Money Management in Theory and Practice: Part 4

This series on optimal money management began with the premise that there is no one specific algorithm for everyone. Each of us has different finances, psychologies, attitudes toward risk, and personal situations. I threw out some questions to help you determine what your parameters were. (Sounds like scientific talk – algorithms and parameters!) Really that is just a fancy way of saying that one size doesn’t fit all.

I then divided bankrolls into three sizes: small, medium, and large. A small bankroll is an amount you could get in a month or less from working, from your business or from your investments. A medium bankroll should take about six months to accumulate. A large bankroll takes a least a year, and in some cases several years. Sometimes your bankroll is so huge, that you may never be able to re-accumulate it, if it were lost. (The bankroll that Jamie Gold acquired from his record WSOP main event win is an example of this, and if rumors are accurate, all or most of those winnings may have been dissipated.) This shows why it is so important to practice sound money management, especially as your bankroll gets large. Never risk losing a large bankroll! The larger your bankroll is, the more risk averse you should be.

I then discussed personal factors. Everyone has a baseline attitude toward risk. In an interesting book called The Art of Risk, Kayt Sukel discusses the factors that predispose certain individuals toward seeking risks. Three factors seem to have a strong effect on how one feels about risk. They are age, sex and genes. Younger people (teens through early twenties) are willing and perhaps even eager to accept more risk. Males generally take more risks than females. Lastly, there are genetic combinations that tend to make some individuals more conservative and others more adventurous. Obviously, experience and environment can amplify or dampen the effect of these factors.

As a strange aside, this book mentions several studies of risk behavior in which participants are given a chance to accept all or part of a fixed sum of money or take a coinflip that offered odds of 2.5:1 for whatever percent of that amount they chose. (If you flipped for $100 and won, you’d end up with $350, but zero if you lost.) Considering the small amount of money offered, the maximum being a few hundred, I was amazed that relatively few people gambled their entire stake. I am an older person and relatively conservative (financially not politically,) but I would be eager to take a gamble this good for up to $1 million, which is not an insignificant portion of my net worth!

Players were divided into three groups – plodders, middle of the road gamblers, and plungers. Plodders try to grind out a steady living. They try to play against opponents who are significantly worse than they are. They play for stakes that are only a tiny portion of their usually increasing bankroll. Plungers like to play for the highest stakes they possibly can, even if it means pitting their skill against the best players in the world.

Bankrolls can be small, medium or large. Players can be plodders, middlers, or plungers. We are now ready to discuss bankroll management. It is possible that you might want to adjust your risk threshold a little higher for great games and a little lower for bad ones. Before starting any session of any game, determine what your bankroll is and then refer to the chart below.

This chart gives my opinion of the maximum percentage of your bankroll to risk in any game. Use the appropriate percentage to calculate the amount you can risk. Over the years, I have made these numbers a little more conservative in hopes of making it less likely that people will go broke.

Plunger Normal Plodder
Small 20% 15% 8%
Medium 10% 8% 4%
Large 5% 3% 2%

Let me emphasize that these percentages are the maximum you should risk. If you lose the maximum in any game, tournament, or sports wager or anything else, recalculate your current bankroll before you make your next wager.

Here is an example: you are a normal gambler with a $25,000 bankroll, which you consider to be medium sized. The table shows that you should risk a maximum of $2,000. If you lose your maximum of $2,000, you probably should quit for the day or at least take a break for a few hours. Also, after you have lost that $2,000, your new bankroll is $23,000, and your new maximum loss is around $1,800.

In reality, you are best off playing in cash games or tournaments where your risk is around $1,000. You have enough capital to sustain a series of $1,000 losses without having to reduce your buy-ins. If you are applying these guidelines to sports betting, the sum of all your wagers should be $2,000 or less. Likewise, if you plan to play four tables at once online, your total risk should be $2,000 or perhaps a drop higher since you probably won’t lose at all four tables.

If a game is really good and you are playing your best, you might take a shot with a larger percentage than the table recommends, but this should not be a common occurrence. But remember tournaments have much greater variance, and tournament players almost certainly want to avoid risking the maximum on a daily basis.

As long as you continually re-calculate the maximum amount you can risk, you will never go broke. If you are playing in games where you have the worst of it, you will eventually end up with such a small bankroll, that it is meaningless. But in general, you will be able to risk larger amounts (never larger percentages) as your winnings accumulate, and you will be forced to play smaller when you are losing. In fact, as your bankroll moves from small to medium to large, the percentage of it you will risk, should shrink. ♠

Steve ‘Zee’ Zolotow, aka The Bald Eagle, is a successful gamesplayer. He has been a full-time gambler for over 35 years. With two WSOP bracelets and few million in tournament cashes, he is easing into retirement. He currently devotes most of his time to poker. He can be found at some major tournaments and playing in cash games in Vegas. When escaping from poker, he hangs out in his bars on Avenue A in New York City -The Library near Houston and Doc Holliday’s on 9th St. are his favorites.