Dennis Riedel

This week we talk about poker and business. We therefore collect and comment sources that relate poker and some form of business. The author found materials mainly from investment people which are quotated in the following.

Investment – a game of incomplete information

Walter Pierson: “ain´t only three things to gamblin’: knowing the 60/40 end of a proposition, money management, and knowing yourself.”

“Knowing the 60/40 end of a proposition” means that you should know your odds. In poker this depends on the actual hand or draw which will have an influence on your decision to whether stay in or to get out. Regarding the odds there is then a comparable decision making process in investment where the pros and cons have to be evaluated; mainly by numbers, the odds.

Money management is important for financial decisions. Asking your financial personal advisor he will recommend you to spread your money over different investments, some classic and secure, some more risky but profitable, the one part in energy and resources, the other in research and technology. This should help to prevent big losses.

The poker player manages his bankroll in a way the also prevents him from big losses. His account is big enough to be prepared against a bad beat, loosing streaks and bad days. He will never enter the table with too much of his money to avoid huge losses and leave at a certain time when the winnings are high enough to avoid loosing them or starting to be “generous” by playing loose.

Therefore personality plays a big role:
David Nelson: “… skill sets for poker and investing are surprisingly similar.”
“… playing poker and the process of investing are more about how you make decisions.”
“In poker and in investing, ‘hope’ can be a very expensive word.”

David Nelson: “You can save a lot of money in poker and in investing if you know when to say adios. But the thing that works against us is that people want to hope and they hate taking losses. They are willing to seek risk to avoid losses.”

In poker it happens that players, after loosing an amount of money after going “All-in”, that they charge their account with the same amount again and try to gain back their previous loss.

You will start to look more for the short outcome of your play, trying to make money as fast as possible and trying to play hands which conflict with the 60/40 rule. You start to hope that the flop, turn or river will give you the hand you need to win or just that the others hand is not that strong as he might play it.

The same may be true for investment that, when loosing an amount of money, someone feels urged to gain back the money by hastily investing more money without a thorough decision making process.
Poker is all about decisions. Warren Buffett wrote, “As they say in poker, ‘if you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy!’”

David Nelson:
“Now the key to winning in low stakes poker is folding. If you’re playing an eight-handed game and the luck of the draw is evenly distributed, you’re going to have the best hand about one in eight times. So seven out of eight times, if you’re playing only your good hands, you should be sitting on the sidelines. People don’t do that. When you play once a month or every couple of weeks, people want to mix it up. They want to be in the hands and get the action and see what the next card will bring. So they will not fold to the extent that you need to because it’s no fun and it requires discipline and patience. You can see where I’m starting to head in comparing investing with poker. Successful investing is boring. It takes place over years of time and involves accumulations of wealth in periods of years and decades as opposed to minutes, hours and weeks. If you’re at the country club and you’re talking about the latest stock you bought, most people want to talk about the thing that went up $10 the last week. They don’t want to say, “I’m in a mutual fund and I think I’ll make 7%-8% annually until I retire and at that rate I’ll be able to achieve my financial goals.” But that’s the way you really should be thinking about investing-over a lifetime.”

http://money.cnn.com/2005/04/27/pf/poker_0505/index.htm

http://www.leggmason.com/billmiller/conference/illustrations/nelson.asp

Bill Miller from Legg Mason uses Kelly criterion (Kelly strategy or Kelly bet). Kelly criterion is part of mainstream investment theory.

http://en.wikipedia.org/wiki/Kelly_criterion

Poker and Entrepreneurship
Table and seat selection. You want to look for a fragmented market with a lot of different companies, holding not more than a one digit percentage of that market. Bigger and more established companies are there for a reason (success and professionality).
In poker you look for a table with a lot of fish (inexperienced beginners and loose gamblers).

Poker is a Zero-Sum Game
Robert Stewert: “Participants who win are exactly matched dollar for dollar by those who lose. (…) In the free market, unless you serve the consumer at least as well as your competitor, you will end up broke—this is known as creative destruction. In poker, unless you are consistently better than your rivals over a five-hour period, you will end up the same way.”

This “the winner takes it all” scenario is not really true for our actual market environment as we have different systems which somehow compensate the losers (social security, bailouts, etc.). That is why Robert Stewert elaborates on a free market (economy) scenario.

Imperfect knowledge
Robert Stewert: “In a free economy information is not free and is difficult to acquire. Government regulators, for example, always like to speak about uniform standards and processes, (…) What is needed is not uniform or standardized behavior but unpredictable behavior. (…) Predictable security standards at airports assure that some criminal will do the unexpected. So will those who are regulated, as the 2008 subprime financial crisis indicated. I’ll bet my house that it was a poker player who came up with structured investment vehicles, which were developed to get around regulators.”

http://www.thefreemanonline.org/featured/poker-and-the-free-market/