Difference Between Poker and the Stock Market

[thing85]

Anything with variance involves "gambling" because of the risk involved. I think one important distinction is that stock market investing can be +EV (and usually is, when executed properly) but that gambling in general (I'm not talking about poker "pros") is -EV. When the general public speaks of gambling, they speak of the typical Vegas casino environment which, aside from poker, is strictly -EV. In terms of expected value, the stock market is not "gambling" but in terms of variance (or risk), it is like gambling.

At least, this is how I see it.

[Daysleeper]

Bets placed in poker are uncollerated?

[RarocASP]

Assuming markets are priced efficiently, you are always giving up edge when investing in the market to market makers. That is, the more you trade, the less you are expected to win. I like to think of commissions as rake and the edge lost to market makers as negative Sklansky dollars. In poker you still pay the rake, but profitable players instead are the recipients of Sklansky dollars.

[thing85]

[ QUOTE ]
Assuming markets are priced efficiently, you are always giving up edge when investing in the market to market makers. That is, the more you trade, the less you are expected to win. I like to think of commissions as rake and the edge lost to market makers as negative Sklansky dollars. In poker you still pay the rake, but profitable players instead are the recipients of Sklansky dollars.

[/ QUOTE ]

All the more reason to use a buy and hold strategy with a portfolio of index funds.

[RarocASP]

I'm a big fan of Bogle myself

[DcifrThs]

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What prompted me to start this thread was an article in the Sunday, NYPOST about the debt accummulated by "Generation Debt," people in the 30-45 age group. The article stated that one of the "problems" with that group (which includes me) is that we view the stock market as gambling.

I understand that the financial firms spend millions of dollars every year to make the stock market seem "respectable" and to hide the gambling element. However, there's no other way to explain the constant fluctuations of stock prices other the gambling element.

If a stock is selling at 30 in November, 45 in March, and 30, again, in August, did those fluctuations really reflect the value of the company?

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this seems to pop up constantly.

imo there are two different widely known methodologies for involvement int he market.

one is passive, strategic, investing (beta).

the other is active, tactical, trading (alpha).

sometimes the two commingle (i.e. in a mutual fund that has a long bias).

sometimes you can separate the two (i.e. investing in an index, using futures to replicate the exposure and take the remaining $ to an uncorrelated alpha generator like a hedge fund...assuming you are good at picking managers and finding a stream like that).

the point here is that alpha generation is far more like poker in that it is negative sum costs included.

beta is not like poker. you can be "guaranteed" a return by simply placing money in a diversified portfolio and letting it grow. there is no such easily acheivable analogy in poker (the only one that even comes close, bust still isn't, is finding great players who need staking and investing in them. problems here are massive adverse selection and moral hazard: those who need staking are typically not players an investor would like to stake and those who don't need staking are more likely to be the highly successful players in whom an investor would love to invest. moral hazard comes from after the investment. if a player sees his losses as-partially- covered, he/she may engage in behavior that he/she would not have done if tthat money was theirs)

anyways, now that i've listed all that out, the similarities between beta and poker are none that i can think of because in the markets, i think picking alpha managers is really freakin ghard, similar to the problems described above with picking winning players.

there is no risk premia creation/distribution in the poker world.

alpha generation though i think does have some similarities as mentioned in this thread.

so if you rephrase the OP to read: "difference between poker and alpha generation" you are far more hard pressed to find a difference.

the MAIN one...and a massive one...is that alpha generation is not and will never be normally distributed since the underlying process is both risky AND uncertain (i.e. the overall fundamental risks are unknown even to the participants) wheras poker is mostly just risky (i.e. 52 cards, known distribution) and thus can be modeled in that portfolio sense with a normal distribtuion thanks to the law of large #s (obviously you can start talking about the players and their deviation from their expectation. even with large #s of players, their errors could be correlated if caused by essenciallyt he same psychological forces etc.). but overall, the DRIVER of the process in poker can be normally distributed whereas the DRIVER of the process in trading is not.

Barron

[spino1i]

[ QUOTE ]
Assuming markets are priced efficiently, you are always giving up edge when investing in the market to market makers. That is, the more you trade, the less you are expected to win. I like to think of commissions as rake and the edge lost to market makers as negative Sklansky dollars. In poker you still pay the rake, but profitable players instead are the recipients of Sklansky dollars.

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Ive avoided both of these pitfalls. I trade at Zecco so I pay nothing for each comission. And I use level II trading software from Ameritrade and so far have had no problems getting a very good price when I buy/sell. Im not losing money to the market maker.

[Isura]

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Here's one that Barrons screwed up when they wrote about me and other poker players.

They suggested that investors should take a hint from poker players who realize that they should quit a game when they are losing, ignoring ego and realizing their results might indicate that they are an underdog .

But the analogy is badly flawed. Because your losses only tell you that you might have made a mistake when you SAT DOWN. In poker that usually means you should quit. But in the market it very often does not. Reason being, of course, that the "bad" buy, could have turned into a good hold, at the new lower price.

[/ QUOTE ]

No, I think you have it backwords, regarding the last paragraph.

[RarocASP]

ur losing edge to market makers

[adios]

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They are both negative sum games. Poker has the rake and stock trading has commissions and spreads. Both are very difficult to overcome for the vast majority of people.

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Commissions are really insignificant IMO. If I buy $100,000 of stock with a $10 commission that's nothing. The rake in poker is much more difficult to overcome. Second of all even if one is doing day trading in a very limited number of stocks, they have the upward bias of the market working for them. I realize that people are not compensated for taking individual company risk and the systematic risk varys from stock to stock (GE correlates more with market movements than somehting like KKD for instance) but there is an upward bias nonetheless. Not true in poker. Sorry the market makers in stocks and the house in casino poker are not the same thing at all, not even close.