Pot Odds: Maximising the Value of Success

I’m inspired by Kent Beck‘s fantastic post on how Delay Chokes Innovation to write something that has niggled around at the back of my mind for over a decade. If you haven’t read Kent’s post, please do so as it provides the context for this one which is a ‘yes, and’ rather than a ‘yes, but’ response. It is also a poker story.

Poker

I hate tournament poker, largely because I’m crap at it. I don’t like the ‘winner takes all’ dynamic and the use of artificial escalation to force a result. I once played a tournament at the Luxor in Vegas and it was the most grindingly grim poker experience of my life.

I learned to play poker in an ever-evolving group working on a project away from home. Once we’d quickly exhausted the delights of the local town we turned to making our own entertainment and a poker school playing two or three nights a week was born. Sometimes there would be four players, sometimes twenty. There were a few regulars, of which I was one, and a number of people who drifted in and out. The standard of play was high and a couple from the group went on to be successful semi-pro tournament players.

I was one of three complete novices when we started with four or five others who had been playing for a few years. My first night was a shock as I lost hand after hand, quickly ripping through my €50 budget for the evening (they were kind to me and suggested I set a budget to avoid financial ruin on top of the inevitable humiliation). So I sat and watched, itching to buy back in, and resolved to learn how play properly.

I set myself an overall budget of €300: if I was still losing hand over fist after I’d spent that I’d give up on it. The second night of play I lost my €50 limit again but managed to last the whole night and from then on I started to lose less, then win a bit, then win a lot. I never quite spent my €300 ‘tuition fee’ and at the end of the project I had a drawer stuffed full of 5, 10 and 20 Euro bills.  I learned an awful lot about bluffing, mirroring, psychological manipulation and risk management, not by reading books but by watching and responding to the actions of my friends/foes across the smokey, dimly lit table.

Pot Odds

Some poker players know the odds of every possible hand given the cards they hold and the cards on the table. I once played against someone in the final year of their PhD in game theory whose party trick (deployed before the game to intimidate us) was to play open hands reciting the odds of winning as he went. Very impressive*!

Less clever players like myself work on the concept of ‘outs’ rather than exact odds. An ‘out’ is a card that leads to a possibly winning hand and if you can identify all the outs you can do a rough approximation of odds: the greater the number of outs and the stronger the hands you end up with the better your chance of winning. ‘Possibly winning’ is important here: many published poker strategies focus on having the best possible hand (or something very close to it), bluffing hard, or else folding quickly to minimise losses and tournament poker tends to favour such strategies. School poker is different because it is played out over many nights and there tends to be more risk taking because the cost of failure (whether losing a hand or losing out over the course of a night) is lower: you can always come back later.

Both forms of poker work on the basis of ‘pot odds’ but these are more important in school poker than tournament. Pot odds is basically the ratio of your odds of winning to the amount of your money in the pot (the total of all the bets on this hand). Let’s say your chances of winning are 1 in 5 and your current stake is 10% of the total pot. A 1 in 5 chance of winning isn’t great, and most poker strategies will tell you to fold such a hand, but with a potential 9:1 return on your money it’s worth hanging around for a bit to see what happens. Conversely if your chances of winning are 1 in 5 but your share of the pot is 25% it’s likely time to get out.

It’s not as simple as that because factors like the number of players left in on the hand, the amount of money you and your opponents have left to bet with, the stage of the evening, your’s and others’ propensity for bluffing, etc. all contribute. But it stands as a basic heuristic: if the pot odds are with you stay in, if they’re against you get out**.

Innovation and Maximising the Value of Success

So what’s this got to do with innovation? As Kent says:

The cost of delay in choking innovation is insidious. From outside the company looks to be doing fine. Smaller wins times a larger market equals continued growth.

This is basically the tournament strategy of folding unless you’re going to bluff hard or have the best hand. The thing is that unlike in the movies those ‘nuts’ hands, where you’re dealt a pair of Aces and another one turns up on the flop, are very rare. You can wait for hours for something like that to turn up, and then try to eek out the betting only for everyone else to fold because they have dogshit and your moment of triumph nets you all of €15 with €5 of that being your own money. There is definitely a role for smaller wins times a larger market in a stable business but sometimes you need or want to do more.

Invisible are all the little roads not taken that could have turned out to be superhighways

Playing pot odds helps you look for those little roads that can turn out to be superhighways.  If you do want or need step-change growth you have to find the opportunities that, even if more risky, have much more reward in return. It’s all about maximising the value of success rather than minimising the risks of failure.

If you’re a company owner or senior manager you need to encourage a ‘play big, win big’ attitude but know how to direct that to areas of innovation that have a chance of disproportionate reward, not to safe projects that will almost certainly bring a modest return and not to vanity projects that deliver all the buzzwords but little value. And sometimes it’s right to go ‘all in’ on an initiative because, as with school poker, there is always the chance to come back later.

Last Words

Those nights playing poker against, amongst many others, Darren, Darren, Phil, Johnny P, Johnny B, James, Brett and Klaus were amazing fun and a greater understanding of human psychology and risk management was just a happy by-product. If any of you happen to stumble across this, thank you.

Thanks too to Kent for a great post and also for this wonderful ‘separated at birth’ opportunity:

Woody Harrelson and Kent Beck. Or is that Kent Beck and Woody Harrelson?

*also completely hubristic. By revealing his key strength up front he told me all I needed to know to play him. Two hours later he was all out.

**basic heuristics don’t last any longer in a game of poker than any other rule or formulaic strategy. It’s the foundation for a strategy, not a strategy itself.

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