Sunday 2013-01-06

The Poker Face of Wall Street by Aaron Brown

Brown's the guy from TheQuants who destroyed Liar's Poker as a Wall Street pursuit. While he does give his side of that story (and it seems like Patterson only read this account), Brown comes across as a guy who plays a very long game, and has played a huge amount of poker.

So much poker, that he feels the need to justify / rehabilitate the game via a million anecdotes and one crazy theory: poker aggregates wealth and facilitates trading in money-poor economies such as the Mississippi delta during the late 17th and 18th centuries, which explains it's prevalence there, relative lack elsewhere, and why Chicago has a huge futures / options exchange, and the East didn't.

Theories aside: Brown has some convincing insights....

Another problem is that there is no such thing as an interesting poker hand. The play makes sense only in the context of a session...
Even the simplest poker decision involves consideration of past and future hands.
The same thing is true of trading and investing. People often ask me for a stock tip or whether it makes sense to be long or short the dollar. If you think that way, you've lost already. You need a strategy, and a trade or investment decision can be evaluated only in the context of that strategy.
-- The Art of Uncalculatable Risk

So maybe his beating Liar's Poker and not taking the lead Trader's money was part of a long game. Or maybe he actually goofed. Crafty... ;)

President John F Kennedy's handling of the Cuban missile crisis is often held up as an example of masterful poker play. It has risker written all over it. Nixon's duplicity, paranoia, and ruthlessness were more characteristic of a winning poker player. But when people say they want a good poker player as president, they are thinking of Kennedy, who played badly (and some of his relatives were among the worst players, and biggest riskers, at Harvard), not Nixon, who played well.
-- Who Got Game
Ethel (Riddle)'s data clearly showed that money flows were influenced much more by whole-table, session-long interactions than by individual bets or hands. Pre-Ethel, 50 years of calculating probabilities and figuring strategies, and no one had noticed that this didn't matter as much as the table interactions; post-Ethel, we've had 85 more years of the same.
-- Who Got Game
Without the Efficient Market Hypothesis (EMH), you can explain anything as a disagreement among investors. He sold stock A to her at $50 because he thought it was worth less than $50 and she thought it was worth more. Stock A went to $52 because more investors wanted to buy it. If you can explain anything, you explain nothing. Whatever happens, your theory covers it, so it never has to be changed. Of course, it also cannot predict; anything is possible in the future.
So (Eugene) Fama asked, "What happens if all investors agree about statistical properties of securities and we try to form good portfolios?" Then he checked to see whether security prices moved according to that prediction. It's important to realize that no one thought the market was efficient; it was just a way to study things rigorously. If Fama could document the deviations from efficiency, there would be something to study, hence the possibility of learning.
-- Finance Basics

And a mini-lesson in Rationality.

Many financial disasters can be traced to people who thought they were hedging. The problem with the idea of hedging is that it depends critically on the scope of your analysis. When you look at a larger picture, what seemed to be a hedge turns out to increase risk.
-- A Brief History of Risk Denial
Poker and trading keep me plugged into society, and to a cosmic muse. I don't need them to be happy, but I do need them to be productive and social.
-- Son of a Soft-Money Bank
Mike (Becker) recruited 50 bridge champions; the rest were poker, backgammon, chess, or go experts. At the peak, 150 of the 400 American Stock Exchange options seats were held by games players trained by Mike or Ron (Rubin). Only a fraction of the other 250 traders had trained in business schools or math departments. Until the advent of high-quality portable computers in the early 1990s, and some market changes, America's stock option exchanges ran on game-trained brainpower.
-- The Once-Bold Mates of Morgan
The ultimate scarce resource in cognitive processing is attention. Things are going on right now that we're not paying attention to. Information is flowing all around us, ignored. The trade-off is between attention and memory.

A court stenographer can record every word everyone says in court, while reading a novel, but ask her what happened ten seconds ago and you get a blank stare.

Attention is the tool you need to get information. People are using unconscious strategies because they don't have the attention to solve everything optimally. We can predict their actions using simple game models because they're not paying attention, not because they are.

-- Colin Camerer, Who Got Game