Market mayhem: Why poker players are better forecasters than economists

As a market mayhem unfolds across the world following the Trump tariff tussle, valuations guru Aswath Damodaran has an unexpected take: he says poker players might actually be better at forecasting the future than economists.

Looking for answers to the question ‘what next,’ Damodaran, who teaches finance at the New York University, writes that the outcomes of the tariff tussle could range from a no-holds-barred trade war, to a partial trade war and even a complete clearing of the air.

The Range Of Outcomes

In his blogpost titled “Anatomy of a Market Crisis: Tariffs, Markets and the Economy!,” Damodaran writes, “The effects on markets and the real economy will depend on how you see the tariffs playing out, with the outcomes ranging from a no-holds-barred trade war (with tariffs and counter tariffs) to a partial trade war (with some countries capitulating and others fighting) to a complete clearing of the air (where the tariff threat is scaled down or put on the back burner).”

More About Game Theory

To forecast what will happen next, the valuation guru says, “While you may be inclined to turn this over to macro economists, this is less about economics and more about game theory, where an expert poker player will be better positioned to forecast what will happen than an economic think tank.”

Three Types Of Reactions

In the blog, Damodaran also talks about three kinds of people that you may come across during such times. He writes, “ In the midst of every market meltdown, you will see three groups of experts emerge.”

“I Told You So” Group

Talking about the first of these he notes, “The first will be the "I told you so" group, eager to tell you that this is the big one, the threat that they have spent a decade or more warning you about. They will of course not let on that if you had followed their advice from inception, you would have been invested in cash for the last decade, and even with a market crash, you would not be made hold again.”

The ”Knee Jerk Contrarians”

Damodaran calls the second set “Knee Jerk contrarians” and adds, “they argue that stock markets always come back, and that every market dip is a buying opportunity, an extraordinarily lazy philosophy that gets the rewards (none) that its deserves.”

The “Indecisives”

Talking about the third set of people, Damodaran labels them the " indecisives." He says these are those “who will present every side of the argument, conclude that there is too much uncertainty right now to either buy or sell, but to wait until the uncertainty passes. There are elements of truth in all three arguments, but they all have blind spots.”