What I've learned (so far) from gambling

Good decisions are not equal to good outcomes.

I've never liked the idea of gambling. There was just something about losing your hard-earned money that puts me completely off from doing it. Earlier in my life, I also worked a bit in the gambling industry, so I knew enough to know that the house always wins.

A while back, I read a tweet that said playing poker should be essential learning for anyone in business school. I was fascinated by the idea, and when I dug a bit deeper, it turns out that poker players always think in probabilities.

Alex Lieberman ☕️ @businessbarista

Fundamentals of Poker should be a required class at every business school. - You learn statistics IRL - You learn how to weigh risk / reward - You get a crash course in human behavior - You learn how to act when $ is on the line

So I downloaded a game on my phone, listened to Annie Duke's "Thinking in Bets", and did a Udemy course on how to play poker and here is what I've learned so far why you can apply poker principles in business. (As you can see, I can't claim to be an expert poker player yet, but I think the lessons are valuable.)

• Separate results and decision making. In poker, they call this "resulting". You can make the best decision, but the game's outcome is determined by "randomness" or the "luck of the draw". Bad outcomes do not equal bad decisions, and good outcomes don't necessarily mean you made a good decision. In business, we make the best decisions we can with the information available to us. But there are always unknown unknowns (black swans) and surprise actions by the market or our competitors, resulting in a different outcome to what we expected.

• Think in probabilities. The best way to visualise this is to ask yourself - if you can replay this decision or event a million times, what decision will you take? If you start thinking in terms of a large sample size, you'll realise that sometimes the good decision will have a bad outcome, but your probability of being right was right over a large sample. In poker, the example is a pair of pocket aces. You are the 80% favourite of winning with this hand, but remember you can still lose 1 out of every 5 games. But if you play pocket aces a million times, you should see yourself winning that hand 80% of the time (or winning it 800,000 times - but also losing it 200,000 times)

• In poker, they talk about "variance", which refers to the variance of a hand's outcome compared to the expected value or expected result. If you only play a few hands, this variance can be big and instead of winning 80% of the time with your pocket aces, you actually won only 30% of the time. But over time and as you increase the number of hands you play, this variance will move close and closer to the expected outcome. The importance of this is that we sometimes make a mistake to make business decisions based on too small a sample size, and we need to make sure we have enough data, so the variance to the expected outcome is small.

• A low probability doesn't mean that you'll never be wrong, and similarly, having a high probability of being right doesn't mean that you are guaranteed a good outcome. So if you have a 90% probability of being right - you are still going to be wrong 10 out of a 100 times - that doesn't mean you made a bad decision.

• Avoid going on 'tilt' - in poker; this refers to a player losing his cool after losing or winning a hand. So because he just lost on an excellent hand, he plays the next hand with less optimal cards and bets too much to try and make back some of his losses. Or because of a win, you are so confident that you overestimate the value and win probability of your cards (or ignore the signs that your opponent might have better cards). Avoid making decisions based on extreme emotions.

• Always protect your bankroll! It is better to fold and lose your money to throw more money behind a bad bet. There will be another round. Or, put in business terms, "fail quickly".

• It is boring. Most of the time, you are just folding the hand being dealt to you, and you have to guard not falling into the trap to make a bet for the sake of getting some action. In business, we often feel like we need to do something, anything - instead of waiting for the right opportunity.

• Your position also influences the outcome of your hand in poker. The later your position, the more information (other players actions/bets) you have and the better your odds of winning. Similarly, in business, you have an advantage if you have more information, but you have to decide with the information available to you at the time.

• Your position at the table is important - sometimes it helps to be at the right place at the right time. Some flowers grow better in a different environment, so this could also determine the outcome. In business, we sometimes underestimate the impact of the environment on our business and our people. I've seen people that flourished when moved to a different department (environment). I've seen businesses fail just because they are in the wrong environment, not because it was a bad idea.

• Action produces information. As the betting unfolds, you get more information about your own hand and the opponent's hands. Every action you take to raise or check produces a new action by the opponents and produces more information. As you gather more information, you might have to change your mind about your hand.

• Letting go of bad hands. Sometimes you start with a good hand, but after the flop and the second round of betting, you realise that your opponent might have a better hand. You've already raised pre-flop, and now you have committed a lot of money to the pot. The temptation is to continue with the betting and put more money into a bet that you don't think you can win anymore, but you also don't want to lose out on the money you've already bet. This fear of loss is evident in business as well, where we don't want to let go of a project because we don't want to lose face, money or respect for not completing the project, but in doing so, we compound the mistake and make it bigger.

  Don't hold onto a mistake because you spend a lot of time making it.

• You have to control your fear of loss. The better players are the ones that take some chances and play a bit more aggressive with their relatively good hands. You can make good decisions the whole time, but you will slowly see your bankroll diminish if you never take chances. The same in business - you can always play it safe, but you will never grow and lose market share against your competitors.

Summary: don't play the game of life like it is just one big hand where you have to try and win big only once and risk everything to get it. Rather play it like a series of hands, where you know if this hand doesn't work out there will be more hands and if you continue to make the right decisions over a long period of time and over many hands you will end up on top.

Bonus tip: Use decision trees to force yourself to think in probabilities.

If you want to learn more about poker and decision making, I recommend Annie Duke’s “Thinking in Bets”.

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