Business Is A Poker Game

In Poker Is Good for You David Sklansky and I wrote “Poker teaches you how to cope with losses because they occur so frequently. You lose far more hands than you win, and losing sessions and losing streaks are just normal parts of the game.”

In other publications, Sklansky discussed why and how poker helps us to handle losses:
Poker teaches us to focus on the present and future, not the past.

He recommends that before deciding whether to check, bet, call or raise we should:

• Count the pot’s total chips.
• Consider all chips as equal in value. Ignore how many chips we invested. They’re exactly the same as the other chips.
• Compute our current expected value (EV). What odds are we getting? What will it cost? What can we win?
• Base our decision entirely on our current EV. If it’s not a good bet NOW, don’t make it.

He applied the same logic to deciding whether or not to quit or keep playing. Realistically evaluate the game’s current EV. If it’s positive, keep playing. If it’s negative because the competition is too tough, we’re not playing well, or any other reason, go home. Whether we’re ahead, behind, or breaking even, play the same solid, unemotional game.

Irrational reactions to losses are more common and obvious in small games because weaker players are less disciplined and more open about their feelings. We’ve all heard and may have thought:

• “Since I’ve gone this far, I’ll keep going.”
• “I know I’m beat, but I call.”
• “I’ve got to get even.”

Whenever we feel that way, we’re heading for trouble.

Learning how to cope with losses is one of poker’s most valuable lessons for business people and everyone else. We all occasionally can’t handle losses such as business setbacks, bad marriages, or other “investments.” Instead of focusing on the present, we try – sometimes desperately – to protect our past investments. It often costs much more than the original decision.

Why Are We So Self-Destructive?

There are two main causes. First, we protect our egos by hiding our mistakes from others and – more importantly – from ourselves.

Second, we try to avoid the pain of losses. Barry Tanenbaum and Prof. Rachel Croson related Tversky’s and Kahneman’s Prospect Theory to poker. Kahneman won the Nobel Prize in Economics.

They wrote, “People feel much worse … losing a bet than they feel good winning one.” (Volume 18, #20) To reduce that pain, we deny reality and throw good money after bad.
Business Examples

William Norris, Founder of Control Data Corporation, had a pet project called PLATO, a form of computer-based training. He insisted it would become extremely profitable, even after years of losing money. He forced employees to lie, inflating revenues and burying costs, to “prove” that PLATO was making money.

Most employees had to take PLATO courses, they were reported as sales, and the “revenue” was credited to PLATO. Plans became creative fiction. If a salesman missed his quota, next year’s quota might be tripled, and sales were often overstated. Plato’s costs were assigned to other projects. Anyone who told him the truth was punished.

Because the accounting was so dishonest, nobody knows how much was lost, but estimates exceed $1 billion. Even more money was lost because Norris refused to accept and adjust to other realities, especially changes in computer technology and usage. When the losses became too large to hide, Control Data’s bankers forced him to resign, but it was too late. Refusing to accept and adjust to reality essentially destroyed a multi-billion dollar corporation.

The developers of the Concorde supersonic jetliner made a similar mistake. Fairly early in the development process, every objective, knowledgeable person knew it couldn’t be operated profitably and wouldn’t sell. Airlines don’t buy airplanes they can’t fly profitably. The only rational decision was to cancel the project.

Instead, they spent billions building a plane that nobody willingly bought. The French and British governments forced Air France and British Air to buy it, but they couldn’t operate it without huge government subsidies. Because the losses were concealed, nobody knows how much was lost, but it probably exceeded $3 billion.

Let’s take a positive example. Ed Ryan, Founder of Ryan Homes, wouldn’t hire or promote to a senior level anyone who hadn’t proved that he could accept and correct his mistakes. They’re inevitable in the construction business, and you must admit them and adjust quickly. He said that it’s not the million dollars you pay for a piece of property you mistakenly bought. You can sell it for a small loss. It’s the ten million you spend on roads, water, sewers, and houses trying to hide your mistake.

Political Examples

Richard Nixon was forced to resign, not for serious policy mistakes, but for Watergate, a pointless burglary. He was certain to win the election and didn’t need the stolen information.

We can’t know whether he planned or knew about Watergate in advance, but he tried very hard to conceal it. The cover-up destroyed him, not the burglary. Even Leon Jaworski, the Watergate prosecutor, stated that, if he had admitted his mistake, fired a few people, and burned the tapes, he would have survived, but he wouldn’t do it. (The Right and the Power: The Prosecution of Watergate, p. 272.)

President Clinton’s affair with Monica Lewinsky was an even tinier mistake. Historical records show that many presidents committed adultery, and JFK and LBJ were notorious womanizers. Besides, as Clinton’s approval ratings demonstrated, most people weren’t that troubled by his affairs. If he hadn’t tried to bury the truth with an escalating series of lies, the scandal would have quickly blown over.

Clinton was even more irrational than Nixon since his mistake was so paltry, and he had seen that Watergate destroyed Nixon. Some advisors certainly told him to admit his mistake and move on, but he couldn’t do it. He let this piddling affair cripple his presidency and become the centerpiece of his legacy.

Accept And Adjust To All Losses.

Losses occur for many reasons, not just mistakes. Conditions change rapidly in poker, business, and life. A third spade converts top set into a loser. An economic, technical, or personal change can transform an asset into a liability. Smart players objectively assess the current situation and make rational, future-oriented decisions. Foolish ones can’t do it, and they pay a high price for their shortsighted rigidity.

The same principle applies to business and life. It doesn’t matter why you’ve lost; you must base your decisions on the current situation. Just accept reality and cut your losses.

Remember, the chips you don’t lose have the same value as the ones you win. Knowing when and how to cut your losses will not only reduce your pain; it will also dramatically increase your win-rate. The important issue is not how much you win or lose on this hand or this session. It’s how much you win for your entire poker career.  ♠

After publishing five long, expensive poker books, Dr. Al, [email protected], has switched to short, inexpensive, eBooks. Stay Young; Play Poker and How to Beat Small Poker Games cost $2.99 at Amazon.com.