Learn to avoid emotional traps by playing a little Texas hold ’em.
The psychological issues that drive investing and gambling decisions aren’t merely similar. They are “identical,” says Andrew Lo, director of the Massachusetts Institute of Technology Laboratory for Financial Engineering and one of the leaders in the field of behavioral finance . It’s easy to find investment professionals and professional poker players who agree. Says poker pro Daniel Negreanu, who holds four World Series of Poker bracelets and two World Poker Tour Championship titles: “Having emotional stability and emotional control is key to both investing and poker.”
Can you gain that control at a poker table? Aaron Brown is among many who think so. Brown is a onetime finance professor and former portfolio manager for Prudential Securities who is now a risk manager for hedge funds. He’s also the author of The Poker Face of Wall Street (Wiley, $17). Says Brown: “People tell me playing poker is risky. Investing for a financial lifetime without playing poker is risky. I’d much rather make these mistakes at the table.”
And by mistakes, Brown means the common emotional errors that plague investors. The burgeoning fields of investor psychology and behavioral finance are uncovering more about these errors all the time, and they are the subject of a year-long series co-produced by Kiplinger’s and Nightly Business Report on PBS.
By playing some poker, “you can find out your tendencies to make emotional mistakes, and then you can guard against them,” says Frank Murtha, a behavioral-finance consultant with a PhD in counseling psychology (his dissertation explored the effect of psychological errors in gambling). Murtha helps clients from investment banks, financial-services companies and trading firms to avoid making psychological errors.
He’s also co-founder of MarketPsych, which offers psychological-training services to traders and money managers and which offers a number of online tests that any investor can take to better understand his or her own psychological makeup.
Most investors make few investment decisions over a year, or even over a lifetime. But experts agree that just a few hours of playing poker will take you through literally dozens of financial decisions -- potentially a lifetime’s worth if you were making those decisions about your portfolio. By playing poker while keeping in mind the psychological errors that are also common to investing, you can get a lifetime’s worth of training in one evening.
What are these errors? We’ve picked five of the most common, and all can be found both in investing and in gambling. Click on each one below to learn how they appear in poker and investing and to find out how you can use poker to help train yourself not to make these errors.
http://www.kiplinger.com/features/archives/how-poker-can-make-you-a-better-investor.html
