The Weekend #190—Why you should lose more often

How poker teaches Wall Street’s top earners

One of the universal rules of life and really the universe is that of risk and reward. Generally speaking, you need to bet big, to win big. Likewise—no risk, no reward, per the well known Wayne Gretzky quote.

As such, the pursuit of progress isn’t about risk avoidance, it’s about risk management. Life (and business) is uncertain, but if you manage risk properly, you can set yourself up for more optimal outcomes.

Unlike chess, which is a game of deep theory and total transparency—most opening lines have been played hundreds of times by top pros—No Limit Hold’em Poker is a game of probabilities, a game of inherent uncertainty.

In chess, everyone knows where all the pieces are. With poker, you have to act on limited information, both quantitative (analyzing your cards, people’s bets, and the communal cards face up on the table) and qualitative (figuring out your opponent).

In that sense, poker is the ultimate game of risk management.

It’s why trading behemoth SIG (Susquehanna International Group) has all of its new recruits learn poker.

Here’s the WSJ (via Greg Kidd):

To get a close look at the affinities between financial trading and poker, The Wall Street Journal invited two of these pros to the newsroom for a game of no-limit Texas Hold ’em: Todd Simkin, an associate director at Susquehanna and Jeremy Wien, founder of Moo Point Capital Management. 

Simkin, who has traded, launched new businesses and trained hundreds of rookie traders since joining Susquehanna in 1997, explained how its poker playbook has applied to a growing number of markets around the globe. 

“It’s good to think about the world in probabilistic terms,” said Simkin, 49, before flashing a cursory glance at his cards. 

It took Simkin a fraction of a second to calculate how likely his hand was to win and decide how much to wager: He would go on to raise another player’s bet. He splashed chips toward the middle of the table while midsentence with a Journal reporter, barely breaking eye contact, and was equally quick to fold when things seemed to turn against him as the last communal card, known as the river, was unveiled. It was a seven of hearts, potentially giving an opponent a flush.

A web of probabilities shapes the worldviews of players and traders alike. Both groups continuously assess the chance of a particular outcome, based on endless morsels of information. For traders, that could include economic data or share prices. For poker players, it could be cards they’ve seen played or body language. Calculating risk becomes second nature. 

…

“Our goal in trading is to have an active picture of forward-looking truth,” Simkin said. “As we get new information, we update our view of truth.” 

In another hand, when an opponent made a risky bet to go all-in, he reflexively called, or matched the wager, to capture all her chips with a full house—sevens over threes.

“It’s a very good model for making decisions with imperfect information,” Simkin said of poker. 

Past generations of pros relied on more qualitative aspects of the game, such as exploiting their opponents weaknesses. These days, players are deeply versed in opening range models and probabilities. A common approach is called Game Theory Optimal, which is essentially a way of playing the numbers such that you are unexploitable no matter the cards and bets.

It might not always be the most profitable strategy—you’ll have to manage your risk a bit more aggressively if you want to win bigger. Or maybe you just want to minimize your losses so you keep your seat at the table.

Such is the elegance of poker. Risk management is key, but it’s still up to you to define how much risk you’re willing to take.

Another key thing that winners intimately understand is that losing is not only a core part of life and learning, it’s also woven into the choices you make:

In one training session, Lindstrom recalled, she and another player were the last remaining. Lindstrom studied the cards face-up in the middle of the table, rapidly deducing the permutations of those remaining undealt. After the last card was unveiled, her estimate of how likely she was to have the “nuts,” or best possible hand, skyrocketed. 

But she had a hunch she could trap her opponent and decided to let her bet first before raising the wager—and winning.

The moment taught her the importance of adeptly sizing bets and going big when she had a strong hunch.

Her first year as a trader, her manager pointed out that she was being too cautious. 

“They pulled me aside and said: ‘You never lose money. That means you’re not taking enough bets,’ ” Lindstrom said. “ ‘You need to bet more.’ ” 

Those lessons paid off. After spotting mispricings in the commodities market ahead of the Covid-19 crash in early 2020, she picked up options that would profit if oil prices plunged over the following weeks. The contracts soared when the pandemic sent oil prices into negative territory for the first time, making the trade a big moneymaker for her investment firm at the time. 

Poker, Lindstrom said, “taught me to be aggressive. It taught me to bet properly.”

Check out the full piece: Why This Wall Street Firm Wants Its Traders to Play Poker

Enjoy the weekend!