How Texas Hold 'Em Simulates Investing

Both are based on incomplete and unfolding information.

Of all the gambling games, “Texas hold ’em” best simulates investing. Other gambling games can spark the same errors, but poker is closer to investing because a good player can win consistently (whereas players will lose over time with games of chance such as roulette and blackjack). And Texas hold ’em involves many decisions per hand. “The stock market and Texas hold ’em are games of investing based on incomplete and unfolding information,” says Frank Murtha, a behavioral-finance consultant with a PhD in counseling psychology (his dissertation explored the effect of psychological errors in gambling). “The goal of each is to accumulate wealth by making decisions based on that information.”

(Researchers have long known about the gambling/investing connection. In fact, gambling is often used in laboratories to test psychological reactions that are also common to investing. For example, see The Gambler’s Fallacy and the Hot Hand: Empirical Data from Casinos and How Winning and Losing Alters Our Perceptions of Risk).

Texas hold ’em is a variation of seven-card stud (see a complete set of rules). In Texas hold ’em, each player is dealt two cards face down, then there’s a round of betting. Next, three community cards are placed face up in the middle of the table. Another round of betting follows. Then another community card, more betting, and the final community card and the final round of betting.

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How does this simulate investing? Think of your first two cards as a potential investment -- say a stock, mutual fund or bond. Your first decision is: Do I want buy it (bet) or pass on it (fold)? If you decide to buy it, you have made an investment, and you’re given the same choices that you get with any investment you own: buy more of it (bet), hold it (check), or sell it (fold).

Every time community cards are shown, you get more information about your hand, which is just like getting more information about your investment. And every decision point can be a lesson in controlling your emotions.

(If you want to learn how a simple device can help measure the emotional nature of your decision-making, as well as how I stumbled on the poker-investing connection, see How Deepak Chopra Helped Me Become a Better Poker Player.)

Playing poker to train yourself to recognize and correct psychological errors isn’t hard. You can play Texas hold ’em online for free at a number of poker sites, and at portals such as AOL and Facebook. Betting money isn’t necessary to trigger the psychological errors -- the competition alone is motivation enough. In fact, when researchers conduct experiments to study these errors, they rarely use any kind of reward. Playing in no-money-involved tournaments, in which players are inclined to make more-thoughtful decisions, is a better way to hone your skills that doesn’t risk your cash.

Bob Frick
Senior Editor, Kiplinger's Personal Finance