Business School at the Poker Table — Part 1
Most of my analytical process is drawn from poker theory. That sounds strange but I’ve spent years analyzing and optimizing literally millions of poker hands. My deepest knowledge base comes from poker, a partially random game for which I’ve studied statistics, economics, game theory, and Mathematics to improve at. While playing online with a dozen games open at once, decisions and calculations have to be executed in seconds to move on to the next decision in front of you. Because of this, my first statement rings true — To me, every decision is a poker hand.
The most fundamental principle in poker is Expected Value. You don’t need to understand the poker background but it’s here if you like:
Your EV is the average expected outcome of a decision. If that decision played out a million times, randomness is not a factor and you will know if you made a profitable play.
In this example, assume we know our opponent has a pair of Jacks and we have no pair. He bets $20 into us and we have to make a decision. Our odds to improve to a hand that wins here is 61%. For that $20 bet we can expect to win:
$20*0.61 — $20*0.39= $4.40.
Every single time we make this decision we might win $20 or we might lose $20. But over a large sample size, every time we make this decision we profit $4.40.
Now lets apply this to the real world. I borrow a phrase from poker legend Phil Galfond, your Expected Happiness or Real Life EV. An opportunity arose for SewnR Consulting to develop a virtual reality project. At the time, the company had no professional grade VR equipment, so we weren’t equipped to handle the technology. Using some reasonable assumptions, let’s decide how to move forward.
Hypothetically, let’s say upfront costs were $1,000 and the project yielded $15,000 profit. If the odds of success were meager, even as low as 15% this is still a profitable decision.
0.15*$15,000–1.0*$1,000 = $1,250
Moving forward with the project will net $1,250 given the risk versus reward.
Everything is a poker hand. You perform this sort of logic already and I’ll bet you aren’t as precise as you could be. That meeting, that sales pitch, that instance variable…it could work out. It might not.
“Here’s what I know right now and how it affects the outcome.”
That’s what you should ask yourself every few seconds until it becomes second nature. I’m not saying everyone should go and play 30 hours of poker per week to learn the secrets of life. I’m saying you already know them from your own experience. This is only mine; and it expands everyday from my encounters. Don’t waste your effort without learning from it.
(In the above example you might say there are other factors we didn’t include. Long term effects from the project’s success or failure: my company’s reputation or the loss of other opportunities while we’re tied up in virtual reality. That’s where we leave off for part two with Implied Value in Business.)