Dynamics of Texas Hold 'em and Financial Markets

I recently started getting back into the wonderful poker game that is Texas Hold 'em. I used to play on and off, but only within the past few months have I begun to see the true beauty of the game. As a financial mathematics student, I already have an affinity for its many dynamics. My rudimentary thought is that poker is not unlike the financial markets. The inherent concepts and strategy of the game make it remarkably similar to trading in financial markets.

Making decisions in a poker game depend on several factors. Among others, this can include:

1. Current state - how much information you have at any given time about your table, the strength of your hand or current position.
2. Position - the position you are in and your current financial position.
3. Betting - the amount and timing of your bets into the pot.
4. Predictions - Your read on what other players are holding.
5. Implied odds/pot odds - the odds of your hand winning at any given time, and how much you can potentially win with respect to how much you bet.
6. Player psychology - making decisions based on how others generally react to certain stimuli, e.g. is on person likely to fold his hand if I raise, or should I slow-play this hand to maximize my potential profit?

All of this information forms an optimization problem that gives you an optimal decision rule at any given time. Based on your position at the poker table, at any given time, you have a certain amount of data. This data, combined with either your aggressive or passive stance determine your decision rules during the game. The rest of the game is more or less stochastic and depends on the cards dealt and the play of others. You then base your subsequent decisions using all of this information and this becomes an iterative process.

Does this not sound familiar? If you are trading in financial markets, your decisions are based on exactly these types of rules. Here's an analog to the rules listed above applied to investing:

1. Data - be it company financial statements, historical data and trends (technical analysis), insider knowledge, etc.
2. Position - Your current financial situation and deciding the optimal time to execute trades
3. Preferences - the type of security you want and the amount you'd like to invest
4. Market knowledge - determining what other agents in the market are doing
5. Probabilities - calculating if it is worth it to make a particular investment, and how to maximize the probability of profit
6. Market psychology - how markets react to certain stimuli, e.g., is there a herd mentality among agents?

People invest optimally by making decisions based on having this type of information. In poker, most players make decisions based on what is optimal to them at the time, and how optimal others are playing. I find it very interesting that agents at the poker table as well as in the markets are acting based on similar strategies. Of course, there is always a certain level of sub-optimal decision-making, and this is perhaps where arbitrage opportunities exist on a skill-based level. However, there is of course a certain level of stochasticity in the markets and during a poker game as well, which confirms an element of luck is involved to some extent in order to become profitable. Eventually, I would like to look more in depth into the dynamics of poker and financial markets. Interesting stuff, eh?