Poker and Financial Markets

Many years ago I used to play chess. At one time I was quite proficient at this game. Games have always fascinated me. I gave up chess many years due to the hard work that is required and the time involved. Nowadays I play backgammon and poker. Twice a year I will travel to the US to play backgammon (when I can). Poker is available at most major Ontario casinos so I will drop by once a month to make a donation.

One of the more interesting subjects to discuss is the similiarity between various games and financial markets. I am sure this subject has been broached before. Game theory is a whole area of study if I am not mistaken. Financial markets seem more like gambling games since participants are placing bets on human actions and organizations.

Out of all the types of games I have played I would say poker is closest to "playing" the financial markets. Poker is a game of unknown information whereas chess and backgammon the information is all known (you can see it)

Here are some playing rules for poker. Read it and it might sound familiar.

Rules for Poker:

1. You should not play in the game unless you expect to win. If you decide to play in the game anyways expect to lose money over the long term to the house and the other players. Playing the game is not free. The house provides the game and they charge a fee for playing. There are many houses and you should look for the house with the lowest fees.
2. If all the players are better than you then you should avoid the game. You must make an objective assessment of your ability to play the game.If you think you are a weaker player then try to bet on all the other players (index fund).
3. Most of time the game is boring. You will be dealt a rotten hand which you must fold. Most of time you must do nothing. If you insist on playing too often you will be giving away money to the house and the other players.
4. Once in a while you will dealt a very strong hand. Such hands are quite rare. When this happens you should enter the game with lots of money. You should enter the game since you are a mathematical favorite to win. Over long periods of time you can make lots of money with the rare strong hands. Therefore, it stands to reason that you must be very patient to wait for strong hands.
5.  If you are playing the game you must always be evaluating information as it becomes available. You must adjust your play to new information. If new information arrives that is bad news you must quit the game (fold).
6. The game has mathematical laws which you should know and understand. Many actions in the game will tend to repeat themselves - often you can exploit this factor for financial gain. The game also has uncertainity due to human behavior. Generally speaking you should try to avoid situations with a great deal of uncertainity.
7. You should evaluate the actions and tendencies of the other players in the game. Often you should play your hands contrary to the actions of the other players. For example, if the other players appear to be passive you should play aggressively.
8. The game is constantly evolving. New players are coming into the game and existing players are leaving. New players often bring in new methods which must be evaluated. New methods can be attractive to follow and copy since they may be profitable for some time. This is usually because it takes time to adjust to the new methods. New players are often unfamiliar with game strategy. This creates what is known as information asymmetry - some players know the game and others do not. Often this factor can be exploited to make money.
9. Most of the time the game is proceeding normally. However, once in a while the game goes beserk for some unknown reason. Human actions, it would appear, are somewhat unpredictable. Players are often drinking late in the game and this leads to unusual behavior. Situations can arise where players win or lose huge sums of money.