In order to make winning bets on the future, bet like a professional poker player
In business, a company needs to decide where it is going to place its bets. Which businesses do we back, which trends do we ride, which investments do we make?
We can make better bets if we learn from the best betters in the world – professional poker players. Winning betting strategies for poker have a great deal in common with winning betting strategies in business:
- Don’t play every hand
- Calculate the odds you will win
- Estimate the size of the prize
- Only consider incremental investment
- Continuously recalculate the odds based on new information
- Bet large when the odds are in your favour
- Mess with your competitors’ head
- Bet with discipline, not emotion
Don’t play every hand
“You have to know when to hold ’em, and know when to fold ’em”
The Gambler, Kenny Rogers
This is the first rule of poker to master before you play it for money. There is no reason to play every hand! Antes and blinds tend to be small compared to the full price of betting. In any case, that money is a sunk cost the moment you pick up your cards. Most of the time your first cards will be nothing special. Then you have a choice – do I play this hand even though it is probably not the best around the table and count on lady luck, or do I fold? If you are an amateur playing for fun, sitting out is no fun, you play most hands. This is a poor choice to make money though – chasing a better hand from behind and relying on luck is a losing game. Professional players play 10-20% of the hands, they feel no shame in folding 10 in a row. There is nothing brave or macho about chasing fro
The parallel: Companies should also sit out opportunities that do not suit them. They will husband their resources, both financial and human, for the opportunities where they have a chance to win a big prize.m behind.
It takes courage to sit out an opportunity, especially when all your competitors are rushing towards it. Capital markets are notoriously impatient, so a company that waits for its window of opportunity will come under pressure to “do something”. An impatient personality has also propelled many CEOs to the top, so many of them are likely to amplify this pressure on the organisation, not filter it.
Explicitly “sitting out” can be a challenge for some company cultures where the safest career choice for a manager is to make small bets on everything so that they can never be wrong. The downside for these companies is that most of the small bets never pay off, and those that do never result in leading positions.
Calculate the odds that you will win
At its heart, poker is about calculating the odds, and betting when they are in your favour.
The most critical judgement a poker player is making is how their hand compares to others around the table.
Winning poker players are not just assessing their current hand against the rest of the table’s hands. They are also judging how likely it is that they and their competitors will improve their hand.
The parallel: The harsh rule of business competition is that it is usually the leading player who makes all the money. Whether through customers buying the leader, distribution clout, economies of scale or the experience/learning curve, leaders tend to make attractive returns, number 2 and 3 might earn their cost of capital and other players lose money.
So before you make your bet, face the brutal facts. Why do we believe we can become the leader in this area? Does this bet fit with our competitive advantage? If we have a breakthrough, are we strong enough to defend it? Are we ahead today? If our competitor has a 6 month head start in bringing a new product to market, will be able to catch them? Or are we better off placing our bets in another area where we can be the winner?
Estimate the size of the prize
Greed is a powerful motivator! Of course poker players think about how big the pile of chips in the centre of the table is before they bet. The best poker players go a step further – they estimate how big the pot will be when the bidding ends. This is their real potential win they use in their calculations to compare how much they need to bet to.
The parallel: It is very hard to be precise about what the pay-off will be for a big bet. However, it is very possible to form a rough estimate of the opportunity. Is this a $10million, $100million or $1 billion opportunity? If the company is sitting out on some opportunities and concentrating investment in a fewer number, the ones they do back had better be worthwhile.
Only consider incremental investment
How much money you have already invested is irrelevant to a good poker player. The only investment to consider is the current bet – how much do I need to bet now to stay in the game? This bet is compared to the odds of winning and the size of the prize to determine if the expected value of making the incremental bet is positive.
The parallel: Sunk cost is irrelevant to business decisions on whether to continue pursuing initiatives too. Telecoms companies around the world bid huge amounts for 3G spectrum. One this money has been spent, it is irrelevant to future decisions – the only consideration is how can we maximise the value of the spectrum asset we have?
Internal politics, an aversion to write-offs and the desire of some companies to find someone to blame make it hard for them to ignore sunk costs and look at decisions purely on forward-looking criteria.
Continuously recalculate the odds based on new information
You don’t just calculate the odds once in poker then sit back. Each action brings new information. The flop of a card changes the odds, helping some hands and wounding others. Does another player bet or fold? What are the “tells” of the other players that will tell you what they hold? A winning poker player is watching carefully and incorporating every new piece of information into their “mental model” of the game.
The parallel: Companies too are not launching their “big bet” strategies and then sticking to them rigidly. They have identified the assumptions behind their big bets and designed early pilots and tests to validate them. What do the leading indicators say about how big this market will be?
Their competitive intelligence network actively monitors competitive activity – what big bets are my competitors making? How do their bets change the odds for me?
Bet large when you are ahead
When you have the winning hand at the table, you need to make it pay. Winning poker players “fatten the pot” when they are ahead to maximise their winnings. They don’t always win, there is still a chance that another player gains a better hand against the odds, but over a series of bets they come out ahead. When you have the best hand, aggressive betting pays off.
The parallel: When you have identified an attractive prize, and judge that you have an advantage in seizing it compared to competitors, that is the time to put the accelerator to the floor. This will make the difference between capturing a substantial lasting advantage and a one-off result.
The Razr was a huge success for Motorola, but it was never turned from a one-off product hit into a sustainable platform. Motorola faded to return to the mobile phone pack after 2 years. By contrast, Apple followed up their iPod hit with continuous innovation, filling out the product range to leave no free niches for competitors and pushing performance every year.
Everyone know that bluffing is a key poker skill. The psychology of poker goes well beyond bluffing however. How do you break your opponents detachment, get them to doubt themselves, make them take it personally, get them to make decisions based on how they feel rather than ruthless calculation of the odds?
There are two objectives to these head games:
- How can you intimidate your opponent to fold when they have better cards than you?
- How can you look like a victim to persuade them to stay in when they have worse cards than you?
The parallel: The focus on your opponents mindset is not as great in business as in poker – customers matter more. However, you want to consider how you can impact your competitors’ behaviour. You want your big bets for yourself, you don’t want anyone else sharing the prize.
You can use principles of game theory, with a combination of signalling, commitment and enhancing your competitive reputation to motivate your competitors to leave you to it rather than fight.
Bet with discipline, not emotion
In some sports, powerful emotions will propel you to greatness – look at how John MacEnroe or Rafal Nadal use their emotions to pump up their game in tennis. In poker, your emotions will lose you money. Calculating the odds and judging your opponents, are very intellectual challenges. If gamblers were robots it would be easy to program a totally disciplined approach to gambling, playing it by the odds every time. However, we are human and that means that emotions will creep into our decision making.
You calculate the odds perfectly, draw in the suckers to fatten the pot and on the last card, your opponent gets the one perfect card he needs to beat you and cleans up. Do you stick to your odds calculations or give up in disgust? If you are on a losing streak, do you get a sick feeling in your gut and start to bet less confidently? Or double up to earn your money back? Do you vow to get your revenge on the opponent who just beat you for that big pot? It is even harder to stay calm when your opponent is going out of his way to needle you, knowing that you will play a loose game if you are upset and angry.
Great gamblers have learnt to master their emotion and play dispassionately.
“Know when to walk away and know when to run”
The Gambler, Kenny Rogers
Emotion provides the driving force in business as well as in many sports. Once you have made your decision about the “big bets” your company will make, emotion will help align everyone behind these choices, build their commitment and inspire them to make them work.
If emotion is present in the evaluation however, it will get in the way of an accurate assessment of the odds. Natural optimism will overestimate the accurate evaluation of the odds of success. Pride and confidence in the company will cause competitors to be underestimated. Desire to “see things through” or make “just one more push” will cause projects to be supported long after the odds have shifted.
Emotion should be held in check during the decision-making, while the odds are calculated and assessed. Once the decision is made, it can be engaged to propel execution.