Is Trading A Game of Skill Or Chance Insights and Thoughts

Is Trading A Game of Skill Or Chance? Insights and Thoughts

ByOddmund Groette Trading strategies

Three german researchers have written a study called Is Poker a Game of Skill or Chance? A Quasi-Experimental Study. I was made aware of this article in Peter Warrens’s blog (only in Norwegian).

I totally agree with the content. Most traders have too much confidence and have too much ego. Overconfidence is a trader’s worst enemy. The element of randomness and luck are underrated.

Trading – Skill or Chance

When someone is successful we immediately rate them as very smart. However, there are so many players in the markets that it’s inevitable that a lot of the successful funds are just plain lucky.  Think about Long Term Capital Management – the geniuses that failed.

The conclusion from this research study was quite interesting:

……results showed that experts did not outperform average players in terms of final cash balance. Rather, card distribution was the decisive factor for successful poker playing. However, expert players were better able to minimize losses when confronted with disadvantageous conditions (i.e., worse-than-average cards). No significant differences were observed between the game variants.

My personal opinion is that this does not differ very much from the stock market. You have to manage risk in a proper way.

FAQ:

– How does the study’s conclusion relate to trading in financial markets?

The study’s conclusion can be applied to trading in financial markets, suggesting that traders must manage risk effectively. Similar to poker, where card distribution can determine success, trading outcomes can be influenced by market conditions and luck. Expert traders are better equipped to mitigate losses when faced with adverse situations.

– What is the significance of overconfidence and ego in trading?

Overconfidence and ego can negatively impact traders. Overconfidence can lead to risky decisions, while ego can prevent traders from acknowledging the element of randomness and luck in the markets.

– Why is it essential for traders to recognize the role of randomness and luck in their success?

Traders should recognize the role of randomness and luck to avoid attributing success solely to skill. Understanding that luck plays a part can help maintain a more realistic perspective on trading performance.

I’ve got an Msc from Heriot-Watt University, Edinburgh (1996), in addition a to a business administration degree the Norwegian School of Management (BI – 1994). Did my mandatory military service in between.

After university, I worked two years as an auditor (1996-1998).

I co-founded Aksjeforum.com in 1998/99 - one of the first websites about trading and investing in Norway. It was later acquired by Digi.no in 2001.

I have written 4 books about trading (in Norwegian). One of them has sold 30,000 copies, a record for a financial book in Norway.

From 2001 until 2018 full-time independent prop trader (Series 7 in 2001) and investor.

2018-today: Investor, writer, analyst.

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