From the Archives: The 80/20 Rule in Action • Systematic Relative Strength • Dorsey Wright Money Management Systematic Relative Strength:
From the Archives: The 80/20 Rule in Action
According to a fascinating study discussed in Time Magazine based on 27 million hands of Texas Hold’em, it turns out that the more hands poker players win, the more money they lose! What’s going on here?
I suspect it has to do with investor preferences–gamblers often think the same way. Most people like to have a high percentage of winning trades; they are less happy with a lower percentage of winning trades, even if the occasional winner is a big one. In other words, investors will often prefer a system with 65% winning trades over a system with 45% winning trades, even if the latter method results in much greater overall profits.
In fact, you are generally best off if you cut your losses and let your winners run. This is the way that systematic trend following tends to work. Often this results in a few large trades (the 20% in the 80/20 rule) making up a large part of your profits. Poker players and amateur investors obviously tend to work the other way, preferring lots of small profits–which all tend to be wiped away by a few large losses. Taking lots of small profits is the psychological path of least resistance, but the easy way is the wrong way in this case.
—-this article was originally published 2/10/2010. Investors still have irrational preferences about making money. They usually want profits—but apparently only if they are in a certain distribution! Real life doesn’t work that way. Making money is a fairly messy process. Only a few names turn out to be big winners, so you’ve got to give them a chance to run.
I suspect it has to do with investor preferences–gamblers often think the same way. Most people like to have a high percentage of winning trades; they are less happy with a lower percentage of winning trades, even if the occasional winner is a big one. In other words, investors will often prefer a system with 65% winning trades over a system with 45% winning trades, even if the latter method results in much greater overall profits.
People overweigh their frequent small gains vis-à-vis occasional large losses,” Siler says.
In fact, you are generally best off if you cut your losses and let your winners run. This is the way that systematic trend following tends to work. Often this results in a few large trades (the 20% in the 80/20 rule) making up a large part of your profits. Poker players and amateur investors obviously tend to work the other way, preferring lots of small profits–which all tend to be wiped away by a few large losses. Taking lots of small profits is the psychological path of least resistance, but the easy way is the wrong way in this case.
—-this article was originally published 2/10/2010. Investors still have irrational preferences about making money. They usually want profits—but apparently only if they are in a certain distribution! Real life doesn’t work that way. Making money is a fairly messy process. Only a few names turn out to be big winners, so you’ve got to give them a chance to run.
Most professional poker players are classified as "scalpers": they try to take down pots early and they don't want to face a big showdown by going all-in. They have no recourse if they lose, and payoffs are only 1-to-1 in a heads-up situation. They is no value in playing for an outlier unless the implied pot value is extremely high early in the hand - in this case, a pro player often wants to take down a pot early. This is very common in cash games, and less so in tournaments for one reason: they buy-in in tournaments is a call option, and moving up the prize ladder is all gamma. This is why you see more all-ins and wild play in tournaments than in cash games. 99% of all pro gamblers make less than 50K AGI, and most of their income comes from endorsements. if pro poker players take a huge hit in a cash game, they might lose their entire year's income or even more. at $4K/month before taxes , it is a tight lifestyle if you have no endorsements. a pro in a tournament wants to try to make the prize cut, then play more aggressive/sharp when the pro is in the money. The story is most likely referring to cash games, but tournaments often have good players with "low frequency wins".
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