Games of Chance
These are good for Fun. And for Critical Thinking too.
“...no journalist is interested in failures – with the exception of fallen superstars. This makes the cemetery invisible to outsiders. In daily life, because triumph is made more visible than failure, you systematically overestimate your chances of succeeding.” - Rolf Dobelli, The Art of Thinking Clearly
“Learning to play poker or learning to play bridge, anything that teaches you to play the probabilities . . . would be better than all the books on the stock market.” - Peter Lynch, Legendary Fund Manager of Magellan Funds (1977 - 1990) at Fidelity
The reason I provided 2 quotes, to begin with, is simply because one is incomplete without the other. Unfortunately, our observations and experiences are replete with one of them, not both. Time spent in sports and games is fun and goes a long way in building relationships. But may not be translated into a competitive advantage or personal edge in economic opportunities. Whereas, bad financial decisions could cost you heavily, interrupt your compounding efforts, risk ruin, and damage relationships. And not weaving these two domains for getting better, is an opportunity gone waste.
And, that’s where games of chances or probabilities come in, with its utility being way more than meets the eye. It could be Chess, Poker, Snooker (my favorite), Bridge, or many others. These games are fun to engage with but provide many valuable lessons that could become a part of your personality, which further helps in excelling at Investing, which is also an Art and not a perfect science like Physics or Chemistry.
“Survivorship bias means this: people systematically overestimate their chances of success. Guard against it by frequently visiting the graves of once-promising projects, investments, and careers. It is a sad walk, but one that should clear your mind.” - Rolf Dobelli, The Art of Thinking Clearly
As I have explained in my previous posts, we are biased towards optimism and overconfidence. And this situation doesn’t get better, as many are not inclined to give you quick and honest feedback, since they would like to look good in front of you. In a competitive organization, you might even be an asset to many others who would like you to be blindsided about your weaknesses since it helps them prosper even more due to less competition.
Without a frank and quick feedback loop, you might even be disadvantaged thinking highly about yourself, since there is no feedback mechanism breaking down your self-perception that feeds into your ego many times. And when this overconfidence seeps into decision-making, you might land up making decisions purely on a hunch or feeling right about them. And that’s where many mistakes take place. e.g. over-leverage, concentrated portfolios, blind faith in someone, overexposure, biting more than you can chew, and buying things you don’t fully understand.
“Our lack of perfect information about the world gives rise to all of the probability theory, and its usefulness. The theory of probability is the only mathematical tool available to help map the unknown and the uncontrollable. It is fortunate that this tool, while tricky, is extraordinarily powerful and convenient.” - Shane Parrish
But Sports/Games ain’t like corporate entities where you could survive being mediocre and with no honest feedback. These are endeavors of probabilistic thinking where you have to make quick decisions, depending on the risks and rewards involved. These games provide many benefits - quick feedback loops, constant decision making, clarity on rewards involved for the risk omitted or committed, developing equanimity while losing, not letting your emotions ruin your play, and the constant push to keep getting better at the game.
And these benefits can only be derived if you take time out to think about your game, analyze your game, ask for expert’s opinion on how you play, see yourself play via recording or memory, make notes on what’s working and what’s not, try to improve areas of weakness and get better at your strong points and most importantly, create reminders for not making the same mistake again.
The entire process of thinking, strategizing, planning, prepping, and executing is put to work every day or every week, in case you play weekly. But this habit builds you into a different person, a more thoughtful being. That itself gives you an edge over 90% of human beings that struggle to think from first principles and are purely engaged in the act of doing, instead of an act of getting better at doing what they are doing.
Liv Boiree is a World Series of Poker (WSOP) and European Poker Tour (EPT) champion and is the only female player in history to win both a WSOP bracelet and an EPT event. I loved the lessons she states in this video -
Life’s a game of skill and luck and there are lots of ambiguities and uncertainties to deal with. One has to get good at understanding what role luck plays in these situations, while you keep developing your skills.
Quantification of probabilities is very important instead of using words or concepts very loosely. One has to think in numbers to understand the odds.
We are vulnerable to many biases and emotions. And hence one needs to develop intuition and also the ability to only use it only when odds are clear vis-a-vis using it everywhere or not using at all.
“Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.” - Phil Ordway Notes
The difficulty in compounding money, credibility, knowledge, and health ain’t going away. If you find making decisions, understanding information, investing wisely, and making career or lifestyle choices as overwhelming at the level of income you have currently, then there is bad news for you, it only gets more complicated and nuanced with your personal and professional growth. And if the level of difficulty increases with time, so must your ability to deal with it.
Playing Games of Chance ain’t a sure shot formula to crack the code but it certainly will keep you on the edge and nudge you into sharpening your game and your thinking all the time. Now, this is a frustrating exercise, since developing proficiency in any game is a slow grind. You may not realize it when you play for fun, but when you play to compete with someone and win, it needs your brain to be firing on all cylinders.
You will need to develop cognitive and emotional abilities to ace the game. Some of the cognitive abilities are as follows -
What’s the odds of your move paying off? And if it doesn’t, how much damage you incur? Can you recover from the damage or not?
Gauging the skills and the weaknesses of your opponent? Can you keep him away from making the moves he is good at and make sure you make him play his weaknesses so that he makes more unforced errors?
Quick decision-making since it’s time-constrained
Developing the memory muscle to remember moves and counter moves from your practice sessions
Sustaining attention or using selective attention
Processing visual cues from the opponent’s body language and the environment around
Some of the emotional abilities that get developed are as follows -
Anxiety and stress management
Energy management
Interpersonal skills
Willingness to collaborate
Coachability
Another very important lesson one gets to learn is to play the Loser’s Game instead of the Winner’s Game and this is a very important distinction to understand. It’s not about looking cool or getting browny points in the eyes of others. It’s about avoiding stupidity and playing a game builds that muscle too. Let me provide the excerpt from Charles Ellis’s paper on the subject :
Simon Ramo identified the crucial difference between a Winner's Game and a Loser's Game in his excellent book on playing strategy, Extraordinary Tennis for the Ordinary Tennis Player. Over a period of many years, he observed that tennis was not one game but two. One game of tennis is played by professionals and a very few gifted amateurs; the other is played by all the rest of us.
Although players in both games use the same equipment, dress, rules and scoring, and conform to the same etiquette and customs, the basic natures of their two games are almost entirely different. After extensive scientific and statistical analysis, Dr. Ramo summed it up this way: Professionals win points, amateurs lose points.
Professional tennis players stroke the ball with strong, well aimed shots, through long and often exciting rallies, until one player is able to drive the ball just beyond the reach of his opponent. Errors are seldom made by these splendid players. Expert tennis is what I call a Winner's Game because the ultimate outcome is determined by the actions of the winner. Victory is due to winning more points than the opponent wins – not, as we shall see in a moment, simply to getting a higher score than the opponent, but getting that higher score by winning points.
Amateur tennis, Ramo found, is almost entirely different. Brilliant shots, long and exciting rallies and seemingly miraculous recoveries are few and far between. On the other hand, the ball is fairly often hit into the net or out of bounds, and double faults at service are not uncommon. The amateur duffer seldom beats his opponent, but he beats himself all the time. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points.
As a scientist and statistician, Dr. Ramo gathered data to test his hypothesis. And he did it in a very clever way. Instead of keeping conventional game scores – "Love," "Fifteen All." "ThirtyFifteen." etc. – Ramo simply counted points won versus points lost. And here is what he found. In expert tennis, about 80 per cent of the points are won; in amateur tennis, about 80 per cent of the points are lost.
In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser. The two games are, in their fundamental characteristic, not at all the same. They are opposites. From this discovery of the two kinds of tennis, Dr. Ramo builds a complete strategy by which ordinary tennis players can win games, sets and matches again and again by following the simple stratagem of losing less, and letting the opponent defeat himself.
Dr. Ramo explains that if you choose to win at tennis – as opposed to having a good time – the strategy for winning is to avoid mistakes. The way to avoid mistakes is to be conservative and keep the ball in play, letting the other fellow have plenty of room in which to blunder his way to defeat, because he, being an amateur (and probably not having read Ramo's book) will play a losing game and not know it. He will make errors. He will make too many errors. Once in a while he may hit a serve you cannot possibly handle, but much more frequently he will double fault. Occasionally, he may volley balls past you at the net, but more often than not they will sail far out of bounds. He will slam balls into the net from the front court and from the back court. His game will be a routine catalogue of gaffes, goofs and grief.
He will try to beat you by winning, but he is not good enough to overcome the many inherent adversities of the game itself. The situation does not allow him to win with an activist strategy and he will instead lose. His efforts to win more points will, unfortunately for him, only increase his error rate.
As Ramo instructs us in his book, the strategy for winning in a loser's game is to lose less. Avoid trying too hard. By keeping the ball in play, give the opponent as many opportunities as possible to make mistakes and blunder his, way to defeat. In brief, by losing less become the victor.
Playing Loser’s Game or being coachable or quick decision-making, are just a few of the mental frameworks that are essential to Success in Investing and in Life. And if you were to read the autobiographies or hear the interviews of people you admire, you would realize that there were many of these mental models at play in their journey to the pinnacle of success in their chosen fields. It ain’t about skill alone.
Queen’s Gambit on Netflix remains one of the best TV Series I have ever watched and Anya Taylor-Joy enacts the role of a Chess Champion in the most graceful manner possible from an actress. But she also gives you a peek into what the journey of a champion looks like.
You and I may not strive to be the most elite performer in our chosen games of chances, but it surely will leave you better than you were when you first picked up the game. And if you add the relationships built along the way, it’s an endeavor you will cherish for a very long time.
“It’s a probability game. If you meet twenty people in a week, chances are you’re gonna meet someone who’s interesting. So, part of it’s just improving your odds of experiencing nice events, nice encounters, by being out there. I think it’d be pretty hard to be lucky if you weren’t.” - Richard Wiseman, Luck Factor
My favorite sport is Snooker and I love playing the game every week, twice if not thrice. It has taught me many things, as pointed above, but the one that I value the most is the Energy Management aspect of the game. I have realized that I play well when I am feeling good, high on life, well-rested, not in a rush to go anywhere or do anything, and 100% in the zone to play. And hence managing my lifestyle in a way that allows me to be in the right frame of mind, produces a fantastic game for the 2-3 hrs that I am in the Snooker Club.
But every time I have broken this protocol or not managed my affairs well, I have either lost the match or not enjoyed the game at all. And I have taken this lesson to heart, for all my endeavors. Either give 100% to them in mind, body, and spirit, or don’t indulge at all. And that makes for giving my best at all things and making my efforts count, even if results sometimes may not be in my favor.
That’s me and dad having a great time at the Snooker table, every time we are together. I look forward to games with him. I even get to play with my ex-colleagues and a client of mine on weekly basis. The sport allows me to build genuine long-term relationships and create memorable moments, while I get better at the games of chance and using them for practical applications.
This seems win-win all the way.
“When we are unsure about the situation but still want to express our opinion, we often preface our remarks by saying “the chances are,” or “probably,” or “it’s not very likely but. . . .” When we go one step further and attempt to quantify those general expressions, we then are dealing with probabilities. Probabilities are the mathematical language of risk.” - Warren Buffet
I’m hoping you will pick a game too, and take it on like fish to water.
Wishing you loads of luck.
Manish
Sir, can you suggest ways or books where probability aspect of Investing is covered so that i can learn more on this topic.