Business Is A Poker Game: The Right Stuff, Part II

My previous column described “The Right Stuff,” the personal traits that separate the biggest poker and business winners from the wannabes. The primary driving force is ruthless competitiveness, an insatiable need to win. Without that intense hunger, they wouldn’t make all the sacrifices needed to reach the top of the poker or business pyramid.

That hunger must be balanced by extreme realism and discipline. They accept their limitations and make intelligent trade-offs, sacrificing less important goals to achieve more important ones.

Less extreme amounts of these qualities are needed to achieve any significant success in poker or business. You’re unlikely to beat any game unless you’re competitive, realistic, and disciplined. These qualities help you to make trade-offs which fit your priorities. This column discusses a few trade-offs you should make to win at any level of poker or business.

Fun Versus Profit

It’s the most fundamental trade-off, and the one which affects the most decisions. We’re defining “fun” very broadly as anything more pleasant than the hard work, study, preparation, and frustrations that the hungrier competitors accept.

The weakest competitors frequently sacrifice profits for fun, and the best usually choose profits, but nobody always sacrifices fun for profit. For example, it’s boring, but necessary, to fold preflop The weakest players see far too many flops, and the strongest see only a few too many.

We’re humans, not robots, and we all occasionally reduce our profits to increase our pleasure or reduce our frustration. Rational people make small sacrifices; irrational people make large ones. For more discussion of this trade-off, see my “Fun versus Profit,” at CardPlayer.com.

Risks Versus Rewards

Economists have often discussed this trade-off. To get higher returns, you must usually take greater risks. Poker winners understand and apply that principle, even without reading economics books. Poker teaches them that trying for higher profits usually increases their risks.

For example, higher-stakes games are generally riskier. As the stakes get higher, the games get tougher. Every good player is tempted to “move up,” but the smart ones soon learn to choose games they can beat consistently. They deliberately trade their chances for higher profits to get smaller, but safer, ones.

Most players are undercapitalized, and everybody’s variance is much higher than their hourly win rate. Because the win rate is much smaller than the variance, losing streaks are inevitable, even for excellent players. If you play above your bankroll, you can easily go broke.

The average win (in big bets or big blinds) declines as the game gets larger because the competition gets tougher. Since they win so little per hour, and volatility increases in tougher games, bigger games create a greater risk of going broke, even with a proportionally higher bankroll.

Winners sacrifice the opportunity for larger immediate profits to increase their chances to survive. They play at safe stakes, build their bankrolls, and move upward slowly. Losers — including some excellent players — refuse to make that trade-off, move up too quickly, and go broke.

This trade-off is just as important in business, but countless people won’t believe it. Many studies have shown that undercapitalization is a major cause for failure, and some authorities say it’s biggest one.

Countless owners and executives have ignored that research. They may have excellent products, market potential, and people, but run out of money. They start operating before getting enough capital, or they expand too rapidly, or overpay themselves, or invest too much in R&D, or do other things they can’t afford. Instead of growing slowly and safely, they go broke. Like poker losers, they often blame bad luck, but they just paid for their own mistakes.

A similar denial of reality has caused an unending stream of “get rich, no risk” schemes such as worthless land, phony stocks, revolutionary inventions, and can’t-miss franchises. Late-night television has many infomercials offering “risk-free” systems for becoming rich. Only fools believe that they can get higher rewards without taking greater risks.

Our most recent recession occurred because banks and their customers took foolish risks. Millions of people bought properties they couldn’t afford, and the banks loaned them money they could never repay. Wiser people urged caution and warned of previous debacles, but the losers didn’t listen. They believed what they wanted to believe, and it hurt them and the entire economy.

Ego Building Versus Profits

Many losers build their egos by doing foolish things, such as taking reckless chances to prove they are macho gamblers, criticizing weak players, and bragging about their brilliant plays. These actions make them feel good, but reduce or eliminate their profits. Winners forego this satisfaction to increase their profits.

Ego-building is just as common in business. In fact, some of the mistakes discussed earlier are ego-driven. Business people want to show off by expanding rapidly, introducing new products, building fancy headquarters, overpaying themselves, having lavish expense accounts, and buying expensive cars or corporate jets. These actions make them look successful, but weaken their balance sheets and have often caused failures.

Recommendations

This column has four recommendations, and the first is the most important and unpleasant.

1. Accept that trade-offs are unavoidable.

You won’t make optimal decisions without accepting this unpleasant reality: You have absolutely no chance to satisfy all your motives. You must sacrifice some to satisfy others. If you don’t plan your trade-offs, they’ll be made for you, and they probably won’t fit your priorities.

2. Understand your own priorities.

Since you have to pay for everything you get, you must understand the importance of various goals and how much you’ll sacrifice to reach each one.

3. Learn which trade-offs each situation requires.

Since each situation requires somewhat different trade-offs, learn what they are and relate them to your own priorities. You’ll win more in soft games, but won’t develop the skills you’ll need to move up and make more money. In tough games your risks are higher, and your short-term profits will be smaller, but you’ll develop important skills. A secure job may be boring or offer less opportunity for promotion, while an exciting job with great chances for advancement may be very risky. A job with short hours and easy work is unlikely to pay well or offer good promotional opportunities.

4. Make the trade-offs that fit your priorities.

Pick the games and strategies that offer the best combination of risks and rewards, short-term and long-term profits. Generally, pick soft games to build your bankroll, but occasionally choose tough ones to develop your skills. At work, you can select a secure market, company, department, or job, then adopt a high risk strategy advance your career. ♠

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