Hedging is for Tourists - Or is It?

Let's pretend you made a friendly wager on the Yankees to win the American League Championship Series against the Red Sox. With the line at +143, you bet $35 to win $50. When the series went to 3-0 and you had the clutch El Duque on the mound against the shaky Derek Lowe, would you bother to hedge by betting the Red Sox in game four?

If you're a true professional risk-taker, the answer to that question would simply be a function of your analysis of that particular game. One of the greatest lessons I learned from David Sklansky and Mason Malmuth is that poker is one long game. There's no such thing as quitting a winner or getting even. If you have a positive expected value (EV), play. If you don't, change tables or go home.

As a poker player, your EV is never a constant. After you lose your buy-in, in what seems like a good game, your opponents might gain a psychological advantage on you. And unless you're a robot, the quality of your play will likely decline. The opposite is true when you're winning, which is why the experts tell you that's the best time to play.

World Series of Poker Champion Amarillo Slim likes to say that he's never figured out how much he can stand to win, but always knows what he can stand to lose. Seventy-five years later, he's still a thriving risk-taker by continuing to play when he's winning, and perhaps more importantly, quit after a loss. He also likes to say that hedging is for tourists.

In life, situations often arise in which the correct "decision" is the one with a negative EV. Let's pretend you're one of those unfortunate souls whose significant other has you under her thumb. You go to Bellagio for a week and she proclaims that you're going to play one hand of blackjack for $1,000. If you win the hand, you'll be allowed to play poker as much as you want all week. If you lose or push, you'll be forced to attend seven consecutive 14-hour Amway meetings with your mother-in-law. So, you place your $1,000 chip on the table, look up, and, lo and behold, see David Sklansky and Mason Malmuth at your table. You're dealt blackjack, only to see that the dealer has an ace showing. "Even money?" he asks, and right away you feel the cold stares of Sklansky and Malmuth. Only tourists take even money, and the notion of even pondering a negative EV bet has you embarrassed. But then your instincts overcome your ego. You realize it's poker or Amway; take the even money and sprint to the poker room – the long run be damned.

Let's get back to baseball. How appropriate that Amarillo Slim had bet, in his words, an awfully big figure – something with some whiskers on it – that the Yankees would win the ALCS at +143. Without the value of hindsight, it's easy to see what he liked about the bet: The Yankees had home-field advantage, Curt Schilling had a bum ankle, and the Red Sox were up against 86 years of cursed history. And the Yankees were underdogs!

For Slim, I don't know if an awfully big figure is $3 or $3 million, but for the sake of analysis, let's pretend it was $350,000 to win $500,000. When the Yankees went up 3-0, should he have hedged?

Was your answer any different from the answer you gave to whether or not you should have hedged your $35 bet? If you're a professional risk-taker, your answer should have been the same: The decision to bet on game four has to do only with the analysis of that particular game. In fact, if you thought that betting on El Duque and the Yankees at even money had a positive EV, you should have done so.

If, however, you were viewing your betting on the ALCS as a single event, or if the amount of money at stake was life-changing, perhaps your advice to Slim would change. Bet $100,000 on the Red Sox in game four and you have one good outcome and one better one. If the Red Sox lose, you've walked away with a net profit of $400,000 for the series. If the Red Sox win, you've just won $100,000 and still have a $500,000 ticket that is likely to be cashed. (In fact, if you run in the right circles, you likely could have sold that ticket for north of $400,000 with the Yankees still up 3-1.)

Continue to play this out and you see that the best possible scenario would be for you to bet the Red Sox in games five and six. So, let's say you laid $150,000 to win $100,000 in game five with Pedro pitching against Mussina, and then bet $100,000 to win $130,000 in game six with a gimpy Schilling pitching against Jon Lieber. Now, you'd be up $330,000 on games four, five, and six, putting you almost even from your initial $350,000 investment.

Going into game seven, you'd almost be on a $500,000 freeroll. You'd have covered most of your costs of the initial bet and have a live ticket for $500,000. Again, what should you do? With the Yankees at -160, the value of a ticket that pays $500,000 for a Yankees victory would be $800,000. And even if you couldn't get someone to actually buy the ticket, you could bet $500,000 on the Red Sox at +150. If the Red Sox won game seven, your $750,000 win plus the $330,000 from games four through six, minus your initial bet of $350,000, would lead to a net profit of $730,000. If the Yankees won, you'd lose $500,000 on game seven, which would cancel out your $500,000 win from your series wager, leaving you with a net profit of $330,000. Of course, you could make many different-size wagers on game seven to hedge accordingly.

All of this sounds great and logical, but remember that as we started talking through all of these hedging scenarios, we lost sight of the fundamental rule of professional risk-takers: Bet only with a positive EV. "Scenario" and "freeroll" are dirty words; they imply that you're making a decision based on something other than EV. That's why Slim likes to say that hedging is for tourists. Then again, I don't know if he said that after the ball off Johnny Damon's bat was flying into the short porch in Yankee Stadium's right field – again.

As you make your way as a professional risk-taker, remember these three things: Build your bankroll so that you don't have to make decisions for any reason other than EV. Specifically for poker, don't play at limits above your means. And for life, decisions should be made by looking at factors beyond just EV – even if that makes you nothing but a tourist.

Along with World Series of Poker Champion Amarillo Slim Preston, Greg Dinkin co-authored Amarillo Slim in a World Full of Fat People, which is available at www.cardplayer.com. He is also the co-founder of Venture Literary, www.ventureliterary.com.