Life Is Like Poker

A life plan should make early decisions that reduce the risk and the complexity of future decisions. In that respect it is like poker.

Good poker players have several clear behavioral characteristics that are not shared with weak players.

  1. They do not play hands unless they think they will have an advantage. Advantage does not necessarily mean good cards.
  2. They will quit if they have been involved and believe they no longer have an advantage. They learn that from the behavior of the others.
  3. They consider more factors. Their hand, the pot, their betting position, the other players and their historic performance, their own state of mind, their own financial position at the table, the financial position of others.
  4. They understand Bayesian statistical thought intuitively.
  5. A bet is really a question. Will you tell me more about your hand? The answer fits into their Bayesian model.

How does that relate to a life plan?

There are many similarities.

For example, in poker, betting early simplifies decision making later. If I have a mediocre hand but good position and bet a reasonable amount and you, a conservative player, calls me, then in future I will credit you with good cards and if you show the slightest aggression as new cards are dealt, I will probably quit. If I had called instead of making an aggressive bet, the future would be fuzzier. Fuzzy costs.

Like life, learn what you can early and cheap. When making life decisions, make some as test or candidate decisions. Try a little investing to learn your ability to lose and to discover information about businesses and reporting. Better a little mistake early than a big one later. Good candidate decisions, whether they turn out well or poorly, will make future decisions less fuzzy. Mistakes are your friends if you make them in controlled situations.

It is okay to quit doing stupid things. That is the mark of the best managers. They quit and they quit sooner. If you try to nurse weak decisions, the times you win, will not be frequent enough or big enough to recover your losses. The rule is win big, lose small. To lose small, you need to quit sooner. And, sometimes you will be wrong to have done so. So be it, folding is a small mistake. Nursing a weak position is a big mistake.

There are lots of opportunities in life. You can’t do everything. Be attracted to things where you will have an advantage. Your experience, skill, connections and temperament will form the basis of that decision. The best investments are the ones you can understand. Most private equity and start-ups don’t fit there. Be a little cautious. Be objective.

Bayesian statistics are a different way to think about things. They deal with probabilistic things rather than frequentist things. What you know now about statistics tends to make you immune to new information. That matters and so a demonstration. The Monty Hall Paradox.

You are playing on a game show. You are faced with three doors. One hides a car, the other two hide goats. You can pick any one and you choose door 1. Monty Hall opens door 3 to display a goat, and then offers you the chance to switch doors. Should you do so?

Think about it!

Most people will say it does not matter, so I might as well stay. 1 chance 2 doors, 50-50 either way. Think about it until you are sure. Do not go on until you are sure of your answer.

50-50 is, of course, the wrong answer. The true probability is 2 to 1 in favor of the car being behind door 2.

I know. You want to argue about that.

You can be forgiven if you can’t see it right off. Conventional statistical thinking will lead you astray. In fact, when this was published in the early ’90’s, more than 1,000 PhDs wrote to explain how the author was very wrong. And that was before e-mail.

By the way, the author was Marilyn vos Savant who from 1986 to 1989 was in the Guinness Book of Records as having the highest IQ. Guinness stopped reporting the category in 1990. Makes you wonder why these people thought they would be right and she wrong.

In this example, by opening door 3, Monty has added new information and Bayesian statistics uses new information at each step. You can read a great deal about this at wikipedia. There may be quite a few Greek symbols lying on their side, but be undeterred. Just ignore them. The article will demonstrate, clearly, that simple things are sometimes more complicated than we intuitively believe or can conveniently calculate.

That is why you need to have a very clear idea about your life plan. That is why you need to make mistakes early. You should develop an instinct that permits you to be not playing when some adverse, unexpected condition arises. Sometimes your greatest successes occur when you are not playing. Better to fail to win a hand you could have won, than to get involved with one that generates an unaffordable loss.

In poker the most important rule is this. “The eighth-best hand loses little, only the second-best hand can cost you a lot of money.”

In life, the rule is, “Success accumulates if you avoid unaffordable losses.”

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. don.s@protectorsgroup.com

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