Typical Human Fallacies: Breaking Even
I’ve been thoroughly baffled by the tendency of humans to want to break even on things that are compartmentalized in their mind — often at the expense of mathematical expectation. This sort of thing rears its head in poker very often. I hear the following statements from new/bad players all the time:
- I just never leave a table while I’m down, so I can’t lose
- I make sure that I win every day. If I win a big pot at the beginning of the day, I quit to lock up the win. If I’m down, I keep playing until I’m back to even for the day.
There are lots of variations of those statements, but they’re all similarly retarded. New players bring a mathematically lacking attitude to the game of poker. I always try to explain that you should make the decision to play or not play without regard for your past results over the last hour/day/week/month. Instead, your decision should be based on the game conditions, your mindset (ie, if you’re tilted), bankroll and other factors. If your next hand should be profitable (ie, you’re playing well, there are fish at the table and you’re bankrolled), then you should play. If you leave tables like that because you won a few big pots and you want to lock up the win, then you have a lot to learn.
So why am I writing about this now? Well, I work with some guys here in Costa Rica who’ve done very well with Poker Source Online and the other websites that they own. They all invest in the stock market and, at dinner last night, we were discussing various stocks. One of them said something like “I bought more of that to bring my average cost down”. I sat there thinking…. “seriously, is that his investment strategy?”. So I said that I feel like the whole idea of averaging cost in a stock is retarded and makes zero sense. Instead, each purchase of a block of stocks should be evaluated separately without regard for a previous purchase or sale. As I said in the opening sentence of this blog, people like to keep “compartments” of profit/loss centers in their life and for some reason, these guys keep individual stocks in compartments. They expressed back to me that they think it’s a bad investment strategy to take a loss in a stock. I asked about the following scenario…
Let’s say you invest $20,000 into a stock. 1000 shares at $20 per share. You make this investment because you feel that the fundamentals of the stock support a $20/share price. Then some bad news hits and the stock drops to $14. You buy another 1000 shares for $14,000 because you feel it’s a good stock at $14. Then the stock goes to $16.50. What do you do?
I asked if they would sell the stock under the assumption that they feel that $16.50/share is a fair price for their 2000 shares at that point in time. They said no and that it’s a bad investment strategy. I was kind of in shock. That makes so little sense to me it’s just ridiculous. What does purchase price have to do with sale price from a mathematical expectation standpoint? Absolutely nothing. In addition, they stated that part of their reason for buying the stock at $14 would be to “average their cost down” to $17. Once again, that’s retarded. Averaging costs is so dumb I can’t even express how retarded it is. What the hell does either purchase have to do with the other one? The answer is that they should not be related. Each purchase should be evaluated on its own merits. Each sale should be evaluated on its own merits. Attempting to break even or win on every stock at the cost of EV is bad investment strategy, plain and simple.
The bad part about people who insist on breaking even is that they have nothing to back up their strategy except “god this math you speak of is annoying and my brain hurts” or “there you go again with your EV and expectation stuff” or “but how can I lose?” or any other silly statement. It’s usually better to simply laugh at them and let them donk on. Of course, the good part about these people is that, in the process of them giving up expectation, that makes the world more profitable for intelligent poker players and investors. So maybe I should stop tapping the glass?
Related posts:
- Typical Costa Rica Travelers
- Guest Posts
- Ways into the WSOP
- Googling Myself
- Process-oriented versus result-oriented
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Comments
http://en.wikipedia.org/wiki/Dollar_cost_averaging
“Dollar cost averaging has been widely criticized by economists and academic finance researchers as more of a marketing gimmick than a sound investment strategy (a way to gradually ease worried investors into a market, investing more over time than they might otherwise be willing to do all at once). Numerous studies of real market performance, models, and theoretical analysis of the strategy have shown that in addition to having the admitted lower overall returns, DCA does not even meaningfully reduce risk when compared to other strategies, even including a completely random investment strategy.”
Which “top investors” actually do this?
I can’t think of anything that annoys/tilts me more than trying to explain why someone’s thought process is flawed and having them respond to me with some comment like, “You can’t talk about anything math-related around Adam or Nat without them correcting you,” like it’s some really big annoyance to have someone explain to you a more sound way of thinking about things.
I sometimes wonder why I even bother trying to help.
I must disagree with the notion that all players have a higher expected value by staying at the table after they win a huge pot.
I believe you should leave if the situation is this:
1)You cannot force your opponent into making big mistakes in the huge pots.
2)Your opponent has the ability to cause you to make big mistakes in the huge pots.
Some players are great at picking up small pots, but they don’t have the experience to play extremely deep. The epidemy of this would be a player with 1000 big blinds who can’t fold AA for his whole stack on the flop…I am certain I would have an edge over this player if his stack was deep enough, but if we were shortstacked, this might not hold true.
RR,
You missed an important caveat of my statement. I said “If your next hand should be profitable” then you should stay. Obviously, if having a large stack makes you -EV because you don’t play well in a deep-stacked situation, then leave. But don’t leave because you want to lock up that money or something like that. Basically, the point of my post was to make decisions based on mathematical EV (obviously it’s a gray concept, but you can approximate it in your head), not on silly random reasons.
-Nat
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you are retarded if you think dollar-cost averaging is flawed…i guess all the top investors who follow this strategy must be retarded, huh?
Dollar cost averaging is an investing technique intended to reduce exposure to risk associated with making a single large purchase. The idea is simple: spend a fixed dollar amount at regular intervals (e.g., monthly) on a particular investment or portfolio/part of a portfolio, regardless of the share price. The premise of dollar cost averaging is that the investor wants to guard against the risk that the market may lose value shortly after making his investment. Therefore, he chooses to spread his investment over a number of periods.