From the Felt to the Boardroom-Absolute vs. Relative Costs

When my car died at Foxwoods last winter, I decided, against my better judgment, to bum a ride to Atlantic City from a woman named Gretchen, who had just lost two dimes. Her loss had nothing to do with luck; this woman made even the biggest of fish look like The Cincinnati Kid.

It was after midnight and the windchill factor was 20 below. I was driving Gretchen's Lincoln, and when she asked me to fill it up, I drove right up to the full-service bay. "Oh, no you don't," Gretchen said. "Get out of the car and start pumping, boy." To this I said, "You'll call 80 cold when you're drawing stone-cold dead, but you can't fade the extra quarter for full service?"

How many people do you know who are so frivolous when it comes to the big things, and so anal when it comes to the small stuff? In life, it's called being penny-wise and pound-foolish. In business, it's called micromanaging. In poker, it's flat-out bad strategy.

You'll hear tight players boast about all the money they saved from not paying off bets on the river. If the pot is $400 and it's $20 to call the final bet, there needs to be only a one in 20 chance that your opponent is bluffing to make calling the right play. Rarely is it correct to fold in this spot, and the players who do are the ones concerned with saving bets, not making money. They're comparable to a salesperson who doesn't want to spend 50 bucks to take a prospect out to dinner when it could lead to a thousand dollar commission. If there's a one in 20 chance of closing the business, they're missing an opportunity.

Or, how about when you refuse to pay $3 for a soda from the minibar at a hotel, but you had no problem spending $99 rather than $79 for a room in a hotel that's only a block closer to the beach? "What's another 20 bucks a night when the whole vacation is going to cost me a grand?" That's what you said when you booked the room, but all of a sudden, you won't overpay a little for a soda. In economics, this is called anchoring. Anyway, it's ridiculous, since your money is all one big pile of cash. Don't think about costs on a relative basis. Think about costs on an absolute basis. Money is money.

So often you'll see a poker player make a bad call and say, "What's another 30 bucks when I'm already stuck three dimes?" Yet, that same player will drive all around town trying to find the cheapest gas station. I want to scream, "It's all one big pile of cash!"

I probably get this from my mom, who hates gambling and has yet to be convinced that poker is a game of skill and not a game of chance. Her distaste for gambling started 20 years ago when she was in Vegas and went out to dinner with a group of friends, including a high-roller named Wayne. Wayne would bet a dime on a hand of blackjack, but couldn't decide whether it was worth it to spend an extra 15 cents for cheese on his burger. You see, the hamburger was $3.25, but the cheeseburger was $3.40.

My mom got so annoyed that she finally asked him, "How can you throw around thousands of dollars on the blackjack table but can't spend 15 cents on a lousy piece of cheese?"

Wayne thought this was a fair question, and replied, "What you don't understand is that when I'm playing blackjack, it's an investment. I'm putting my money at risk to earn more money. But when I consume that piece of cheese, there is no possible return on my investment, except maybe heartburn."

My mom didn't buy the argument and still thinks that Wayne is clinically anal. And while most nongamblers would tend to agree, it's easy to see both sides of this argument. From my mom's point of view, putting forth that much thought over 15 cents is ridiculous. From Wayne's point of view, there is a considerable difference between consumption and investment.

In business, concentrate on the big decisions. If you require five bids and five signatures for paper clips, you are micromanaging and wasting time. But when you're ready to build a new factory, you'd better get three or more bids. And when it's time to buy insurance, don't assume that your buddy from the club is giving you the best deal. Getting competitive bids is the surest way of finding the best deal.

At the poker table and in business, think about costs in absolute terms, not relative terms. And if you can't fade the extra quarter for full service when it's 20 below, it's time to stop drawing dead.

Greg Dinkin is the author of The Finance Doctor (www.doctordink.com). He is also the co-founder of Venture Literary (www.ventureliterary.com), where he works with writers to find publishers for their books and producers for their screenplays.