In Poker and Personal Finance, Here’s How a Small Sample Can Ruin You
By Dan Kadlec
December 7, 2017
Long-time readers know that I enjoy poker and value its many embedded money lessons. I have been part of a home game for years, and I have taken my shot in the big dance in Las Vegas-the World Series of Poker’s Main Event.
What does this have to do with financial literacy? Plenty. But I want to focus here on a simple lesson we often talk about in our home game: Don’t be fooled by a small sample.
The game consists of 12 tournaments a year to determine a league winner. In tournament poker, a dozen is a super small sample size. Winning the league one year doesn’t necessarily validate your strategy. The cards may simply have fallen right. Likewise, failing to win the league does not mean you are an inferior player. These things can only be determined after your play has been tested over hundreds of tournaments.
It is comparable to casino games like www.oxi.casino, where you can earn real money by investing the same. Poker, like online casinos, tends to offer numerous rewards and bonuses. Many people, including young students and working professionals, see it as an investment opportunity to make some extra money.
Young savers and investors would do well to understand the pitfalls of a small sample size. In fact, before planning to put their foot forward in these online tournaments they might do the necessary required research (probably, this guide can help if you are looking for the same), talk to experts, and then only may give their best. However, when it comes to inexperienced people, they are especially prone to interpreting a successful outcome as validation of a particular decision or strategy-even though the outcome may have occurred against long odds.
For example, a young investor may think stock picking is easy if the first stock she buys jumps 10% in a week. Yippee! Let’s buy more! But that pattern won’t persist. Eventually she will begin to understand how much she does not know about picking stocks-too often after loading her portfolio with terrible investments.
David Dunning, a psychologist at the University of Michigan, calls this “the beginner’s bubble” where individuals are ignorant of their own ignorance. This can be a costly state of mind, and yet it is all too common. This is one of the primary goals of financial education-to communicate to individuals that knowing what they do not know about money is perhaps the most valuable knowledge of all.
By the way, this is a central tenet of Warren Buffett’s. He calls it the circle of competence and argues that how much you know about anything is less important than…
• • •
…knowing when you have stepped outside your circle. Those who do not recognize when they have strayed too far from what they know may act from a sense of false confidence and make poor decisions. But if you can identify when you have crossed the line, you will seek answers first.
Over confidence in the money sphere is abundant. Writing in the Wall Street Journal, Jason Zweig notes a survey where 68% of people saving for retirement claimed they were familiar with their plan’s fees but only 25% had ever read the fee disclosures. What was the source of their confidence? Many don’t know what they don’t know.
Only 38% of individuals can answer five simple money questions correctly, according to another survey. And we are talking really basic questions. Take the quiz yourself. Something close to this abysmal success rate applies even among CEOs and other top corporate managers.
Yet when asked how they felt they performed on the five-question quiz, the average respondent overestimated their score. They did not know what they did not know.
Confidence about money is a tricky issue, not unlike Goldilocks and her porridge. Too much confidence leads to poor decisions. Too little confidence leads to inaction. But just the right amount of confidence-the perfect temperature, if you will-leads individuals to ask questions and with the answers take important actions on things like 401(k) contributions and paying down debt.
Financial confidence underpins “financial courage,” which is an important key to overall financial wellness, Mercer found. Only through financial courage does one confront their knowledge gaps and ultimately make wiser personal money management decisions, Mercer concluded.
This finding is changing the financial education landscape at many companies. If financial confidence, or courage, correlates with financial well-being-and it does-what employees may need more than any textbook knowledge of money is an easy and timely way to get the answers that they have the courage to seek.
Teachers, employers and policymakers might keep this in mind as they set a course to help individuals better manage their money. Classic financial education will always have its place. Indeed, it is one source of financial confidence. But what may be more important are tools that quickly steer an individual looking for answers. Such tools might include online resources like mymoney.gov and AskCFPB. They might include hotlines or one-on-one counseling.
For those who lack financial confidence, improvement is most likely to occur through baby steps-by making small financial decisions, and building courage gradually. Moreover, it can be more beneficial if you go through a few financial news or articles, and study other people’s strategies, for instance, a piece of news such as this – Acuris sold to Ion investment group could help you generate new investment and financial ideas, which you can implement in your life. Moreover, without proper knowledge, individuals may not gain confidence, especially if they feel overwhelmed. Coaching and accessible tools help them get past feeling lost, and small wins keep them interested in learning.
In a study, just 38% of individuals-including roughly a third of financial executives-answered all five questions correctly. These are staple questions that have been widely incorporated into financial literacy assessments, including the 2004 Health and Retirement Study and the 2009 and 2012 National Financial Capability Survey. See how you do.
buy modafinil uk pharmacy Compounding Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
More than $102
Less than $102
Inflation Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account?
More than today
Exactly the same as today
Less than today
Diversification Buying a single company’s stock usually provides a safer return than a stock mutual fund.
Mortgages A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less.
Bond Pricing If interest rates fall, what should happen to bond prices?
They will rise
They will fall
They will stay the same
There is no relationship between bond prices and interest rates
How did you do? Answers: 1) More than; 2) Less than; 3) False; 4) True; 5) They will rise.