Yeah… I'm serious!
Rock Paper Scissors!
I know all the other trading educators are talking about poker and the lessons it provides in position sizing and trader psychology. I'd love to sound really cool as well and talk about No-Limit Hold 'em, or Aces over Kings, or all manner of other great-sounding terms. But the fact is that I don't know the first thing about poker. And I figure I'm not the only one.
So, here's one for all of us non-poker nerds… a game that everyone should know, which also provides an excellent lesson for traders.
If you're not familiar with Rock Paper Scissors, check out Wikipedia or the World RPS Society website. That's right… there is a worldwide body dedicated to the promotion of this game, the standardisation of its rules and to overseeing the annual International World Championships.
Essentially, Rock Paper Scissors is a game that is widely used for decision making or solving disputes. Two players simultaneously deliver a hand signal representing either a rock (clenched fist), scissors (as per rock, but with the index and middle finger extended representing the two blades of a pair of scissors) or paper (open palm facing down).
- Rock breaks scissors.
- Scissors cut paper.
- Paper covers rock.
Typically, in an informal setting the winner will be determined by the best out of three throws, although you may from time to time see a single throw, sudden-death game. If you aspire to attending the World RPS championships, the winner is determined by the best out of three sets, each set being won by the best out of three throws.
If you're confused, don't worry – personal Rock Paper Scissors trainers are available.
So, how does Rock Paper Scissors relate to trading?
Let's first examine the nature of the game. On the surface the result of each game appears to be random. Basically a coin toss, but with three outcomes instead of two – win, lose or draw. On closer examination though you'll recognize that the reality is much different. Unlike a coin toss, the outcome of each game depends on decisions made by the human participants.
And human decision making is NEVER random, particularly when there are high stakes involved.
Your decision about whether to throw rock, paper or scissors, will largely be influenced by your beliefs about your competitors decision. If you know what they're likely to throw, you'll adjust your throw to ensure it beats their choice.