Updated: Feb 15
Being stuck in Poker or Investing means that you are currently losing money. In poker, this could refer to your current session or this could refer to your cumulative results over a little while. Being stuck in investing or trading means that you continue to hold an investment/stock because you are losing money in it.
The key reason for this behavior is Hope for a turnaround.
Most poker players who are STUCK will continue to play a session with the hope of recovering the losses. This is when you see poker player playing 4-8 hours session instead of playing for 12-36 hours at a stretch because they are stuck (or in losses). One does not come across players who continues to play more than 20 hours if he is significantly up. Same is true in investing where most people tend to hold on stock which are down 30-70% for eternity with the hope that the companies or stocks will turnaround someday. The same investors rarely hold on to stocks which have given them 4-5x times returns.
Pain from loss leads to risk seeking both in poker and investing to cover up the losses. Poker players showcase by playing trashy hands and investors showcase it by averaging down or investing in penny stocks.
Risk taking increases when faced with imminent losses
For example, what would you choose…?
Scenario 1: To receive a guaranteed payment of $900 or take a 90% chance of winning $1000 (and a 10% chance of winning 0)?
Scenario 2: To choose between losing $900 and take a 90% chance of losing $1000?
In Scenario 1, most people would decide to avoid the risk and take the $900 even though the expected outcome is the same in both cases. In Scenario 2, people tend to choose the 90% chance. While, the reason for selecting between taking the chance or not should be a function of inherent risk taking nature of a person. However, in case of scenario 2 even the most conservative people tend to take the chance.
The Sunk Cost trap
Sunk cost trap refers to a tendency for people to irrationally follow through on an activity that is not meeting their expectations. This is because of the time and/or money that is already invested. This is why people finish movies they are not enjoying and finish meals that taste bad.
Most people stuck in loss making stocks always tell me that they will sell off as soon as the stock recovers to its cost price. The same is in poker, people continue to play a session until they have recovered their losses.
Investors consider selling a stock in loss as a personal failure instead of considering it as a natural outcome of probabilistic event. They hold on to the stocks and argue that the market is not getting it and someday it will.. to satisfy their ego. The same is true in poker, professionals think it is beneath them to have a loss making session as they are better than the quorum. So they keep extending a session – most likely end up with severely battered egos in both case.
How to get UNSTUCK
In Investing, the mantra is to evaluate all your stocks periodically on purely fundamental basis. Well this is easier said than done. If you are not ready to BUY more of a stock at current level – maybe it time to SELL it. However, the problem with our loss-making positions is that the disposition effect sets in and we are mostly searching for information that justifies the investment. Any information which is against our thesis is discounted and we continue to remain invested in a stock which has significantly fallen, convincing ourselves for fundamental reasons.
Some behavioral tricks to overcome these biases
Or remember Legendary Paul Tudor Jones Wallpaper: LOSERS AVERAGE LOSERS
About the Author
I have spent the last 15 years (2004-2019 ) as a Sell-side Equity Analyst covering sectors like Media, Telecom, and Consumer MidCaps. I was at SBI capital markets from 2004-2007 and at ICICI Securities from 2007-2019.
I was rated by Institutional Investor as the best analyst for Media – India for 2014-16. I am a Recreational Poker player and was the winner of the First ever WPT Indian Main event. I have dabbled a bit in Theatre. I wish I can watch more movies and read more books. Hope to travel around the globe.