How to make better business decisions by playing poker

In the pre-pandemic world, I used to meet up with friends maybe once or twice a year and play a game of poker. For me, this was less about the poker and more about the occasion, seeing people, having a chat… as we all know men find it very difficult to just chat without some kind of activity involved! I knew roughly how to play, but never bothered to learn properly. I didn’t care about winning and was happy to lose £30 for the enjoyment of the night.

Then in early 2020, the pandemic hit. We were all in lockdown, and one of my friends came up with the great idea of playing poker online, with Houseparty in the background. This worked so well that it became a weekly event. At the start, as with the real-life games, I was happy to lose £20-30 for the occasion, but after a few weeks it started to get expensive and I started to get annoyed at losing. I had to learn to play properly. I did Daniel Negreanu and Phil Ivey’s Masterclasses and read books like “Instinctive Poker” by James Davis and “Poker Strategy” by Ace McCloud. I started practicing and started winning.

I won a few small tournaments with my friends, even a coveted “Online Bracelet” and regularly started winning cash on Pokerstars. I am far from an expert, but I now understand the strategies, probabilities, and how the game works. Plus, being at home for lockdown it was also a great way to demonstrate Growth Mindset principles to my 5-year-old daughter; She understands that at no point did I consider myself ‘bad’ at poker, I just hadn’t spent the time learning and practicing. I now don’t consider myself ‘good’ at poker, just someone who has learned the game and put the learning into practice. I hope this is what she now feels about what she can ‘not-yet-do-well’ but wants to… currently cartwheels!

There are many applications of poker to life. Poker, like life, and unlike something like chess is a game of imperfect knowledge. You know what cards you have, you know a bit about cards on the table (at different stages of the hand) and you can make assumptions about what cards other people may have based on how they have acted. Games like chess are very different because all the information is on the board in front of you. This is explored in a lot of depth in the brilliant book about decision making “The Biggest Bluff” by Maria Konnikova, which I highly recommend. 

The reason that I am writing about this now is that in a mentoring session that I did recently the company needed to make a decision very quickly about whether or not they should use an amount of their limited funds for a specific course of action. The similarity between their position and a poker hand became quite clear to me, so I helped them to work out how you would play it as a poker hand. In the interests of confidentiality here is a fictional version of the same scenario.

The company has an opportunity that they think can bring in £50k. However, there is a cost of £5k to be in with a chance of getting the opportunity and the £50k is far from guaranteed.

To translate this to poker hand and it’s like there is a £50k pot on the table and it’s £5k to play.

On a simple level, this is a 10 to 1 return: £5k in, £50k back. If this was a simple game you would know what to do. For example, if there are a set number of cups in front of you, 1 has a ball under it and if you chose the one with the ball you win, the odds are easy. If it’s a 10 to 1 return (like £5k in, £50k back) and there are 9 cups or less in play, then you should play, the odds are in your favour. If it’s a 10 to 1 return and there are 11 cups in play then you shouldn’t play, the odds are not in your favour. 10 cups (a 1 in 10 chance) and a 10 to 1 return is even. In economic terms, 10% of £50k and £5k are “the same thing”. The choice there is not about odds, it’s about if you can afford to lose the stake money and other heuristics like ‘loss aversion’, which are covered more under Behavioural Economics

The example of the cups is an example of perfect information. You know that there are a set number of cups, you know that there is just one ball.

Poker, life and business decisions are never that easy. In poker you can guess at the odds. There are certain scenarios where they are clearer than others; Pre-flop a pair Vs 2x higher cards is about 50/50. Post flop, if you have an open-ended straight draw you have about a 30% chance of making the straight. You know what cards you have, how many have been dealt, how many there are to come. You guess what cards others have by how they have played at different stages of the hand, and whether or not they are likely to be bluffing… or trying to make you think that they are bluffing.

You have to put all of this information together and work out what you think, in your best guesstimate, are your chances of winning the hand.

If the % chance of you winning the hand is better than the return you should play, just like you should play the cup game above with 9 or fewer cups. If the % chance of you winning is lower than the return you shouldn’t play, just like the cup game above, with 11 or more cups. You also have to combine other information, like the stage of the game you are at, to work out if that chance is worth taking at that stage.

Back to the mentees. They had a decision to make about spending £5k to get £50k back; a 10 to 1 return. I then asked them to estimate their chance of getting their return. There were 2 major variables; 1) whether or not their application would be successful and 2) whether or not the opportunity would be pulled (a Brexit issue!).

They estimated that there was an 80% chance of the application being successful. That takes this from £5k for a £50k return to £5k for a £40k return (80% of £50k). They then estimated that there’s as high as a 50% chance of the opportunity being pulled. That takes it to £5k for a £20k (50% of £40k) return. This leaves a 4 to 1 return, which is pretty good odds.

We also looked at other factors. Such as what they would use the money for if they didn’t use it for this and what the return could be. This is exactly the same as knowing how many blinds you have left in a game of poker and therefore how many more hands you can play. The fewer hands you have left the more risks you have to take, as the less opportunity you have to get better cards. We also looked at if the investment would be completely lost or if they would have a chance to use the work done for the £5k in the future. This has a poker parallel too, sometimes it’s OK to lose a hand to get your opponent to think that you will play a certain way, you can then use this to trap them on a future hand.

Looking at the situation this way gave the team the opportunity to be objective about their decision and to know that even if it didn’t work out, it was still on balance the right decision to make. This is clearly not an exact science, but it’s not supposed to be.

Decision making for entrepreneurs is hard. It gets harder when you have a group of founders, especially when that group is an even number of people. My belief is that quick, clear decisions are more helpful to a business than long deliberations, even if those decisions turn out to be wrong. Action tends to beat inaction… and leads to future action. If a decision is hard to make, or divides to the group, changing the context… ie how would we play this if it were a poker hand is a great way to get the decision made, so that you can stop wasting time and get on to other, probably more important, things.