I first became interested in risk intelligence when I was teaching in a medical school. My students were very smart, but there was one area where they seemed to do very badly – estimating the chance that a patient had a given disease. They would consistently overestimate the probabilities; for example, they might say someone had a 40% chance of having pneumonia, when there was only a 20% chance. To help my students get better at thinking about probabilities and uncertainty, I turned to an unusual source: professional gamblers.
I spent the next few years interviewing some of the most successful gamblers in the world. These are people who earn at least a million dollars a year from gambling. I’ve noticed that they have several things in common, characteristics that distinguish them from unsuccessful gamblers, and indeed from the rest of the population at large
Some of these characteristics seem to be fairly hardwired. These people seem to be born this way, and you can’t necessarily get there by practice. Other characteristics, however, are habits that can be acquired by hard work. So there is hope even for those of us who aren’t natural born gamblers. We can at least learn from those who are. And this learning can affect the bottom line.
Not rain man
The first thing that struck me about the gamblers I interviewed was their facility with numbers. I don’t mean that they were mathematical geniuses. One or two were, but most had no great knowledge of math. They were all, however, comfortable with numbers. It was largely an emotional thing; numbers didn’t scare them. And though their algebra might be nonexistent, their basic arithmetic was excellent. And that can certainly be acquired by sheer practice.
These men (for they were almost all men) were not highly qualified. Again, some were, but others had left school by the age of sixteen. It seems that formal education is largely irrelevant when it comes to gambling successfully. The skills for winning at poker or picking the right horse are not generally acquired in the classroom. To get good at gambling you have to go to the casino, or play for hours online.
One very successful Blackjack player I interviewed started his gambling career while at college in Las Vegas. He was bored by the classes and started skipping school to sample the casinos instead. He still graduated, because he was smart, but by the time he left college he had racked up many more hours in the casino than in the classroom.
The average IQ of the gamblers I interviewed was no greater than the average IQ for the population at large, but they were all what one might call “street-smart.” They had a kind of native cunning that many educated people lack. This can be crucial for making a living from gambling. It’s one thing to know basic strategy in Blackjack, which anyone can learn with enough study, and quite another to know when the dealer is sneaking a peak at your cards, which requires a knack for spotting a suspicious situation.
Skin in the game
They also had balls, if you’ll excuse the expression. They risked large amounts of money. They had skin in the game, and were prepared to back up a good strategy with serious cash. And this sometimes meant to going out on a limb, like an entrepreneur investing in a new idea.
When Jim (not real name) decided to get into horseracing, he knew it would take him a while to build a good model, so he raised several hundred thousand dollars from friends and put in another two hundred thousand himself. Then he moved to Hong Kong and spent two years developing the model without placing a single bet. All that time he was living off the investor’s cash, like a startup burning through its initial venture capital. Only when he was sure of his model did Jim start placing real bets, and before too long he was earning many millions of dollars per year.
To say that Jim had skin in the game would be an understatement. He was betting all his savings, not to mention those of his friends. He was prepared to take a huge risk if the payoff was right. And it was.
Fourthly, all the successful gamblers I interviewed were able to put their emotions to one side when making a decision. They weighed up the odds calmly and carefully. They did not get caught up in a surge of enthusiasm, nor discouraged by a run of bad luck. They stuck to their strategy despite the fluctuations of fortune, and only modified it when they identified a technical weakness.
Attitudes to winning and losing
This in turn meant they didn’t get nearly as much of a kick out of winning as your average punter. An occasional gambler plays for the thrill of an occasional payout, and shrugs off his or her losses. With successful gamblers, it is the other way round; the wins aren’t much fun, but the losses are painful. This is precisely why successful gamblers learn from their experience, while less successful ones don’t. When errors hurt, you strive to avoid them. When you just shrug off your mistakes, you are not so motivated to learn from them.
I remember sitting with a very successful sports bettor one day watching the horse races he had bet on. He hardly looked at the television, only sitting up occasionally when the results were announced. He was recording it all on video so he could watch it later if he wanted. He called most of the races correctly, but he barely even managed a smile when he chalked up win after win. Only on the few occasions when he lost did he show any emotion, and then it was a huge shout of anger. He would literally kick himself for getting it wrong. And then he would watch the videos of the races he had failed to predict correctly, over and over again, trying to figure out if this was just a random error, or whether there were some crucial factors he had left out of his calculations.
That’s not to say that successful gamblers don’t enjoy winning. It’s just that it’s a much less visceral thing. A rooky gets an adrenaline rush every time he or she wins. For an experienced professional, it’s more like a slow-burning cigar. He or she relishes the cognitive pleasure of beating the system, or outsmarting an opponent; more like a sophisticated Bond-villain stroking his cat than a fist-pumping football fan.
Discipline and hard work
The seventh trait that successful gamblers share is a talent for discipline and hard work. All the gamblers I interviewed spent hours gambling every day, almost every day of the year. They spent long hours studying too. Blackjack players studied different forms of the game, analyzing the subtle changes in basic strategy required by changes in the rules. Sports bettors built complex models to predict the odds. They were effectively scientists, only their research was aimed at making money rather than curing cancer or discovering a new planet. “We’re smart enough to work out how to win,” commented one gambler to me, “but dumb enough to think it matters.”
Successful gamblers also keep records of their bets, games, wins and losses. They study these records to identify their mistakes, and change their strategy accordingly. This also means they know exactly how far ahead or behind they are at any moment. If you ask a gambler how much she has won so far this year, and she replies, “Oh, about $2,000,” then she’s probably a bad gambler, and she’s probably wrong. If, however, she replies, “I’m exactly $1,403 ahead so far this year,” then she’s almost certainly a much better gambler.
This leads on to the last characteristic shared by successful gamblers; they don’t lie to themselves. They know when they are winning, and they know when they are losing. They don’t pretend they are ahead when they are not. They don’t kid themselves they are good something when they aren’t. They know their weaknesses, and don’t bet when they don’t have the required expertise. They aren’t big-headed and they aren’t vain. They are brutally honest with themselves.
Take the famous Irish gambler JP McManus for example. As a teenager, JP worked as a farmhand and labourer, but would head off to the bookies as soon as he finished work at noon on Saturdays and spend his meager weekly earnings betting on horses. He wasn’t very successful at first, but unlike most gamblers, he learned from his mistakes. After building up a fortune from betting on horses, he applied his risk intelligence to a different kind of gambling - trading currencies on the foreign exchange markets. His personal fortune is now estimated at over one and a half billion dollars.
The thing that most struck me about JP when I interviewed him in 2011 was his willingness to admit his blind-spots. “I know what I don’t know,” he said. For example, when playing backgammon, he would make a few deliberate mistakes to see how well his opponent would exploit them. If the other guy played well, JP would stop playing. That way, he didn’t throw good money after bad. In other words, JP knew something that most ordinary gamblers don’t - he knew when not to bet. This turned out to be a common trait among the successful gamblers I interviewed. They all knew their strengths and weaknesses very well.
Recap
To recap then, there are nine characteristics that successful gamblers have in common:
1. They are comfortable with numbers
2. They tend to be “street smart”
3. They have balls
4. They are able to put aside emotion
5. They get less of a kick out of winning, but more pain from losing
6. They get a different type of kick out of winning (more cognitive)
7. They have a talent for discipline and hard work
8. They keep records
9. They are self-aware
Some of these traits are easier to acquire than others. If you are one of those people who can do complex equations in their heads but can’t spot a pickpocket who’s about to steal your wallet, then you might never acquire the kind of “street smarts” that others seem born with. But record-keeping, and hard work, are evidently things that anyone can do if they put their mind to it. As with most things, practice is the key.
Risk intelligence
As I interviewed successful gamblers from around the world, and built up my picture of the characteristics they had in common, I began to wonder if there was a special kind of intelligence for thinking about risk and uncertainty – something that wasn’t captured by traditional IQ tests. I now think that there is such a thing. I call it “risk intelligence.”
For some people, the word “intelligence” suggests something innate and unchangeable. You are either born smart or stupid, and there’s not much you can do about it. This may be true for IQ, but it certainly isn’t true for risk intelligence. There are many aspects of risk intelligence that can be improved, given the right practice.
The key words are “the right practice.” This means not just gambling, but doing it systematically and learning from it. There are some people who gamble for years without getting any good at it because they never reflect on their mistakes. To practice gambling properly, you must take a few leaves out the book of the successful gamblers, and imitate their behavior.
These lessons, by the way, also apply to things are not often considered to be “gambling” at all. Decisions about financial investments, for example, or about buying insurance, can benefit as much from good risk intelligence as decisions about which horse to back in a steeplechase.
The most important thing to start with is to keep records. Each time you bet on a horse race or a football game, or play some hands of blackjack or poker, make a note of how much money you bet, and how much you won and lost. Keep other stats too, such as how long you spent gambling (so you can work out your hourly profit). Many websites can give you tips on what stats to record.
It’s not enough just to keep records; you have to study them too. Expert handicappers don’t stop thinking about a race the moment it is over. Instead, they reanalyze their handicapping after the race, trying to figure out why their predictions were wrong, or why a particular horse's speed was different from what they had predicted.
Learning from mistakes
Few of us make such good use of our mistakes. It requires patience, focus and a resolute determination not to be swayed by what psychologists call "hindsight bias." This is the universal tendency to think, when we encounter new information, that we really knew it all along, and to deny ever believing in something when we discover that it isn't true after all. I must admit that this is one of my pet hates.
The saddest consequence of hindsight bias is a diminished capacity for surprise. In order to be surprised, you have to be aware of the mismatch between the evidence in front of you and your previous expectations. If you deceive yourself into thinking that the evidence is, in fact, just what you had expected all along, you won't experience that curious mental jolt, that sense of wonderment at the unforeseen, which is both pleasurable in itself, and absolutely crucial if learning is to take place.
Records are useful here too because they prevent hindsight bias. It’s easy to say you knew it all along if you don’t have any records of your erroneous predictions. But if you’ve written down your estimates and forecasts in advance, you have to accept that you were wrong. And then you can begin to learn.
To conclude, then, successful gamblers share a number of characteristics that distinguish them from other gamblers and indeed from the population at large. These characteristics go a long way to explain their success. By cultivating these characteristics in yourself, you too can become more successful at both gambling and financial investment.
Dylan Evans is the CEO of Projection Point and the author of Risk
Intelligence: How to Live with Uncertainty (2012). He received his PhD from the London School of Economics and has taught at King's College London, the University of Bath, and various other universities around the world.