The Cashout Curse Myth

And here is what happened when they decided to cut loose.

Every once in a while, you find a gem where you don't expect it. Recently, I made an extraordinary find in the rec.gambling.poker newsgroup on Usenet. Now, frankly, I don't count on too much from rec.gambling.poker these days (nor any Usenet newsgroup, truth be told). An electronic town square is a beautiful thing, and I'm all for unfettered access to the cyber airwaves. But, of course, that means the signal-to-noise ratio (the number of useful, intelligent posts compared to drivel) can often be quite low.

So, imagine my surprise and delight when a poster identified only as "AJB4"wondered if the infamous "cashout curse"of online poker could be a bankroll issue. What an epiphany! To quote my colleague and friend Dan Goldman, "The only thing wrong with that idea is that I didn't have it."

First, here's a few words about the "cashout curse."It is one of those conspiracy theories that swirls around online poker like black helicopters hovering over a grassy knoll. The idea is that if you win a bunch of money at some online poker site and then cash it out, they punish you by flipping a switch so that you get clobbered in subsequent play. It is, in a word, silly.

Anyway, AJB4 suggested that a smaller bankroll leads to more panic if you lose a fixed amount of money. For instance, if you have $400 in your account and lose $100, you have lost 25 percent of your bankroll, and that would be worrisome, not panic-inducing. But if you had cashed out $200 of that, the same $100 loss would represent a 50 percent drawdown, and you'd be very scared. Perhaps you wouldn't play your best game, more losses would follow, and pretty soon, you'd be broke (or re-depositing).

Here's my slight twist on AJB4's suggestion: It's all about bankroll requirements. Gamblers, even those with positive expectation, are notorious for overbetting their bankrolls; that is, playing for much higher stakes than their bankrolls permit. Actually, as I study it, it occurs to me that only positive expected value gamblers could have this problem, since a negative expected value gambler (somebody who is statistically a losing player) needs an infinite bankroll to avoid going broke. Anyway, even those players who have a statistical edge routinely bet more than their bankrolls permit, and that is similar to actually not having an edge at all.

"How is that?"you wonder. Well, if you're playing a betting game in which you have an edge, but don't have a big enough bankroll, your probability of ruin – the chance that you're going to go broke, even with an edge – is very high. Here's an example: You have a net worth of $100,000 (conveniently, all in cash). Somebody comes to you and says, "I will make the following bet with you: I will shuffle a deck of cards and turn up the top card. If it's red, I will pay you some amount of money. If it's black, you will pay me the same amount of money."Well, unless you just like to gamble, you'd have no reason to play. The expected profit/loss for each of you is zero. But now he says, "Actually, I'm a little crazy, so I will remove the black kings and black queens from the deck."Whoa! Now you're a 13-11 favorite. You're thinking, "I've got an 8 percent advantage (54 percent to 46 percent) in this bet – something that would have casino owners drooling."So, you reach for your wallet, and he says, "But only if you're willing to bet $50,000 per draw, and we play 20 times."Oops! If you play this game, he is better than even money to bust you before you build your bankroll big enough to safely play the game. Astonishingly, you must have a $400,000 starting bankroll (eight bets) before your chances of going broke during this game drop below 5 percent.

So, let's get back to your online poker playing. A well-known rule of thumb is that you need 300 big bets in your bankroll to survive the inevitable downswings. If you're playing $5-$10 hold'em, that's $3,000. If you're playing $3-$6, do you have $1,800 in your account? And remember, we're stipulating that you're a winning player. But when you are violating bankroll requirement "rules,"you are flirting with hitting a bankroll size of zero, from which you can't recover without investing more money.

Given that most poker players are overbetting their bankrolls to begin with, what do you think happens when they cash out? They are putting themselves even more at risk. So, you're playing $5-$10 on a $1,000 bankroll, and are already at a relatively high probability of ruin. You win $500, so now you've got a lower probability of ruin because your bankroll has grown. But if you withdraw that $500, you're back to a $1,000 bankroll and the same higher probability of ruin at which you started.

Furthermore, if you keep doing this, you guarantee that you'll go broke. Perhaps you have a 25 percent probability of ruin when starting to play $5-$10 on a $1,000 bankroll. But if every time you increase that bankroll you withdraw funds to bring it back to $1,000, you will, with absolute certainty, sooner or later (and probably sooner) go broke. Then, we'll be reading your "cashout curse" post on RGP.

Manage your online poker bankroll as you see fit. But, if you don't maintain sufficient funds in your account, constantly withdraw when you make a profit, and then go broke, look in the mirror for the cause; it's not a conspiracy of online poker sites.

Go on, take the money and run.