Winner's Games and Loser's Games

A lot of games aren’t won by winners — they’re lost by losers. At any given time in life, it’s essential to know which kind of game you’re playing. And sometimes it’s a mix of both, for completely unique reasons.

I very much enjoy a 1975 article, The Loser’s Game, written by Charles Ellis. In this article he applies the concept of winner’s game versus loser’s game to the world of finance. In the 1970s, the financial world was going through a weird phase. At the beginning of the decade, markets were tumultuous and unattractive. Nobody was really winning. And by the middle of ‘70s, markets were lower than where they had started in 1970. That doesn’t often happen over 5-year periods.

The 1970s were the beginning of the age of institutional investment management. What we now know as the hedge fund. The beginning of the age when the entire market is dominated by organized forces rather than by disorganized buyers and sellers acting independently.

And over the course of the decade, everybody started playing. And then… everybody started playing the same games with the same stocks for the same reasons. And then… smart people like Mr. Ellis recognized that the stock market was no longer a good place to try to be a winner. Because everybody was playing the same game. Because, if you’re doing the same things everybody else is doing, there’s no meat left on the bone. All of the advantage has been captured and monetized.

Ellis’s point is this: it doesn’t matter how brilliant you are if your foundational assumptions are wrong. Too many “brilliant” investment managers were chasing the same returns on the same stocks, because they still thought it was possible to beat everybody else like it was in the ‘60s. But it really wasn’t possible anymore. The very foundational assumptions these money managers were using were faulty. The game had changed.

In other words, it doesn’t matter how well you can play a game if you don’t even know what game you’re playing.

Of course that essay won’t resonate with everyone, since it’s about finance and not everyone’s interested in finance. So I want to illustrate with some examples of my own what he meant by winner’s games and loser’s games.

My favorite example from Ellis’s article is about tennis.

For amateur tennis players, tennis is thoroughly a loser’s game.

Why?

Because points are not earned, they are given away. The match is decided by the actions of the bigger loser. Both players will have trouble keeping up with the ball, have trouble getting back into good position after each shot, and have trouble just putting the ball in bounds across the net. It takes all of an amateur’s energy just to return the ball 7 times a in a row.

Whoever screws up the most gives victory to the other player.

Only once you become a pro does tennis become a winner’s game. Only then is it about placement and spin and catching your opponent out of position. Only then is tennis played with the micro-second precise decision making of a world-class athlete.

As a pro, you take victory. It is not usually given to you. The match is determined by the actions of the winner, not the actions of the loser.

Let’s revisit the world of stocks, but from a civilian perspective that I think we can all appreciate (after the last few years).

When the stock market is down, and scary, and uninteresting… counterintuitively, it’s a winner’s game. 2002, 2009, April 2020. Because it’s the opportunity for people to buy stocks and then hold them for a long time (the way we’re supposed to). It’s the opportunity for people to get back to the front of the line and play a game no one else has the grapes to play.

But when the stock market has been going up for 8 straight years, it becomes a loser’s game. Why? Because everybody is participating — all of the people who are coming to the party are already here. There’s really no one left to keep pushing the market higher.

That’s not to say that it can’t go any higher — that it can’t go up for 9 or 10 years instead of 6 or 8. But it does mean that a selloff is coming at some point. Maybe soon. And some people are going to get hurt very, very badly, because they showed up too late. And the whole idea is to make sure that you’re not one of those people.

If you come late to a house party, you might find that there’s actually no fun left to be had. There’s just people puking and people who will soon puke, and people shuffling out after having their fill, and all the booze is gone. All you’re doing at this point is risking getting mugged or losing something on the way home. Virtually no upside, virtually all downside. This is the same way the average person ought to see the stock market. If you’re too late, you probably just shouldn’t play. Sure the rule that “investing long term is always good” still applies, but your timing could not be worse. And timing matters.

Again, why?

Investing $20,000 at the top of a bull market and then watching it go back down to $8,000 is unbelievably painful. Not only because it’s emotionally hard to deal with, and your wife is going to murder you with an axe, but also because it means that you might not even get back to flat for another 5 or 6 years. And only then can you start accumulating gains. That’s why timing matters. The risk-to-reward ratio is just too high when you’re the last one to a party.

When your mother-in-law asks you how to buy stocks, the stock market has become a loser’s game. And it will remain a loser’s game until the next crash.

When my family started asking me questions about crypto, the top was days away. Crypto had (at least temporarily) become a loser’s game.

That’s the interesting thing: any game can fluidly go back and forth, and can be both at the same time.

Look at Major League Baseball. There is a reason that Hits and Runs, as statistics, are accompanied by Errors and Earned Runs Allowed. It’s because in baseball, even at the highest level, the mishaps can give away games just as easily as the bat can win them. It doesn’t matter that you have 3 possibly performance-enhanced brutes on your team who can hit the ball across the county line, if your fielders can’t pick up the ball. You’re probably going to lose.

And it can even go back and forth with different players and different teams. There’s also a reason that chess champions prepare for specific opponents weeks or months in advance. It’s because they don’t want to be the guy who wasn’t ready for something their opponent was likely to do. That’s just careless.

Some opponents you're pretty sure you can beat by playing really aggressively. Some you're pretty sure you can outlast with psychological endurance. With some, you worry that their level of aggression is way higher than your own — and so you have to defend and count on them making a mistake. In other words, you have to try to put them into a loser’s game.

In modern chess, if you treated every opponent the same, you'd never become a champion. You’d have no chance. You have to know what game they're playing and what game you're playing. Both. Because you have to understand to what extent the match is yours to win and to what extent it is theirs to lose, and in what precise ways, and why.

The kind of game you're playing can change based on incentives and rewards, social pressures, timing, and even who you're playing with.

The kind of game you're playing evolves as the players and the context evolve. This is why professional gamers use the words "metagame" and “meta” as part of their regular vocabulary. They have to play with heroes or guns or strategies that are useful based on what everyone else is up to. They have to play the game that exists above the game itself — the game that exists outside the computer. The meta-game. The game of knowing what everyone else has been up to lately inside the game, and how to best exploit that or prepare for it.

On the other hand, the British found out the horrible way that Standing on the Battlefield Like Gentlemen during the Revolutionary War was a loser’s game. Because the American colonists resorted to tactics the British couldn’t even conceive of, let alone defend against. For the colonists, the war became a winner’s game. Through creativity and deception. For the British, not so much. They didn’t understand what the colonists were even up to until it was too late.

Most wars are not won with straightforward strategy and raw numbers. They’re won because one side did something (or a series of somethings) that the other side couldn’t have planned for. Sun Tzu told us “all warfare is based on deception.” And I think that’s true. At least all good warfare.

There are two ways to win in war: turn it into a winner’s game without the other side knowing; or simply refuse to engage when it’s a loser’s game, until you’ve found an advantage to exploit or until your opponent makes huge mistakes. If you can stick to this, you have a good chance.

But now back to simpler examples.

Going to college? That might be a loser’s game at this point. You’d probably have a better financial (and emotional) future by learning how to weld.

Having a good financial future in the first place? Well, that can be a winner’s game if you plan on starting a business or becoming a long-term investor. But at its most basic level, personal finance is a loser’s game. It’s yours to lose. By spending too much money on things you don’t need to be spending money on. If you can avoid worthless expenditures for ten years, you can turn it into a winner’s game. But you can’t skip those ten years and magically get rich one day. Most people can’t, anyway. And those who do haven’t learned their lesson.

If you ever played Four Square on the blacktop as a kid, that was a winner’s game. Because the skill floor was low and the skill ceiling was also low — in other words, it’s impossible to get dramatically better than other people, because there’s such a limited set of skills that go into the game. It was a very amateur-friendly game. The barrier to entry was basically just a few friends, and you could get good at it in a couple of weeks.

This is also why board games are designed to be winner’s games, not loser’s games. There’s an old piece of developmental psychology wisdom: in order for a child to have fun playing a game with you, they have to win at least 30% of the time. Otherwise they lose interest. Most board games are designed so that it’s basically impossible for any given player to lose all of the time. There’s just enough luck, and just enough guard rails around runaway progress, to even the playing field.

If you design board games so that children can get good at them and beat their much older and much more mature parents, the children will want to buy them and play them. Because they are winner’s games. They’re designed to allow winning with a reasonably accessible set of skills.

Boxing is a winner’s game that turns into a loser’s game over the course of the fight. The first few rounds you can beat your opponent with the right punches and the right movements. The last few rounds when you can barely stand up anymore, you’ll often end up beating yourself. Because you just don’t have the energy to fight smart anymore.

Texas Hold ‘em, pre-flop, is a loser’s game. Because you can give away your whole chip stack buying into hands you have no business in. After the first cards are shown, it’s a winner’s game.

Bungee jumping, although exhilarating, is a loser’s game. You can’t win. You can only survive or lose.

Obviously there are a million ways to win in life and a million ways to lose. But it’s important to keep your eyes on what kind of game you’re playing, with whom, and why. Because it might help you sit still at the right time and take action at the right time.

Drink some water and be smarter than the other guy,

JDR

“During the gold rush, it’s a good time to be in the picks and shovels business.” - Twain allegedly, but probably not

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If you want something else to read, check out one of my favorite Square Man pieces: The Non-Expert Opinion.