People are attracted to what stands out...not what makes sense in terms of probability
I started looking at the top poker hands that I play in terms of how often I play them and how well I do with them. And what I found out startled me. First, I know that hands consisting of an Ace (A) plus another card of a different suit (below a ten) are not nearly as valuable as most people think. But what I found out is that even though I know that, I'm still more likely to play them.
Let's look a two examples. The first one is A9 unsuited. It ranks as the 63rd ranked hand (out of 169 possible holdem hands), but I played it more than any other hand ranked above it. Hmm.
Or how about A7 unsuited? That hand is the 82nd ranked hand.... so near the middle of pack. But I've played it 8 times. In contrast, let's look at another hands that's much stronger, but doesn't stand out -- K7 of the same suit. It's the 42nd ranked hand, but I've never played it. Now it's possible that I've never seen one, but it also much more likely that it didn't stand out and a hand I wanted to play and just threw it away.
So one is much more likely to play hands that stand out and much less likely to play stronger hands that don't stand out. And if that applies to poker, it certainly applies to trading. What happens when a stock is recommended on CNBC. It might be a dog of a stock, but it suddenly stands out, and people are likely to buy it.
Van
Comments
I have written about the similarities of trading and poker many times and that’s why I love them so much! I love talking stocks and poker but most people (the average person) believe that both are gambling and not based upon calculated risks and odds and most importantly: money management! It’s too bad and that’s why most people just don’t “get-it”.
Posted by: chris | July 14, 2006 02:53 AM
I wrote a blog post in June titled: “Expectancy explained through Poker”.
He is s brief snippet that you may enjoy:
Poker expectancy example (this relates directly to trading):
I have been taping the 2005 US Poker Championships on ESPN with my DVR
Nine players at the table
34 total hands were played in this round
Player A saw the flop 28 of 34 hands or 82% of the time
Player A won hands 16 out of 28 tries for a 57% winning percentage
Player B saw the flop 11 of 34 hands or 32% of the time
Player B won hands 4 out of 11 tries for a 36% winning percentage
Looking at these numbers and assuming that both players had equal chips (they were close), who do you think made more money during the round?
Most people would guess Player A due to the 57% winning percentage on 16 hands. Player B fails in comparison with only 4 wins, a quarter of the wins of Player A.
Well, Player A actually had a net loss of 5,500 chips
While Player B actually had a net gain of 10,000 chips.
So what is my point?
The point is that being more active or less active is not a way to guarantee success. You must formulate a positive expectancy system that balances the opportunities with minimal risk and maximum gain. Player B took on less opportunity but made the most of it when the opportunity arrived.
Posted by: Chris | July 19, 2006 02:01 PM