Business Is A Poker Game: Managing Risks and Information

Risks are an inescapable part of poker, business, and life. The strategies of poker and business winners can help you to manage the risks you face at poker and work.

The essence of good risk-management is to get the best of it and then make the most of it.

• Get the best of it means discover or create situations which give you an edge.
• Make the most of it means act decisively to maximize the edge’s value.

Many poker players and business people don’t perform either task well.

Motives And Emotions

Risks arouse emotions, which can cause irrational reactions.

Risk avoiders are so afraid of risks that they’re indecisive. They procrastinate and overanalyze; it’s been called “analysis paralysis.” They believe they can’t make good decisions without all the facts, but you can rarely get them all.

Risk seekers enjoy risks and take unnecessary risks to get a “kick.” They don’t analyze situations thoroughly to get an edge and may not care. The popularity of craps, roulette, and other unbeatable games proves that millions of people want that kick more than they want to win.

Risk takers may look like risk-seekers and occasionally take similar actions, but they have different motives. Risk seekers want that kick and are willing to pay for it. Risk takers want to win, so they control their emotions, accept that risks are unavoidable and work hard to manage them well. Instead of seeking or avoiding risks, they thoroughly analyze the situation, select the strategy that gives them “the best of it” and act decisively to “make the most of it.” Over the long term, risk seekers and risk-avoiders are usually losers, while risk takers are usually winners.

Risk seekers and risk-avoiders look down at each other and use critical terms to describe the opposite type or anyone like them. Aggressive poker players – even rational, controlled winners – have been called “Maniacs,” and conservative ones – even solid, steady winners – have been called “Rocks.” Business people use equally contemptuous titles such as “Crazy Gamblers,” “Wimps,” and even “Little Old Ladies.”

Of course, only a few people are extreme. Like most human characteristics, risk preferences are distributed in that classic bell-shaped curve. But even moderate amounts of either emotional reaction can cause bad decisions.

You can see the effects of both tendencies everywhere. Risk avoiders drive slowly, take secure, low-paying jobs, and invest their money very cautiously. Their fears prevent them from accomplishing much and may actually increase their risks.

Millions of people put their retirement funds into insured savings accounts and government bonds, apparently “risk-free” investments. They learned too late that inflation prevented them from retiring. They’ve been forced to keep working, long after they hoped to retire, because their retirement accounts didn’t keep pace with inflation.

Some businesses “play it safe” by refusing to take the risks of expanding, investing in R&D, or buying new equipment. Some have gone bankrupt because their products or methods became uncompetitive. The small amount they saved by “avoiding risks” cost them everything.

The same principle applies to career-related skills. As millions of people have learned too late, if you don’t “risk” some of your time and money learning new skills, you may become obsolete and unemployable.

Risk seekers have the opposite pattern. They drive too fast, have dangerous hobbies, take high-risk jobs, and gamble recklessly in casinos, the stock market, at work, and elsewhere. Their love of risks can destroy them, but, if they get lucky or are exceptionally talented, they can become big winners.

The lesson is clear: To maximize your chances for success in poker and business, control your emotions, realistically analyze risks, and act decisively.

The Relationship Between Risk Management And Information Management

They are closely linked in poker, business, and other incomplete information games. There’s much less need to manage information when playing complete information games like chess and checkers. Every piece is clearly visible, and you know exactly what each piece can do. Of course, you still have to work to learn your opponents’ skills and strategy.

In poker you have much less information. You can’t see the other players’ hole cards; in business you often don’t know your competitors’ situations, strengths, and weaknesses. Since you can’t manage your risks well without that information, you have three information-management tasks:

1. Acquire information.
2. Analyze it because it’s useless if you don’t know what it means.
3. Control the information you communicate to your opponents. If you know more about them than they know about you, you have the edge and vice versa.

Risk-Assessment Principles

“Getting the best of it” doesn’t mean that you’ll probably win. Your chances for success can be quite slim. There are three critical issues:

• The probabilities of success and failure
• The amount at risk
• The potential payout

As you know, the combination of these factors is your expected value (EV)b. If it’s negative, you should pass. If it’s positive, you should usually take the risk.

EV In Poker And Business

Casinos win, and customers lose because nearly every bet is +EV for the casino and -EV for the customers. Good poker players win because they know how to make +EV bets. If you bet only when you’re +EV, and don’t bet when you’re -EV, you must eventually win. However, because there are so many unknowns, you can’t make only +EV bets.

Some business people don’t understand or use EV. You need accurate information to calculate it and may be unable to get that information.

When playing poker, you can estimate fairly accurately how much you can win or lose and the probabilities of both. In business you often can’t know how much you’re risking, how much you can gain, or either probability.

Lawsuits are an excellent example of the relationship between risks and information. Angry clients often tell attorneys, “I want to sue that SOB.”

Frequently, the attorney answers, “No you don’t.”

“Why?”

“Because it will cost you more time, money, and aggravation than it’s worth, and you can’t be sure you’ll win or how much you’ll get.”

“Why can’t I be sure of winning a big amount? He’s obviously wrong.”

The lawyer than explains that litigation is expensive, time-consuming, and stressful, and only seasoned litigators can reliably estimate what judges and juries will do. The client wouldn’t second-guess an engineer about a technical issue, and he shouldn’t second-guess his lawyer about litigation.

Some clients drop or settle the matter, but a few insist on suing. Occasionally, they win and are satisfied. Sometimes, they win, but are disappointed by the amount awarded. Sometimes, they lose and are angry about everything: the SOB, their lawyer, the courts, the legal system, and – if they are honest – themselves. They wish they had accepted their lawyers’ advice and settled out of court.

Your ability to manage risks can have a major impact on your business and poker careers, and we’ve just scratched the surface. It’s an extremely complicated subject. My next column will discuss managing the classic risk-reward trade-off. ♠

After publishing five long, expensive poker books, Dr. Al, [email protected], writes 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.