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7 Personal Finance Lessons from the Poker Table
Posted By Jim On 10/10/2007 @ 8:02 am In Personal Finance | 6 Comments
I’ve been watching ESPN’s broadcast of this year’s World Series of Poker and I see a lot of parallels between the world of personal finance and the world of Poker. I started playing Texas Hold ‘Em back in college as a way to kill time, earn some spending money, and blow off some steam after hard nights studying (not so much the last one). I would never consider myself really good at the game but I played a style that was probably more conservative than most (tight aggressive is what they’d call it), which probably mirrors my personal finance life strategy. From the poker table I drew a lot of analogies that I think translate quite well to real life and so I’ll give a cut at trying to make the analogy stick.
In poker, hand selection is paramount. While any two cards can win, some cards give you a better chance at winning than others. What this means at the poker table is that you’ll have to fold a vast majority of your hands and wait for the right spots for you to put your money in the pot. What does this mean in life? It means that patience is a virtue and one must have an abundance of it in order to succeed. Whether it’s investing, employment, or some other facet of life, be sure that when you make your move you have the best of it. If the stock market is sizzling hot, like it has been the last few weeks because of the last Fed meeting and the upcoming Fed meeting, fully analyze the situation before jumping in. A 2-7 might win the post but it’s better to wait for a better hand.
Stack management refers really to money management because in any one hand or any one tournament you’re limited in how many chips you can bring to the table. As your stack grows or diminishes, you have to be cognizant of your funds when you make your decisions. If you’re heads-up (one on one) against someone and you have a bigger stack, you have more leverage because you can, in that one hand, put someone out of the tournament. If you’re the weaker stack (less chips), you’re at a disadvantage. As the blinds and the antes chip away at your stack, you have to make decisions or face the consequences. As you can see, the parallels with real life and personal finance are pretty obvious in this case. You are limited in how much money you have and it’s important for you to make decisions with your bank account balance in mind. If you have $5,000 and the rent is due, you can spend all $5,000 on a new television, right?
As in life, everyone will make mistakes at the poker table. If you watch enough poker there’s a common scenario that always happens. A player with a stronger hand will slowplay (pretend to have a weak hand) their hand in an attempt to induce someone with a weaker hand to overplay theirs. So the weaker hand bets, the stronger hand just calls (acting weak), until they can spring the bear trap later on. The only problem is that sometimes the weaker hand, perhaps a hand that needs another heart or two to make a monster flush, hits their money card and is now the better hand. The mistake was the stronger hand not recognizing the precariousness of his or her position and bet strong. That was a mistake (in some cases) and you get better at poker by recognizing those scenarios. Personal finance is probably infinitely more complicated that poker and you will make mistakes. Forget to invest in a Roth IRA or your 401k last year? Did you invest heavily in an industry that performed poorly this year? It’s okay, just invest in a Roth IRA and your 401k this year and you’ll be fine. Mistakes are made, just don’t make them twice (or three times).
At the poker table, people do all sorts of crazy things to give an appearance of something they’re not. Whether it’s showing a strong tell when they’re weak or a weak tell when they’re strong, whether it’s wearing sunglasses upside-down or ones with holographic skulls on them, or whether it’s just acting like a lunatic when really you’re a mild mannered guy… it’s all about appearances. In life, it’s the same way. Why do you try to keep up with the Joneses? Is it because you’ll be happier if you television is bigger or your car is flashier? No, it’s because you want to appear to be better off than your neighbor. The lesson here is that you shouldn’t get caught up in it. Don’t think for a second the guy acting like a lunatic actually is a lunatic, it’s an act and it’s for appearances; that guy knows exactly what he’s doing. Don’t think for a second that Mr. Jones isn’t up to his eyeball in debt just to afford that new boat of his. Don’t buy into appearances, not even on Second Life .
Bad stuff happens to everyone. In fact, bad stuff happens multiple times to everyone. At the poker table, bad stuff happens all the freaking time and if you let it put you on tilt, it’s all over. Being on tilt is when you start acting irrationally and make decisions you otherwise wouldn’t make if you were emotionally stable. The lesson here is that you always have to take a step back, breathe, count to ten, do whatever it takes for you get back on even footing before you act again. In poker, that may mean that you walk away and come back another time. In real life, that means you excuse yourself. Whether you’re getting heated at work, upset about an investment, or just having a bad day… take a step back and take a break. Don’t make irrational decisions when you’re upset.
In poker, this is called reading another player. It’s trying to figure out what it is that the other person is thinking. You want to try to figure what he or she knows, what he or she thinks you are thinking, and finally what he or she will do with all that information. It’s a little mentally twisting but ultimately this applies to real life because anytime you interact with someone, keep in mind what the other person may be thinking. I don’t mean to sound cynical and imply that you should try to figure out WIIFM (what’s in it for me) about everyone because everyone is looking out for themselves, but you have to try to understand the underlying motivations. This is obvious in a negotiation, like buying a car, and less obvious when you’re talking about networking meetings or talking to a financial advisor. Always be cognizant of the other party, even if you’re not buying something.
At the poker table, it’s a grind. Professionals say this all the time – when poker becomes a job, it’s a grind. Day in and day out, you stare at cards and play. You play when you don’t want to. A fun diversionary game becomes work and work sucks. Work is a grind. That’s right, in real life you aren’t going to win the lottery, you aren’t going to be a superstar at your company, you’re going to be a regular ole bloke like me and you’ll spend the vast majority of your life grinding it out with the best of us. What do I mean by this? I mean you won’t be making millions a year flashing a smile on a movie screen or slamming your shoulder into another person’s body, you’ll be a regular person making a regular salary that doesn’t have seven figures. Is that bad? No, of course not. In fact, many people enjoy the fulfilling nature of the grind because it lets you enjoy life. It lets you enjoy your time with your family, your time with you friends, and it doesn’t require you to spend hours and hours and hours at a job. Lots of people love the grind because it is enough to give you a very fulfilling life.
There you have it, my thoughts on the parallels between poker and personal finance, how’d I do?
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