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11 Jul 2011

Stock Gambling & Poker Investing: Lesson in Skill & Outcomes

The May 21, 2011 edition of The Economist had two articles casting a cloud over the skill inherent in successful stock market investing. Why is this important to intuition? It’s because we tend to have an emotional bias that overweighs outcomes in the evaluation of skill.

In fact, the article, “Poker-faced”, cites Steve Levitt and Thomas Miles of the University of Chicago as having found more skill present in poker than in stock investing. Simply stated they found that historically good poker players tend to do better than those without a history of success do. However, such a correlation didn’t exist with stock investing, and thus, they concluded there is “little evidence of skill” in stock investing. Thus, we could claim that poker is more like investing and the stock market is more like gambling.

The other article, “The Missing Link”, reinforces this unpredictability of the stock market by surveying several studies saying there is no correlation that a good economy translates into rising stock prices. Yet, in spite of these articles, we often see investment professionals tout their historical performance to attract additional clients.

Nevertheless, we know that top poker players don’t always finish on top; it’s not unusual for them to go home early. Moreover, poker is more self-contained, more controllable than the stock market. Everyone plays with the same, small, finite deck of cards and, depending upon the tournament, the same amount of money. By comparison, the stock market is anarchy.

We like to believe there is a direct link between outcomes and skills as opposed to having outcomes linked to a myriad of forces beyond our control. The belief gives us security in an uncertain world.  Yet, it will encourage us to see more skill in stock investing than in poker.

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