Investing and poker are they comparable? Part 2

In part 1 of the article, we discussed if investing and poker are comparable.

The similarities between poker and investing will now be stated explicitly in part 2.

As well as risk perception.

Several elements have an impact on how we perceive risk. According to behavioral scientists, the following are some of the frequent factors that affect how we perceive impact:

Information gap:

When playing poker or investing, we frequently act on incomplete knowledge and attempt to fill in the blanks with our experience and knowledge.

Therefore, the only way to acquire experience and expertise is to continually educate ourselves through reading, past experience, working with a coach, etc. The function of an investment advisor is similar to that of a competent coach who guides the student through every crisis while keeping his best interests in mind.

Controlling Emotions:

Emotional stability and control are crucial if you play poker or invest in the stock market for a long enough period. We can’t let our decision-making be influenced by avarice, the arrogance of winning streaks, or remorse of missing out).

Must understand when to seize an opportunity and when to back off. Again, all of this results from being prepared, knowledgeable, and not just going along with the flow.

Patience is the key to both investing and poker. When playing poker and investing, you must exercise patience and refrain from making impulsive decisions.

You will experience hardships due to the economy and other associated factors even though you invest in a solid fund or company. If you have followed the beginning steps correctly—that is, by knowing your purpose and the investment’s time horizon—you should be patient.

Risk-Reward Premium:

How do we combine the appropriate emotional quotient with a rational sense when making decisions?

When playing poker, we utilize odds to assess whether a certain action carries X amount of risk or Y amount of potential gain. Long-term success is certain as long as the return outweighs the risk by a proportion.

Similarly, even in the stock market, your portfolio can have initial large fluctuations, but each one must be consistent with the risk-reward profile for the time horizon you are investing for. Most of the time, as humans, we prefer immediate gratification over long-term achievement.

Generally, people overestimate the rise of the sharp crash in the equity markets and underestimate the impact of inflation on their savings. ‘’ The real risk is not the stock market will melt down, but that inflation will raise your cost of living and erode your savings.

Familiarity with risk situations:

Investors are more likely to accept risks when the circumstances and investments are known to them. Unknown causes us to feel worried while familiarity gives us comfort. As a result, investors are hesitant to accept fresh ideas and are only willing to take risks on ventures that have previously generated money for them. As a result, they frequently overestimate the risks of the new and underestimate the risks of the old.

Herd Mentality:

The actions of the crowd also affect how we perceive risk. We find comfort in the company of the crowd. We tend to consider the popular choice to be less risky. On the other hand, being contrarian constantly puts our beliefs to the test. History has demonstrated time and over again how tales influence crowds, which can lead to frequent risk estimation errors. If you follow the crowd, you will panic along with them.

Aversion To Ambiguity:

Even though we favor simplicity and certainty, dealing with complexity and ambiguity is necessary for the stock market. One must make a conscious effort to distinguish between risk and uncertainty and even consider it in terms of probability. It is not surprising then, in our endeavor to reduce our worries, we tend to overpay for what looks like ‘defensive ‘investments: which gives us a sense of certainty or lower volatility. We overpay for avoiding risk and end up settling for lower (and often negative) returns.