Winner’s Games and Loser’s Games

In winner’s games, participants win through actions that require exceptional skill. In loser’s games, participants succeed by avoiding actions that cause failure.

This model was named and discussed at length in The Loser’s Game (Ellis, 1995).

Outside of Business

Ellis compared Winner’s Games and Loser’s Games through the lens of sports and other competitions, which are almost always a Loser’s Game when played by novices.

• In tennis, merely hitting the ball over the net and in bounds is often good enough to win
• Golfers who can consistently keep their ball in the field of play while their peers send shots wildly in all directions
• Casino gambling, where the house takes at least 20% of every pot, is obviously a Loser’s Game

Similarly, campaigning for elected office is a Loser’s Game: the electorate seldom votes for one of the candidates but rather against the other candidate. Professional politicians advise their candidates: “Help the voters find a way to vote against the other guy, and you’ll get elected”

An interesting wrinkle to these categorizations is that they can evolve over time. Tennis and golf become Winner’s games when played by professionals. Similarly, gambling becomes a purely mathematical Winner’s Game when a participant discovers a positive-expectancy strategy.

In Business

Industries can also shift over time from Winner’s Games to Loser’s Games.

Ellis argues that investing transformed from a Winner’s Game to a Loser’s Game as professional investors’ share of market transactions increased from less than 30% in the 1960’s to above 70% only ten years later as the money management industry matured and expanded.

The high level of competition for information, transaction costs, and occasionally liquidity make investing a game that can be “won” by doing as much as possible to minimize these headwinds and other sources of drag.

Letting your competitors defeat themselves echoes lessons from other mental models of business such as avoiding self-harm (Via Negativa), competition (Thiel), and “games” outside of one’s circle of competence (Buffett).

Advice

Adopted from Ellis.

Play your Own Game

Know your policies, principles, and competencies very well and play according to them all the time.

Admiral Morrison says: “Impose upon the enemy the time and place and conditions for fighting preferred by oneself.” Dr. Ramo suggests: “Give the other fellow as many opportunities as possible to make mistakes, and he will do so.”

Keep it Simple

Focus on building your strengths and exploiting them through repetition.

Simplicity, concentration, and economy of time and effort have been the distinguishing features of the great players’ methods, while others lost their way to glory by wandering in a maze of details.

Returning to sports metaphors: “Play the shot you’ve got the greatest chance of playing well.”… “Every game boils down to doing the things you do best, and doing them over and over again.”

Concentrate on your Defenses

Almost all of the focus in investment management today is oriented toward purchase decisions. It’s too hard to outperform the other fellow in buying. Concentrate on selling instead. In a Winner’s Game, 90 percent of all research effort should be spent on making purchase decisions; in a Loser’s Game, most researchers should spend most of their time making sell decisions.

Further Reading

From this series:

• “Circle of Competence” (November 2018)
• “Via Negativa” (July 2018)

The full article by Ellis is here.