Check-raise

I started playing poker again recently, when I found some guys at work who did a Texas hold'em no-limit game once a week or two. It's been quite invigorating, and I really look forward to playing every Tuesday or Wednesday (especially since I won big the last two weeks). Interestingly enough, as I get more into financial analytics specifically and the finance industry in general, I have come to draw some very close parallels between poker and investment management.

The truth is, speaking as someone who has completed all the CFA exams successfully, investments are institutionalized gambling on the vastest scale. People with solely a heavy economics background - as I was at one point in my life - tend to ignore or gloss over this fact, but most quantitative analysis is generally geared to justify the actions of money managers ex post, and at most control total value-at-risk ex ante, to the point that risk can actually be "controlled" (as experience shows, taming risk is no easy proposition). Many aspects of modern capital markets are zero-sum games, such as commodities and derivatives - like poker, where for every dollar winner, there must be a dollar loser. There is even a parallel to the casino's rake: broker fees and trading costs such as the bid-ask spread and cost-of-carry for deliverables. However, the most striking similarity - and here is why I have observed that every institutional money manager is an incessant gambler - is the ironclad relationship between risk and reward. Do you chase the open ended nut straight draw when your opponent simply bets the turn at 10 to 1 pot odds? How about writing a $50 million futures position on the long end of the UK treasury curve? Maybe spice it up with credit default swaps across a basket of BBB+ bonds?

Not all portfolio managers are gamblers, but of the ones that I personally have known, a disproportionate number are, either the first to put down a twenty on making the birdie putt on 18, or spending Sunday morning at the blackjack table in Vegas. Early on, I had put myself on the path to be in investment management, and as I get closer to a point where I can make the jump in my career to be so, I suppose it would be a good thing for me to figure out whether I want to be - for all intents and purposes - a professional gambler. Who knows? Maybe 15 or so years down the road I will be going all-in on the flush draw with millions of your hard-earned pension dollars.