Investing can sometimes feel a game of chess. Things follow some basic rules, but the rules are so flexible that an enormous amount of variation is possible. But when people play enough games, they tend to get better because they remember in the past that turned out to be successful. But in the investment world the rules are constantly changing, so how do chess players respond when you change the rules, and what can we learn about investments?
In 1996, former chess brandmaster Bobby Fischer Chess960 was published. It is an intriguing concept to help chess players train their mental flexibility. The idea is that the rules of the game remain the same and pawns remain in their usual position at the start of a game. But behind them the figures are randomly shaken. The only two conditions that must be met are that bishops must be on the opposite squares and the king must be placed between the tower to pour. If that sounds complicated, consult the screenshot below for an example of the starting board.
Example of a starting board of a chess 960
Source: Salant et al. (2025)
As you can see, this presents a wonderful parallel with investing, because the basic rules are known, but the concrete situation that is in control is unknown and new. Chess960 is indeed mentioned in this way because there are 960 different starting boards, much less than real-life variations on financial markets, but enough to perform an experiment.
A team of Northwestern University Asked for around 147,000 chess players from different skill levels to play these games from Chess960 and measured the quality of their movements. In this study they mainly investigated the opening movement because all chess players tend to remember opening movements. The difference is that more experienced and higher players have remembered more movements.
The graph below shows how often players chose a specific movement as a function of the quality of the relocation (based on the Centipawn -scaleWho measures the advantage that a player wins by making the move).
Frequency of chosen movements
Source: Salant et al. (2025)
A few things stand out in the graph. Firstly, better movements with a higher centipawn rating are chosen more often. Movements that are part of the remembered set of opening movements that a player has, however, are chosen much more often than movements that the player has not remembered. Secondly, movements that a player did not remember are selected less often than chance. And third, even the best possible movement that a player can make, but has not remembered, chosen less often than the worst possible movement that a player can make and remembers.
The latter is what the authors of the study call a memory premium. The lower costs for collecting a specific movement from the memory compared to analyzing the unknown situation fresh and without prejudice make us opt for suboptimal movements.
And as you may have guessed, I think that is what is happening in the investment world. People are often standard in Heuristics, where they do what has worked in the past. As Richard Feynman liked to say: “Similar problems have similar solutions”.
That works in the sciences where the laws of nature are unchangeable, but it does not work in situations where the rules change. As we know from Bergen of research into behavioral economics, Heuristics can take us astray as investors.
But what this experiment shows me is that there is a consequence: the better your memory of past events, the more options are immediately available to you when you encounter an unknown situation. And that enables you (at least in theory) to make better choices.
#good #memory #investor