Tuesday, June 7, 2016

Review of Your Worst Poker Enemy by Alan N. Schoonmaker

Investing and poker are highly analogous (chess and investing, not so much), so even though I don't play poker anymore, sometimes I'll "cross-train" by reading a poker book, like Your Worst Poker Enemy, which is about poker psychology. 

The author, Schoonmaker, thinks that there are some highly gifted intuition or "gut" based players, but that everyone else should stick to making decisions according to a rules based system specified in advance.

He really belabors this point about the difference between logic and intuition. But is there really a difference? Isn't intuition just a pattern matching logic that's encoded in the neural network in a way that's difficult to articulate?

And even if you are an "intuitive" player, you still need to be disciplined. Anyway, the book is directed at the great mass of poker players who are overconfident and undisciplined.

Being overconfident leads players to play at tables where they are outmatched. He mentions the old saying: it doesn't matter if you're the tenth best poker player in the world if the other nine are at your table. This is why our ideal investing situation is when there is no one with brains (preferably an index fund or something) taking the other side of our trade. We don't like Bill Ackman, of course, but can't we find a trade where he is not on the other side?

Being undisciplined leads to players playing too many hands. This is also like investing. I was realizing over the weekend that in the past decade I have had about four good ideas. (Some were themes that lead to trades in a number of companies, but those are just applications of the novel idea, the theme.) It's hard for investors to sit still for a year or more waiting for a really good idea.

So why aren't all poker players disciplined, if it is a beneficial trait? It's because of the randomness of poker: the reinforcement pattern makes it hard to extinguish bad habits unless you really want to. Investing is like this too, and the essay Untangling Skill and Luck [pdf] talks about this. The uneven reinforcement pattern is going to keep the vast majority of poker players and investors undisciplined.

Similarly, poker players are not going to stop being overconfident, because that seems to be an adaptation that many people have (and few don't):

"Like other decision-making biases, overconfidence seems detrimental because it increases the frequency and costs of fighting. However, evolutionary biologists have proposed that overconfidence may also confer adaptive advantages: increasing ambition, resolve, persistence, bluffing opponents, and winning net payoffs from risky opportunities despite occasional failures."
So there is money to be made by those who are properly calibrated. Maybe the well calibrated won't rise to the level of billionaires - "sociopath took insane risk, got lucky" - but successful enough so that they can live off of their capital.

Being disciplined and appropriately calibrated is like being a tight-aggressive poker player. Not seeing a lot of hands but not being afraid to risk a lot of chips when expected value favors you.

Couple other worthwhile thoughts from the book about psychology. It is very common for people to play badly (make bad decisions) when they are losing (down). Because of the randomness in poker and investing, they are a "bad foundation for self concept". People in these fields probably need a hobby or another business where the progress and payoffs are more linear. Think of weightlifting and physical fitness.  



Taylor Conant said...

"So why aren't all poker players disciplined, if it is a beneficial trait?"

I will think about an answer to this by studying a friend of mine. He described everything as a bad beat and refused to study any books on the theory of poker and gambling. He actually thought doing so would take the "fun" out of it because then he'd have to "play like a robot" as I did.

Why was it more fun to get bad beat? Why wasn't the idea of creating a systematic edge gained through logical study appealing?

Because his deep psychological needs wouldn't allow it. The universe had more order, in his mind, when he could only be beaten by bad luck and random unfairness. The universe was more enjoyable when it was unpredictable and he didn't have to face the disappointment of being right, but having no good options other than to fold.

He may have had a trauma from childhood or elsewhere in his personal experience where he did everything right (he thought) but got punished anyway. In this way, a "bad beat" is a replay of that episode and psychologically gratifying because it confirms in his mind how unfair his life has been. That's a very comforting assurance for people who suffer and don't know why. There is a kind of pride in being a victim who has borne the suffering and continued on in spite of it.

He didn't play poker to win. He came at it with completely different objectives-- to explore his metaphysical paradigm. How many countless others are drawn to speculative enterprises for the same reasons, and who, without such chips on their shoulder, might find more modest and humble enterprises to pass the time?

I'd extend this to the world of investing without fear of missing much. It's simply a bigger game with more complicated rules but the same hurt feelings of the players are present.

CP said...

Thank you, 5/5 comment.

In other words: not everyone is really trying to make/keep money in poker or in investing.

Taylor Conant said...

Who needs me around to comment on things at length when you can say it better yourself in fewer words?

CP said...

There's a big market for verbosity!

innerscorecard said...

Ed Seykota said the same in his Market Wizards interview. People get what they want.

CP said...

Success in new ventures is not about product-market fit (read How Brands Grow to get the evidence on that one). It’s really about getting lucky. It may look like skill, but you’re not seeing the tens of thousands of skilled entrepreneurs who fail. Most startup products for a given market are remarkably similar in functionality, but you don’t see the competitors who fail to raise funding or fail to get lucky in the market. You’re seeing the successful companies, and they have a great story to tell about how skillful they were. This is like saying The Rolling Stones and other popular music talent rose to fame because their music is so good. That has been shown to be false. The market selects. The market magnifies. The market creates the jobs. Often, the market selects randomly and for impossible-to-predict reasons, with plenty of herd behavior.


CP said...

The basic result is that overconfidence is beneficial in proportion to two factors: (1) the size of the payoff relative to the cost to play and (2) uncertainty about competitor capabilities. There are two optimal strategies for a population, overconfidence (which minimizes unclaimed resources) and underconfidence (which minimizes conflict costs). Unbiased self-perception is always dominated by these strategies. However, an overconfident person can successfully invade an underconfident population while the reverse is not true. So overconfidence is the stable solution.

The direct implication is that resources get destroyed. It is optimal for an individual to be overconfident, but then he ends up fighting with other overconfident individuals, which imposes costs.


innerscorecard said...

It seems, then, one should try to play poker with successful entrepreneurs.

High Plateau Drifter said...


"In other words: not everyone is really trying to make/keep money in poker or in investing."

And why have a simple plan when a vastly more complicated plan will achieve the same objective? :-)

When it comes to investing CP, your plan is much more complicated than mine.

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