On a recent flight home from Las Vegas, I happened to be sitting next to a woman who was travelling with her family. We started talking, and I learned that she had a Ph.D. in economics. She then asked me what I did, and when I finished explaining that I use the game of poker to teach people about decision making and critical thinking, she asked me, “isn’t poker mostly luck?” Having been asked this question countless times, I was more than prepared to answer it. I considered my audience and simply said, “it’s not luck, it’s variance”.
Although she had little poker experience, she understood my answer because her educational background made her familiar with variance, which is a component of probability theory, meaning the deviation from the average. Lucky for you, you don’t need a Ph.D. to understand the fundamental math behind poker. Poker involves hands, which can be equated to trials in probability. The “goal” of poker, which will result in playing well, is to assess the statistics of a particular hand, and to bet when your expected value (EV) is positive. Positive EV means, that given a large number of repeated trials you are going to come out ahead.
For example, let’s say you are dealt pocket aces, which pre-flop makes you an 80% favorite to win. This means that if you have pocket aces in ten different hands, you will win 8 hands and lose 2. This math problem gets a bit more complex as the community cards are dealt and the pot size is raised, but the fundamentals are the same. Given what you know do you have positive EV? If so, take action, if not, you probably want to fold unless you think you can win by bluffing. More on bluffing another time.
Your ability to calculate the probability of winning a given hand while considering the pot size, your position at the table, and the styles of the players really is the “skill” in the game of poker. This skill has been studied by the The Erasmus School of Economics (ESE). ESE ranks as one of the top institutions for their work in research and a reputation in economics, finance and management. The study is called, “Beyond Chance? The Persistence of Performance in Online Poker”, in which they reviewed a sample of hundreds of millions of online poker hands in which it was concluded that skill is an important factor for long term success.
This study states, “for optimal play in the long run, poker players generally need to apply the expected value criterion to every decision in the game”. With the right information, poker situations can be broken down into math problems and evaluated based on whether or not the decision will yield a profit in the long run. To do this effectively, we cannot just memorize the odds of starting hands, like pocket aces, we need to understand outs, equity, and pot odds, so we can continually assess expected value as a hand develops. Here are a few definitions and concepts:
Outs – The number of cards that could come to give you the winning hand.
Equity – Likelihood of having the best hand on the river, your chance of winning.
Pot Odds – The ratio of money in the pot compared to the bet you need to call.
Expected Value – The average outcome of a given scenario based on probability.
A classic example of when this is relevant is when facing a bet while on a flush draw. To see a full hand breakdown and the thought process of a flush draw, go to:www.gonutspoker.com/how-to-win/. This walks you through an expected value equation, and ultimately if Equity > Pot Odds = +EV we should continue in the hand.
If this poker example wasn’t clear, or you’re not able to follow the link, let’s look at a different example. We’re going to flip a coin. There are only two possible outcomes, heads and tails. The probability of heads is 1:1 or also expressed as 50%, because it could be only heads or tails. If we were to bet that every time it was tails I’d pay you $25, and every time it was heads you’d pay me $25 there would be neutral EV, it would be a break-even bet.
However, if I were to give you $50 every time it was tails, and you were to give me $25 every time it was heads, you’d expect to show a profit. You’re still going to lose half of the time and give us our $25, but the other half of the time you’re going to win $50. Just to show you how this works, here’s the expected profit over 100 flips:
50 heads: -$1,250
50 tails: +2,500
$2,500 – $1,250 = +$1,250
What makes poker a valuable skill to learn, and fun to play, is that this way of analyzing risk and decision making is applicable far beyond the poker table. It’s a framework to accurately evaluate your risk relative to the reward. You want to invest your money, time, and effort in situations where you are +EV. By making decisions this way, you are not guaranteed to win any given hand, but you will be profitable in the long run.
What you must keep in mind is that it’s all a process. Focus on taking the right actions towards what you want, and detach emotionally from the outcome. To put it in perspective, the best baseball players in the history of the game, the hall of famers, the Babe Ruths of the world only have a batting average around .350. This means they get a hit 3.5 / 10 times. This means they get out 6.5 / 10 times, almost twice as often as they get a hit. Putting faith in your ability to take action with any decision with positive expected value, doesn’t mean you’ll never have a bad outcome, but it’s your best way to ensure over the long-run that you will be producing the results you want, when it comes to poker, business, family, or anything else.
To put a finer point on it, this decision-making philosophy shows us that sometimes you’re going to make the best decision and still lose. Let’s face it, there are some things we have no control over. This may sound easier said than done, but focus on the process not the results. Spending time and energy complaining and whining about bad outcomes or things we can’t control or influence is a waste. In other words, don’t be mad it’s raining, just dress appropriately and grab an umbrella!
That said, focusing on what you can control is +EV. I believe that as individuals we need to take more control and responsibility for our lives. We need to stop blaming outside factors and influences. It’s up to us as an individual to choose what we want and what we don’t want. Life is an opportunity to create who you want to be. Some of us are born with easier circumstances than others, but that doesn’t mean anything. If you haven’t realized it by now, it’s not about the cards you’re dealt, but how you play them!