see it...before we put any skill or lack of skill into the equations. Poker has never offered that sort of benefit, has it? The only way poker could offer that sort of gain is if the pot were to grow without additional bets being added to it. That has never been a part of the game of poker, but it an integral part of investing in equities.

This makes investing exactly the opposite of the cassino where the house takes their cut all of the time. Now, surely the brokers take a cut, but it is a fraction of the total gain offered by the game itself. I would argue that it is darned hard to lose money over the long haul investing in the stock markets...unless you allow the experts to sucker you.

So, I would argue that you have not seen the reality of the markets if you think investing is much, much more risky than gambling. The biggest risk in this World is in NOT having your money in the game. Inflation will suck up about 2% to 3% over the long haul and other internal factors can eat at least another 1% to 2%. That is before you pay any taxes on your winnings! That is another risk that we must deal with in gambling and in investing. Thus, you are starting out with at least a 3-4% albatross on your back that is weighing down your progress. It is there whether you are sitting at a table in Reno or at home rolling dice. Thus, you need at least a 6% personal CAGR to guarantee a reasonable profit for yourself.

The name of the real game is winning. Gambling in any form is a sure way to lose. I use the BMW Method to improve my performance in an already winning game. To me, there is no better game in town.

So, I agree with your first statement, "I'd argue that investing's not at all like gambling." Where I take exception to your argument is from that statement forward.
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A second game is Investor vs. Investor. This is a zero sum game where one player's win is another one's loss. All option plays fall in this category.

I like the way this reads. Being that I primarily invest/trade in options, I think this gives me a new wrinkle. Personally, I would like to slightly alter this for me to be Investor (Me) vs. Public Perception.

So, should I ever trade an option that is not at the top of the headlines? Buy when it's all negative (WMT) and sell when it's all positive (AAPL right before iPhone). When I do find a company that I am ready to invest in after proper DD, should this be the final investing decision???

This has my Monday morning brain really peeved at me!!
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We deceive ourselves into thinking that investment outcomes are predictable, given enough information and investing skill

There is no doubt that investors (except the few who are gambling) diversify because they recognize that outcomes are not predictable a hundred percent of the time; even given enough information and investing skill. There is no other explanation why an intelligent investor would diversify. Those lucky few who put all their eggs in one basket — some good folks in Omaha who handed all their savings over to a young Warren Buffett, for instance — were gambling, they just got lucky and hit the jackpot.
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"Most people base decisions on selling an equity based on whether or not it has been performing for them. This is wrong! It doesn’t matter if the equity has lost a bunch or gained a bunch since ownership – it is the prospects for the future, the odds that one will see a rise from that price point, that count."

Well said. Trading is an emotional rollercoaster. But investing is like betting on the house, and in the long-term the house will always win.

GB
No. of Recommendations: 0
"Most people base decisions on selling an equity based on whether or not it has been performing for them. This is wrong! It doesn’t matter if the equity has lost a bunch or gained a bunch since ownership – it is the prospects for the future, the odds that one will see a rise from that price point, that count."

Well said. Trading is an emotional rollercoaster. But investing is like betting on the house, and in the long-term the house will always win.

Thanks - I happen to think this is one of the hardest things to master. It is one thing to not sell in panic, it is another to analyze an equity dispassionately in a volatile market.
No. of Recommendations: 2
"Most people base decisions on selling an equity based on whether or not it has been performing for them. This is wrong! It doesn’t matter if the equity has lost a bunch or gained a bunch since ownership – it is the prospects for the future, the odds that one will see a rise from that price point, that count."

"Well said. Trading is an emotional rollercoaster. But investing is like betting on the house, and in the long-term the house will always win." - Sand105

The problem is, if you bet with the house, on average you will match the performance of the house...at best. Thus, it matters which house you are betting with and when you place your bets. Sure, the house always wins, but some houses are better than others at any point in time.

You must become your own "house." The BMW Method shows us how to take any other available house and beat it at it's own game. As you said, you bet on the house but only when the price pleases you. Your personal CAGR will naturally be even better than the house's CAGR. Conversely, if you choose to bet on the house when the price is above it's average price, you are destined to fail to beat the house's average performance. You may make money, but your returns will be substandard. Remember, our personal "house" consists of buying and selling other "houses." Recently some people even tried to play this game with real houses. That can work too. But, the key is to be out of the housing market when houses drop in price.

I prefer a more liquid investment than houses with lower trading costs than 6%. Common stocks fit that definition for me better than anything else.
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Sand105,

Thanks for the excellent post.

Having two out of three hobbies actually make money keeps me off the streets and the wife happy

Ah, that's the secret! I need to play more poker. ASL doesn't make me any money. At least I stopped throwing dice years ago. :-)
No. of Recommendations: 0
Ah, that's the secret! I need to play more poker. ASL doesn't make me any money. At least I stopped throwing dice years ago. :-)

Pebbled,

Colored me shocked that someone else on the board here plays ASL (much less knows what it is). I used to run a big ASL website out there, ASL Crossroads, but kids and work just got too much for me to keep it up.

I still enjoy playing, though I haven't rolled those dice in a little bit.
No. of Recommendations: 0
Once an ASLer, always an ASLer.

but kids and work just got too much for me to keep it up

Ditto. I used to play about once a month for about ten years before "work and family" took away from my ASL time. And since we moved last year and now live about an hour away from my ASL buddies, I only play about 3-4 times a year.

There are lots of lessons learned in ASL that I could apply to investing, but you may be the only one to understand what the heck I would write about. :-)

For exmaple, I have been watching URGI for nearly a year now and seriously thought about nibbling a bit yesterday, thinking to myself, "Can this get any cheaper?" And then--BAM!--buyout and a 77% pop! Had I bought, it would have been like going into close combat three squads with a CX half squad and rolling snake eyes and the defender rolling box cars. Sometimes you just need to rush in there and gamble.

OK, maybe that's a bad example. :-)
No. of Recommendations: 0
For exmaple, I have been watching URGI for nearly a year now and seriously thought about nibbling a bit yesterday, thinking to myself, "Can this get any cheaper?" And then--BAM!--buyout and a 77% pop! Had I bought, it would have been like going into close combat three squads with a CX half squad and rolling snake eyes and the defender rolling box cars.

I would regard that more in the line of paratroopers diving out of their glider during a windy moonless night into an emplaced nest of German 88's and landing safely (and on the board)...

But, hey, it could happen.

;-)
No. of Recommendations: 1
Excellent article. I also love to play poker and invest. I have a couple of comments/additions:

I would add the following to the dissimilarities: Poker is event based while equity investing is not. In poker, the event is your one chance to make a profit or loss on a given hand. In investing, you can make a purchase and watch that position drop in the short-term. You know that the company is still undervalued and you can hold on for a long time or even add to your position.

keeps me off the streets and the wife happy

I have found the opposite to be true especially with poker. If you've played 1,000,000 hands in the last few years then your wife may feel neglected. Mine has so I stopped playing so much poker.

Again, I really enjoyed your write-up. Thanks.

Chris
No. of Recommendations: 6
"I'd argue that investing's not at all like gambling. It's much, much more risky. We deceive ourselves into thinking that investment outcomes are predictable, given enough information and investing skill." - TaoFelix
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Since the BMW Method is designed to prove your argument wrong, I will take the opposite side. I would argue that investing is far less risky than gambling.

First, if you are talking about gambling in any cassino, I win the argument hands down. The cassino takes their cut from each and every spin of the wheel or each hand of poker. You are losing your 2% to 6% of your "investment" every second you are inside of that casino.

That's not risk. The loss or "negative expectation" over the long term is certain.

But, let's say we are in a poker game or flipping coins on the street. No one is taking their cut, but over the long haul, the coin flip will make everyone even. In poker, there is skill involved and the better players should win over the long haul. But, this is still risky because you are spending your time to make that money. Can you make more playing poker than investing in the stock market?

You're confusing risk with expectation of profit.

First, take your coin-flipping game. There's very little risk at all. The probabilities are known. You'll break even. The odds against breaking even (more or less) are extremely small. Almost no risk, but no expectation of profit either.

Poker is considerably more complicated because in addition to the mathematical odds of any given hand winning, you're playing against other opponents. Although the calculation of expectation of profit (or loss, obviously) is extremely complex, it's still theoretically calculable. In fact, good poker players do roughly calculate their expectation of profit and are usually quite accurate.

I would argue that the stock market has returned approximately 8 to 10% to the investor for over 150 years. Prior to 1900, it returned a dividiend of 5-1/2% plus a CAGR of 2-1/2%...the total return was about 8%. Today, the return is slightly higher except the CAGR is about 7-1/2 to 8% and the dividend is closer to 2 to 2-1/2%. The roles of the dividend and the CAGR have reversed, but the return to the investor is still there.

This reminds me of the turkey in Taleb's "The Black Swan." For 1,000 days, a turkey is fed and cared for. It gains weight and satisfaction every day. Based on it's experience, it has an expectation that it will continue to be kindly fed by humans and then... on the 1,001st day, the day before Thanksgiving, a Black Swan event occurs.

There are a few other fallacies in your argument. First, you don't adjust for inflation, but more importantly, none of us live for over 150 years. That the stock market has returned 8, 10 or 2-percent over 150 years is irrelevant to me since my time horizon is shorter. If I'm fully invested in the market and it drops 90% tomorrow, it is of little comfort to me if it takes 20 years for me to recoup the loss and realize 8, 10 or 2-percent annualized returns.

This makes investing exactly the opposite of the cassino where the house takes their cut all of the time.

Again, your conflating risk and expectation. For the purposes of a discussion about risk, a broker's commission and casinos' "rake" don't figure into it. They are predictable and quantifiable. No risk there at all, just a drag on expectation of profit.

So, I would argue that you have not seen the reality of the markets if you think investing is much, much more risky than gambling... Gambling in any form is a sure way to lose.

Those two statements are contradictory. (The second is also untrue but more on that in a minute.)

If gambling is a sure way to lose, and the losses are predictable over the long term (the 2% rake the casino takes, for example) there is no risk at all, just a guaranteed loss.

Investing, by contrast, is not governed by mathematical probability, but instead by uncountable known forces and who knows how many unknown ones of potentially enormous impact. Therefore, it is much more risky.

"Gambling is a sure way to lose."

That's true with regard to coin-flip games where the casino takes a cut, but not, as you yourself have noted, with games like poker in which a skilled player can have a positive expectation of profit, with or without the casino's rake.
No. of Recommendations: 0

Taleb says 90 to 95 percent of his investments are conservative, protected against negative Black Swans. Five to 10-percent are speculative, to take advantage of positive Black Swans.
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Although the calculation of expectation of profit (or loss, obviously) is extremely complex, it's still theoretically calculable.

This depends on the time scale. If you are talking about expectations for individual hands I would argue that it is so complicated as to be impossible. If you get a chance read "The Mathematics of Poker". It goes through the math involved in a two player limit game. The math is astoundingly complex. For more than two players it is so intractable it simply isn't possible.

Over the long run many players estimate their future win rate - true. Their estimates are more hubris than anything else. Losing streaks can be long and brutal, even with very high quality play. Picking a win rate for the next year is folly.

Much more like the markets than most realize.
No. of Recommendations: 0
"Gambling is a sure way to lose."

That's true with regard to coin-flip games where the casino takes a cut, but not, as you yourself have noted, with games like poker in which a skilled player can have a positive expectation of profit, with or without the casino's rake.

Gambling is not a sure way to lose in all cases. As with all things in life, it has everything to do with the odds and the variance you are willing to live with. There are utility equations out there to help calculate these things.

The statement is true for a negative expectation game.
No. of Recommendations: 1
Although the calculation of expectation of profit (or loss, obviously) is extremely complex, it's still theoretically calculable.
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This depends on the time scale. If you are talking about expectations for individual hands I would argue that it is so complicated as to be impossible.

I don't think we're in disagreement. I agree that it is practically impossible. However, it's theoretically possible. That may seem like a difference without a distinction, but my point is that in poker, unlike in investing, there are no "Black Swans," no rare, large impact, hard to predict events.
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Gambling is not a sure way to lose in all cases...

The statement is true for a negative expectation game.

Isn't that what I said?
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Q for poker experts:

I have heard that with two evenly matched players the one with deep pockets wins. Can you confirm or comment on this? Is there a parallel to investing here or not?

Thanks.

Denny Schlesinger
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Taleb says 90 to 95 percent of his investments are conservative, protected against negative Black Swans. Five to 10-percent are speculative, to take advantage of positive Black Swans.

This was a great interview. Very enlightening. I felt this statement was one of the best jewels. I have been trying to formulate my own somewhat original opinions about it over the last several days.
No. of Recommendations: 0
I have heard that with two evenly matched players the one with deep pockets wins. Can you confirm or comment on this? Is there a parallel to investing here or not?

Definitely not. In limit poker (fixed size bets) it makes no difference whatsoever. In no limit poker (or pot limit) having a smaller amount on the table can affect strategy and may raise variance, but it doesn't affect the odds at all. In fact, in no limit poker one strategy that works is to sit down with significantly less money than most do.

There is a bit of a distinction inside no limit games. In a tournament it does matter because chips the one who wins needs to take all the chips, so if you have more to begin with you have more chances to catch something good. In a cash game where the goal is percentage based (you don't need to win all the chips, just more than you started with) there is no difference. Equity markets are a cash game - so in this sense no real parallel to exploit.
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Gambling is not a sure way to lose in all cases...

The statement is true for a negative expectation game.

Isn't that what I said?

Perhaps so - my reading comprehension is sometimes challenged. ;-)
No. of Recommendations: 2
There's another dissimiliarity between poker and equity investing: In poker, the pot never grows larger than the sum of players' contributions to it. In order for anyone to walk away with a profit, someone else must leave with a loss, making it a win-loss scenario. At a table full of world-class poker players, some will be losers by the end of the tournament.

With equities, every investor can profit because the "pot" is growing over time due to productivity growth and value creation. Good investors can obviously do well, but those who aren't can compensate through diversification and still earn returns comparable to the market. Thus, while some people obviously do lose money, their loss is a result of their decisions and not because anyone is required to take a loss in order for others to gain a profit. At a table full of world-class investors, everyone wins.
No. of Recommendations: 2
At a table full of world-class investors, everyone wins.
Haise

Provided you are not in a bear market. How much "wealth" disappeared between the 1929 peak and following crash?

Denny Schlesinger
No. of Recommendations: 0
Provided you are not in a bear market. How much "wealth" disappeared between the 1929 peak and following crash?

Yes, it is a matter one's time horizon. You could hold on long enough and make money. Even buying in 1929 would have been better than not buying at all (of course there were many better entry points after 1929). Some people say their time horizon is forever. You could assume this means never sell because forever is long time, and our sun will explode before the end of time.

Chris
No. of Recommendations: 1
Provided you are not in a bear market. How much "wealth" disappeared between the 1929 peak and following crash?

A table full of world-class investors would remain invested and eventually make their money back. Any short period of time could be selected from history to illustrate this point, but they only show us that emotional indifference and patience will get you through any dark tunnel, in both poker and investing.
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Provided you are not in a bear market. How much "wealth" disappeared between the 1929 peak and following crash?
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A table full of world-class investors would remain invested and eventually make their money back.

Yes, if someone invested at the 1929 peak, it'd have taken them only 30 years to make their money back, assuming they were still alive.
No. of Recommendations: 7
"Yes, if someone invested at the 1929 peak, it'd have taken them only 30 years to make their money back, assuming they were still alive." -
TaoFelix

Well actually, it was 25 years, but that is a nitpick. IT was surely a long time.

Then again, someone who understood the BMW Method in 1929 would have been out at the top of DOW 381 and back in at DOW 41 in 1932. The BMW Method shows that the market went over-valued in 1926 at DOW 140 and everything above that level us hype. Then, it went below it's low CAGR in 1931 and everything below that level was negative hype.

The problem was the people who wanted to buy stocks in 1931 had no money to buy with. The bankers and brokers, who understood the BMW Method had taken all the money away back in 1930 and left the suckers to hold all of the over-priced, losing positions.

I think we are smarter than that today. The Internet bubble we saw from 1995 to 2002 was the exact same thing as the DOW from 1925 to 1932 all over again. Thank God it only affected the NASDAQ in the same pattern as the 1929 crash. Meanwhile, the DOW and S&P 500 held up quite rationally and are at new highs already. This time around there were individuals with money picking up the bargains along with the bankers and brokers.

By the way, from the low of 1932, the CAGR for the DOW is showing 8% not including the dividends for the ensuing 75 years! Even from the peak of 381 in 1929, the CAGR shows a 4.7% return. I think this perspective goes a long way toward showing the need for the BMW Method.
No. of Recommendations: 1
<<<Yes, if someone invested at the 1929 peak, it'd have taken them only 30 years to make their money back, assuming they were still alive. >>>
That is if they were Americans. Germans and Japanese who were long term holders in their country's stocks did even worse. Many not only lost their money, they lost their lives in the war.
Go back earlier and think of how well Russian investors did in 1918.
No. of Recommendations: 1
Then again, someone who understood the BMW Method in 1929 would have been out at the top of DOW 381 and back in at DOW 41 in 1932. The BMW Method shows that the market went over-valued in 1926 at DOW 140 and everything above that level us hype. Then, it went below it's low CAGR in 1931 and everything below that level was negative hype. -BuildMWell

I was thinking about that issue when you were talking about BMW method would have gotten us out at the top of DOW 381 -- I was like "really?" I think it is more likely we would have sold at the DOW 140 like the bankers did:

The problem was the people who wanted to buy stocks in 1931 had no money to buy with. The bankers and brokers, who understood the BMW Method had taken all the money away back in 1930 and left the suckers to hold all of the over-priced, losing positions.

See my rationale? BMW method might mean that we miss out in partaking in the crazy, speculative gains. But I've been starting to think that it doesn't really matter anyways because speculative gains are awfully difficult to keep in the first place (like you have to have a good timing in getting out). So I'd rather look at if the calls I make is right 5-10 years from when I made the call than if I'm right in the immediate term.

Anyways...bankers sure have something working in their favor. What happens when the stock market skyrockets? People take their money out of the bank to put it in stocks. So, even if bankers don't want to sell stocks -- I think they have to anyways. But that is a good thing anyways -- a good time to sell the stock when everyone is buying it and hyping it up. Then when the market crashes...people run screaming out of the stock market, selling their stocks, and bringing the money they recovered back into...the banks! Now the banks get more money to buy stocks at just the best times.

-Tim
No. of Recommendations: 3
Yes, if someone invested at the 1929 peak, it'd have taken them only 30 years to make their money back, assuming they were still alive.

Only 8 years, according to:

http://www.globalfindata.com/articles/bullbear_barrons.html

The 25-year time frame (1954) for recovery ignores dividends, which were a significant factor. You have to look at total return.
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Yes, if someone invested at the 1929 peak, it'd have taken them only 30 years to make their money back, assuming they were still alive.

For one, even if you don't get back to even, you could've still regained some of your losses with time by simply remaining invested.

Second, by continuing to invest after the 1929 Crash and through the Depression (of course, assuming one had money to invest, but that's always an inherent assumption with investing), you could compensate for the losses on your poorly timed investment at the peak.

And lastly, the stock market is a man-made system. It's not perfect. If you're looking for that, I'd refer you to the reason the market is closed on Saturdays and Sundays :)
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And lastly, the stock market is a man-made system. It's not perfect. If you're looking for that, I'd refer you to the reason the market is closed on Saturdays and Sundays :)

What on earth makes you think I think the stock market is "perfect." My point throughout this thread is that it's anything but. In fact, it's so astoundingly "imperfect," and imperfectly understood, that I've argued that it's far, far riskier than gambling.
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What on earth makes you think I think the stock market is "perfect." My point throughout this thread is that it's anything but. In fact, it's so astoundingly "imperfect," and imperfectly understood, that I've argued that it's far, far riskier than gambling.

I don't understand the original point about making one investment at the 1929 peak and losing money on it. How does it relate to real life investing behavior, where you invest money over time in both bull and bear markets?
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I am a long time poker player (60+ years) and disagree with all who consider poker as a gambling game. If you learn the game, play it long enough and aquire a good skill set, you will discover that in cash games, it is 80% skill and 20% luck. Thus in the long run, if you are a skilled player, you will win 80% of the time (in cash games). Being a skilled player includes the skill to pick the right game with the right oponents. I believe that poker can be discribed as:
"Non-random/incomplete information: This type of game has as its main component inferring the most logical content of incomplete information. It also involves anticipating the moves of an opponent by their past actions (part of which is assessing incomplete information)."
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Hey KRR,

I believe that poker can be discribed as:
"Non-random/incomplete information: This type of game has as its main component inferring the most logical content of incomplete information. It also involves anticipating the moves of an opponent by their past actions (part of which is assessing incomplete information)."

There are two main components to poker. Take holdem. Your opponent has 2 cards that he knows and you don't. Incomplete information. You also have cards from a shuffled deck turned up to make a complete hand. Each card that comes up is a random pick (assuming a shuffled deck). This isn't opinion - this is fact. Poker has both randomness and incomplete information. Simply no way around it.

If you learn the game, play it long enough and aquire a good skill set, you will discover that in cash games, it is 80% skill and 20% luck. Thus in the long run, if you are a skilled player, you will win 80% of the time (in cash games).

This is more subjective - but I think this is impossible. Take a really good player - Chris Ferguson. Put him in a low limit casino game. No way he hits 80% - rake is too high. Put him in a typical high limit game where the rake is negligible and the quality of opponent is such that 80% is again unattainable.

Put Ferguson in a high limit game filled with asleep drunks and he gets there - but how often does that happen? I would argue that this is more in line with selective memory (something we all do).

Poker, and holdem in particular is designed such that the live ones walk away some part of the time with a win. Combine that with the rake and the good ones don't even breathe 80% win rate. That is a chess type win rate over inferior opponents. Of course, a lot depends on what exact game you are talking about (limit has higher variance than no-limit, for example).
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Wow, I must be my evil twin. I play both poker and Advanced Squad Leader. However, Instead of Diplomacy, I would have used Settlers of Catan in your example.
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That was a great read. As a former math major and games enthusiast, it really struck a chord in me. However there is one part I have to respectfully disagree with.

<blockquote>The top left are the most straightforward games – chess, go, etc. Not surprisingly these are the ones in which computers have become better than humans.</blockquote>

Poker bots are stronger than go engines. To the best of my knowledge, I can utterly crush any go program in the world, and I'm actually not a very strong player. Wikipedia has a decent article about the difficulties in making go AIs.

http://en.wikipedia.org/wiki/Computer_Go
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Poker bots are stronger than go engines. To the best of my knowledge, I can utterly crush any go program in the world, and I'm actually not a very strong player. Wikipedia has a decent article about the difficulties in making go AIs.

And I can crush any poker bot out there. ;-) That I know of, anyway.

I think the major point I was trying to make is that it is much easier to make a program to solve a game without probabilities and incomplete informatin than it is to solve one with. Poker bots get the easy "knowable" parts right and do pretty terrible on the incomplete information part.

Perhaps there has simply been much more effort and history in creating strong chess engines and not so much Go engines?