Forward thinking is key for both chess and money management.
Not only is that the basis for Susan Polgar’s and my book, but it was the topic of a conversation I had with Professor Harry Markowitz, Nobel Prize winner and father of Modern Portfolio Theory.
What it takes to win
Winning a chess game requires having a plan and executing it on a constantly changing field. Winning the financial game requires having goals and creating a financial plan that will achieve them, while accounting for unknown market volatility that will occur years in the future.
Yet, it is not enough to have a strategic plan and be able to execute it… otherwise there would be more chess grandmasters and more millionaires in the world.
This is what happens when a Nobel Prize winner analyzes a game of chess
One of the main differences between a grandmaster and a recreational chess player is seen in the forward thinking skills they employ during play.
Needless to say, when I played chess with Grandmaster Susan Polgar, I lost. Professor Markowitz analyzed why:
“…try to think through the long-run consequences of a move. So we play the investment game or the trading game one move at a time, and we have to think forward. We use Monte Carlo to help us think forward, and good happens because of it. So that is like chess. Susan was able to think more moves forward and about more paths than you’re able to.”
From here, it appears that the key to winning is strategic forward thinking. However, this does not mean thinking tens of moves ahead and then locking yourself into your strategy, because no one can ever completely second-guess an opponent. A great chess player is able to see two or three moves ahead and gauge the other side’s strengths and weaknesses on the board. As the game progresses, the grandmaster continues to think ahead, step by step, adjusting strategy accordingly. The same applies to investors, who use Modern Portfolio Theory to assess their moves and strategy, but tweak the plan if market conditions appear to demand it.
To listen to our discussion of Modern Portfolio Theory as it applies to chess, click here.
Douglas Goldstein, co-author of Rich As A King: How the Wisdom of Chess Can Make You A Grandmaster of Investing, is an avid chess fan, international investment advisor and Certified Financial Planner (CFP®).
