Digging Deeper: A Gambling Analogy from the Economist

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Jun 11, 2018
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Investing, Personal Finance

If you are a regular reader of The Economist, you are probably familiar with the Buttonwood articles/blogs that appear each week in the Finance and Economics section. (Here is a bit of financial history trivia: the name “Buttonwood” comes from when the stock exchange first started in an organized fashion and traders met under the buttonwood tree outside of 68 Wall Street in 1792.) While there has been a very recent change in the author of the posts, they continue to provide insight into a variety of aspects of Wall Street and the world of finance.

These blogs are written in a manner that makes the topic approachable and understandable. The May 26 post discussed why one would want to hold Treasuries, when and for whom shorter term Treasuries would make sense, and how holding longer term bonds are one way of effectively diversifying one’s portfolio. It was the first time that I have read an explanation of “duration” that immediately made sense to me. This article might be a stretch for your students, but might be of interest to you and is worth a read.

This past week’s post is titled Lessons From Las Vegas. It draws an analogy between playing poker (specifically, the World Series of Poker), and investing. It will definitely appeal to statistics fans! This is one your students might enjoy, and it makes a pretty basic but important point quite clear.

For example, we are all familiar with the probability of getting any given number when throwing a pair of dice. But we are always uncertain about what the next throw will be. In poker, you may be able to calculate the odds of certain cards appearing to strengthen your hand, but there are so many other unknowns that you can’t control, like what the other player(s) are holding, where you are in the order of play, and how well other players are bluffing. Successful players work very hard to try to uncover these uncertainties by reading patterns in their opponents’ behavior.

With investing, we are all aware of the risks going into any position we take. (That is why we diversify our portfolios.) Expert investors, like professional poker players, try to look for clues from trends and company actions to remove some of the uncertainty, but few of us will get anywhere trying to do that. And emotion can play a role that may steer you in the wrong direction in both betting and investing.

The moral of this analogy is that whether you are playing poker or investing your money, the best strategy is to actually form a strategy, and to stick with it….no matter what.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an M.B.A. in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducting student workshops, and developing finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.