Here’s Some Investment Advice From a Poker Star: Focus on Your Decision-Making Process – Barron's

Perhaps now more than ever it’s important to understand what factors are driving investment decisions and develop strategies for making the best choices with the information available, confusing as that information may be. The extreme ups and downs and uncertainties of the pandemic have left many investors grappling with feelings of angst, doubt or—in the case of the newly minted day trader—overconfidence.

We first spoke with Konnikova in September, and followed up at the end of November. During that time a lot had changed—the stock market has reached new highs, a new president has been elected, and Covid-19 cases have surged at the same time vaccines are on the horizon. What hasn’t changed is Konnikova’s advice for how long-term investors can play their cards right. Here is an edited version of our conversation.

Barron’s: Surveys and anecdotal accounts suggest that many of us are struggling with making decisions. What’s going on?

Maria Konnikova: Right now we’re constantly dealing with probabilities and trying to evaluate risk and risky behavior. This is the kind of stuff that stresses us out the most, and we’re doing it in an environment that is so uncertain and so ambiguous. Human minds don’t like uncertainty and they especially don’t like ambiguity. Our cognitive-processing capacity is taxed beyond belief.

At the same time, more individuals are trading stocks and options. What’s driving this behavior?

I think there are a few things happening. First of all, we have the classic Dunning-Kruger effect, which predicts that people who are the most ignorant about something will be the least aware of their own ignorance. They have the highest sense of false confidence.

Meanwhile, things like Robinhood [the zero-commission trading app] have made it easy to trade, and there’s been a huge marketing push that actually has coincided with Covid-19. I’m not a fan of these platforms, by the way, because I think they take advantage of people who have no idea what they’re doing and who might end up losing a lot of money.

I also think that with so many things being out of our control, people see this as a way of reclaiming agency and being able to actually play with risks, but on their own terms, or so they think.

What’s your advice for investors who are tempted to speculate?

You can’t game the market. Even if you think you can, it’s really hard to predict what the market’s going to do, especially if you’re not an expert at doing this. I’d also urge people to look at the track record of professional traders. What Daniel Kahneman [Nobel-winning psychologist and economist] has found is that most of them would make more money if they didn’t trade at all.

There’s very little correlation year to year between how well someone has done and how well they do the following year. A lot of traders think that they’re playing poker, but really they’re gambling. They’re at a roulette table and just rolling the dice.

What are other poker parallels?

Poker definitely teaches you that players who are too active, who make too many decisions, or play too many hands because they’re bored…they tend to lose money. People tend to think that doing something is better than doing nothing, and that activity means productivity. Oftentimes the best thing to do is to do nothing, but it has to be a choice. It can’t be because of inertia or because you’re scared or because you don’t know what to do.

Many people got out of the market this spring and are sitting on too much cash out of fear. Do you have any advice for them?

I think you need to identify the source of fear and figure out if it is relevant to the decision. Is it rational or not? Is it based on past experience, or is it because you don’t fully understand what’s going on? This may be a time when it makes sense to consult with someone you trust, who has the expertise to help you make the best decision. If your fear is coming from a place of knowledge, it may be valid. But that is often not the case.

How can investors avoid making poor decisions out of fear or, perhaps worse, fear of missing out?

If you have a good reason for doing what you’re doing, trust yourself, trust it. Don’t second-guess it.

I think every time you make a decision, you should write out why you’re making it and what your reasoning is. And also argue against yourself. In poker, if you’re pretty sure that you’re going to raise this particular hand, first, in your head, do a quick argument for why you would not raise, why you would call, or why you would fold. Your focus has to be on process, because that is the only thing that you can control. So your process has to be as good as it can possibly be. But you have to constantly revisit your process because you’re constantly growing as a person and the world is always changing.

Thanks, Maria.

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