I’m still surprised how similar the investment world is to the poker world – and how the people within those worlds are seemingly cut from the same cloth. But to some extent they play the same “risk versus return” game. And while each set of players knows that probability and odds factor strongly in their result, they are also keenly aware of the psychological factors at work. The ability to understand the psychology of their opponents, as well as their own individual state of mind, is paramount to both poker player and investor.

I was focused on this thought as I got into a co-worker’s car at lunch time last week. Delicately moving the used syringe and high-dollar sun glasses from the passinger seat, I slid into the car for what I knew was going to be a short lunch – but a long ride. He’d made a couple of bold moves in the market, well researched and objectively analyzed. But bad beats happen – and sometimes they keep happening.

I’ve seen poker players suffer a prolonged string of bad beats. In that vein, I remember that the 2005 WSOP for Richard Tatalovich was brutal and almost sureal. Coming up on the Series, he had a particularly nice run. Unfortunately life has a nasty way of regressing toward the mean. He was knocked out of event after event with the most outrageous bad beats – wtih each new bad beat more improbable than the last. After each ridiculous elimination, he would head for the mountains to meditate and mentally regroup. But sometimes you hit a streak that you just can’t overcome.

In 1969, Elizabeth Kubler-Ross introduced a psychological model for how people deal with the ultimate bad beat – terminal illness – and what is known today as the five stages of grief. In this model, people go through a progression of denial – anger – bargaining – depression – and finally acceptance. Poker players and investors go through their own progression – but it is slightly different. Ours wastes no time and starts with anger. But any good “player” moves quickly into acceptance as they wouldn’t still be a player if they didn’t. We definately go through a bargaining stage – the “just let me win one hand so I can get back to even” stage. But as the bad beats mount, tilt sets in. We lose faith in probability and odds. We wallow in the senselessness of it all. We doubt all.

As the Dow Jones Industrial Index plowed under 9,000 points yesterday, most investors were able to head into the last phase of their grief. It’s that last stage – one step past tilt – that poker players know so well. And it’s definitely not acceptance. It’s hard to actually find a word for it, but its akin to mental shock. It is marked by disassociation and the inability to react normally to stimuli – this is understandable as stimuli is no longer deemed to be normal. And strangely enough, the stage is also punctuated by very dark humor.

As I sit here this morning, watching the markets tank across the globe, I know that gallows humor awaits me at the office.

Photo credits:
1) AP, Richard Drew – the NYSE board showing the DJI close
2) Reuters, Mike Seeger – trader outside the NYSE
3) AP, Dita Alankara – trader at the Indonesian Stock Exchange after trade was suspended