The Difference Between Poker and Chess—And Why it Matters

Annie Duke explains

Annie Duke is a retired poker champion. In her book Thinking in Bets, she makes this seemingly subtle point:

“Life is poker, not chess.”

What’s the difference between chess and poker?

In chess, all of the pieces are on the board, where both players can see them. There are no secrets. So winning and losing depends only on a player’s skill. But with poker, it’s the opposite, and that introduces a dimension of randomness to the outcomes.

This distinction—between realms in which randomness does and does not play a role—is important to understand. Investing certainly falls into the poker category, where random events can, and often do, occur. This is why Howard Marks reiterates so frequently that “you can’t predict.” But what can you do instead? Prepare.

How?

No one can see around corners, but you can structure your portfolio so your plans aren’t vulnerable to market downturns. In practical terms, that means an asset allocation that stows sufficient assets in more stable holdings. I prefer a combination of bonds and cash.

When the market is going up, it might feel like a drag to hold bonds or cash. The reality, though, is that market downturns always arrive without warning, so in my view, it’s a small price to pay to keep a part of your portfolio in the slow lane so it’s always there when you need it.