Poker: Art Vs Science
In this article, Cameron Hight breaks down Game Theory Optimal (GTO) play in poker and compares it to investing.
“People describe poker as a game of art and science. Both intuition and science have merit, but the best players approach the game very quantitatively.”
– Liv Boeree, Professional Poker Player
Our COO, Graham Stevens, and I met over a poker table. We’ve been playing together for many years and he was recently watching an Oxford Lecture Series video by Liv Boeree that he turned me on to.
Liv is a very successful poker player with a physics degree from the University of Manchester. She was discussing the use of Game Theory Optimal (GTO) play and the use of GTO Tables to break decisions down into ranges of hands based on different situations to aid poker players in knowing the optimal decision (Bet (big or small), Check, Fold).
She stated that the best players in the world all employ GTO. And even though all players assume their opponents are playing GTO, it is incredibly difficult to exploit those predicted decisions because they are optimal. In an interesting exchange in the video, Igor Kurganov, another very successful poker player who was in the audience, said that intuition (playing the player instead of playing the cards) factors into his decisions, but only to a small degree. He said that the best intuition can do is change a 50/50 bet to a 55/45.
The parallels to investing and Alpha Theory are clear. At Alpha Theory, we allow firms to build their own Game Theory Optimal system to figure out the “optimal” amount to bet on each position in their portfolio. And we find that firms that use intuition instead of their model lose to the hypothetical model performance about 75% of the time.
The reasons portfolio managers choose to vary from their model are numerous, but have a common theme; there is an intuition that the model isn’t capturing. Granted investing is not poker. Poker has a finite set of variables and permutations comparted to the seemingly infinite number of variables to consider in investing. But even still, just like in poker, the world-class players are going to be the ones that are following the model and only making small tweaks for intuition.
**Do I practice what I preach? A note on my own poker play. I do not play GTO because I have not memorized the tables. I know some of the shortcut rules for when to bet and fold pre-flop and I can do a rough calculation of pot odds post-flop but that’s the extent of my skills. If my buddies would let me pull out my computer while I’m sitting at the table, I would follow GTO. If I were playing for a living, I would learn and follow the model.