Is Trading More Like Chess or Poker?

"Poker is a game of people- it's not the hand I hold, it's the people I play with."  -Amarillo Slim

Listened to an interesting podcast where the Bloomberg Odd Lots people interviewed chess player Hikaru Nakamura, who achieved Grand Master status at a younger age than Bobby Fischer.

Hikaru also trades options in his own account, and was asked whether trading was more like playing chess or poker.  He answered poker, adding that he would often get frustrated because he would play his hand perfectly yet still lose the game, as luck played such a part of the outcome.  With chess, if you have a good enough game plan (he mentioned a string of 20 good moves, for example) then you have a very high chance of winning.

One of the toughest lessons for a novice investor is to accept that even if you have a solid research process and uncover the perfect investment candidate, the market will sometimes just move against you.

Source: Wikipedia

They also discussed the impact of computers in competitive chess.  Hikaru said that now the first 15-20 moves of a chess match are pretty much scripted, as everyone knows how computers have learned the ideal moves based on your opponent.  So years ago, you could start to use your own style and outsmart your opponent in the first 15 moves- but now that opportunity has been worked out by computers.  You have to wait until later and work harder to find ways to beat your opponent.

Interesting parallels to the challenges for active management and the "shrinking alpha" in the markets.  Investors need to work harder than before to uncover opportunities, and this will continue to lead to innovation.  But just a chess Grand Master keeps trying to improve, we must always remember to be a student of the markets.

You can listen to the entire interview here.


Disclaimer: This blog is for educational purposes only, and should not be construed as financial advice.  Please see the Disclaimer page for full details.