Poker: October 2007 Archives
I chose the title of this blog because two of my hobbies are poker and economics. In both fields, "expected value" is an important concept (I'm fudging here; it's very important in poker, and also well known. It's also pretty well understood in finance, game theory, and other business sciences, not all of which you would label "economics"). I suspect that for anyone wandering by this blog will be a collection of amusing ramblings and angry rants, but I hope that every once in a while a pleasantly useful (erm, valuable) piece of information might hop along.
I'm doing an MBA. In class today a great example of how business and poker are really the same thing Came up. Assume a random manufacturing company has costs for a project of $250000. They are considering how much to bet (um, sorry, bid) on the project.
| Bid | Winning Chance | Profit* | Expected Value |
| $600000 | 5% | $350000 | $17500 |
| $500000 | 50% | $250000 | $125000 |
| $400000 | 85% | $150000 | $120000 |
| $300000 | 95% | $100000 | $95000 |
*Really, this Contribution Margin, not Profit.
Note that the scenario where we only win the bid just half of the time has a greater payout than the one where we almost always win! This, at its core, is all you need to know to be a winner at poker. Ever hear someone say "it's not how many pots you win, it's how much money you win"? Ok, ok, there's a lot more, but once you really internalize this, you are well on your way. And, of course, the element of risk is captured here very eloquently. Notice that the element of risk is captured perfectly here, too. If you're a family-owned manufacturing company that's currently in the middle of a downswing then, hell, a sure-fire $95000 looks a lot better than flipping a coin to get $250000. But if you're a little software company owned by Paul Allen, then your mandate is probably to maximize EV and swing for the fences. This is all you really need to know to determine your poker bankroll requirements. To illustrate, your tolerance for risk in a $1/$2 no-limit hold-em game is a function of your bankroll. If you've got $35000 set aside in a bank account that's just for playing poker, well, your risk tolerance in this game is very high; you're not likely to take any actions that lower your expectations, such as buying insurance when you get all-in as a favorite.
Of course, there are dozens of ways that poker and business (finance, economics, etc) are similar, but these are my two for the day.
