I have a suspicion that over recent weeks and months you have become aware of a puzzle called Wordle. A simple, web-based word game that has become staggeringly successful since its October 2021 launch; so much so that the New York Times recently purchased it for a seven-figure sum. Both the structure of the game and its rise to popularity provides timely reminders of some crucial investment lessons:
1) Most activities are a combination of luck and skill: Like investing, Wordle is an activity that combines luck and skill. There are approaches that can be adopted to improve our odds of success (the word we choose to begin with, for example), but they don’t guarantee a good outcome. In any given game a statistically supported and robust approach can be outdone by someone starting with the word ‘toast’ because they were playing whilst eating breakfast. Over time, however, good decision making should win out.
2) How we start matters: Our fortunes in a game of Wordle will be heavily dependent on how we begin. A poor choice at the start, or some bad luck, will have a significant impact on our end results. Investing is about making sensible decisions at the beginning and sticking with them.
3) The usefulness of new information depends on the environment: Wordle is a small, stable game with a limited range of outcomes, where the new information we receive improves our chances. Investing is vast, chaotic and uncertain. We can never be sure what information is relevant, or how to apply it. How helpful new information is depends on the environment we are in.
4) Going with our gut is probably a bad idea: Once we know some of the letters and their position, we will inevitably get an instinctive reaction as to what the correct word is (we might call this a system 1 response). Following how we feel rather than working to a plan will probably lead to poor choices and inferior outcomes.
5) We don’t like missing out: We are social animals. We want to do what other people are doing and hate to miss out. This applies to the puzzle game that everyone is playing and the latest investment craze.
6) People enjoy showing off their successes: A key element of Wordle’s popularity is the ability to share our results on social media. Much like investors (selectively) lauding their investment performance on Twitter, we find it hard to resist highlighting our wins.
7) It is difficult to predict fads and fashions: Is Wordle significantly and obviously better than every other word puzzle game available that has not gripped our attention in the same manner? Probably not. Its resounding success is likely a result of a confluence of unpredictable factors such as timing, narrative and social connections. That is not to understate the attractions of the game, but in a parallel universe it may never have captured the public’s attention. We cannot hope to predict what games, stocks or themes will grab our imagination in the future, nor when the enthusiasm will abate.
8) Simplicity is powerful: The beauty of Wordle lies in its simplicity. It is easy to understand, has broad appeal and is quick to play. Achieving this type of simplicity is incredibly difficult. Its realisation was perhaps aided by the fact that its creator initially designed it as a game to play with his partner – it wasn’t intended to be a product to monetize. When we are designing something with the aim of selling it, we often have a bias towards complexity to prove our sophistication, evidence endeavour and ward off the threat of competition. This is certainly the case in investing where simplicity works, but complexity sells.
9) Costs matter: Wordle is (currently) free, it is almost certain that its enormous popularity would not have occurred had there been a charge to play. Costs are a critical factor in success.
10) Games are meant to be fun; investing isn’t a game: Although there are ‘optimal’ approaches to solve Wordle that improve our probability of a quick win, it is fine to ignore them. Wordle is a game and supposed to be enjoyable. Taking a studious and deliberate approach will suck the joy out it for many players. We should be happy to just go with how we feel. Contrastingly, investing is not a game and if it gets fun or exciting, we should start to worry. Unlike Wordle, taking a boring, evidence-based approach that gets the odds on our side is always the right thing to do.