The Biggest Game of All

Benny Binion, was intrigued by an offer put to him one day to organise and stage the biggest poker game ever played. Nick “The Greek” Dandalos wanted to play, and beat, the best and Binion knew just the man.

He and Johnny Moss were friends from their days in Dallas where Moss had carved a reputation as the best Draw Poker player of them all – a feat he would go on to repeat in Texas Hold’em. Moss lived for the game of poker and reportedly played every day of his honeymoon, on one memorable occasion reaching behind him and taking his wife’s wedding ring off her finger before putting it into the pot.

Ever the opportunist, Binion said he would host and organise the game as long as it was played in public in his casino and both parties agreed.

The game lasted an amazing five months in total with the players only pausing to sleep – and even that was optional for Dandalos. Moss recalls coming down some evenings after a 4 hour break to see The Greek standing at The Craps tables, keen to start, and asking him why he insisted on sleeping his life away!

The legendary hand came during a stint of 5 Card Stud – not Moss’ preferred structure – in which each player gets dealt one card face down and a card face up before there is a round of betting and then receives three more cards face up, each followed by a another round of betting. It is a very pure form of poker, very little played these days on account of the low hands that are created which most new players feel creates little excitement. In this particular hand, Moss started with a nine face down and a six face up. Dandalos was showing an eight.

After an insignificant couple of bets, Moss caught an unhelpful two while Dandalos drew a four. The next card brought Moss another nine making him a pair of nines and Dandalos a six. At this point in the hand, Moss knew he was ahead because there was no card which Dandalos could have “in the hole” that is face down which could give him a superior hand. With a six and an eight showing, nothing could beat Moss’s pair of nines and therefore Moss confidently bet $25,000. It’s easy sometimes to be nonchalant about the size of bets in big poker games so it bears consideration that this single bet was very nearly as much as the contents of the most lucrative Deal or No Deal boxes. Dandalos called, however, maybe with a pair of eights, maybe a pair of sixes, maybe – better still for Moss – a seven on the off-chance that he might make a highly unlikely straight.

The next card brought an unhelpful and irrelevant two for Moss and an equally unlikely four for Dandalos. Again, Moss knew 100% that he must be winning at this point and bet out again – $30,000 -  enough to maximise his win but not enough to scare off his opponent who by this time, with just one more card to come, stood very little chance of winning the hand. Incredibly, the bet was called.

Moss’ final card was again an unhelpful three but Dandalos received an equally trashy jack. There were only three cards in the whole deck which Dandalos could have “in the hole” which could beat Moss at this point – one of the remaining three jacks to five Dandalos a pair of jacks. But for The Greek to have one would have meant that he had put $50,000 into the pot before that point with literally nothing; hoping, praying, feeling that he would catch one of just three jacks by the end of the hand. To Moss’ astonishment and delight, Dandalos bet out $50,000 and without too much hesitation Moss, believing his hand had to be better, pushed all his money into the middle of the table. More than $500,000. A huge bet. In any game. Of any era.

Apparently, in the pause that followed, Dandalos hung his head and Moss started to count the money in the middle as you do when you know that the pot is imminently going to pushed your way. Instead of folding his cards, however, Dandalos looked up at Moss and raised his eyebrows…

“Mr Moss, I think I have a Jack down there in the hole.” He said, essentially claiming to have won most of Moss’ fortune at that time.

“Greek” said Moss “If you’ve got a jack down there you’re gonna win yourself one helluva pot.”

Dandalos called the bet and turned over a Jack to reveal one of the craziest plays in all of poker and one of its biggest pots. He had bet more money than many Americans earned in a lifetime on a hand which until his last miracle card was just Jack, Eight, Six, Four! And Moss, regarded as one of the best five players ever to play the game had just played the biggest hand of his life. And lost.

Borrowing money to get back into the game Moss must have had some negative thoughts although he has never revealed them in all the time he talked about it since. All he ever said is that he knew that if his opponent continued to gamble like that he would break him in the end.

Eight weeks later, Dandalos, two million dollars worse off, rose from his chair and uttered the immortal words “Mr Moss, I’m going to have to let you go.” Johnny Moss went on to become the greatest player of his generation and Nick “The Greek” Dandalos was eventually seen playing $5 limit poker in the casinos of Gardena, California having won – and lost – more money during the course of his lifetime than most of us will ever see during the course of ours.

Posted 11:00am by Caspar and filed in Decision Making, Risk

Fate and Destiny? Or Chaos and Insanity?

About eight years ago, my poker mentor and I were tucking into our fourth plate from the Bellagio all-you-can-eat buffet when I decided to bemoan the bad run of cards I had experienced that week. My guru ordered a jug of coke before telling me a story which has stayed with me every day since then: an old gambler who had come to town many years previously to play in The Big Game but now, 15 years later, was reduced to passing chips around the $3-$6 Limit Holdem tables downtown. His bankroll, once nearly a million, now stood at just $6,000 – a sum from which he eked out the most basic of returns and humblest of lifestyles.

“Most of his income came from the occasional handout from his son and the buffet comps which he received from the casinos after every four hours of live play. It was humiliating to queue for them at the cashier’s desk every day, but necessary. Necessary.”

“One night, after drinking too many free White Russians in The Freemont, he goes “on tilt” and burns through $1500 in four hours. Chasing flushes, inside straights and trying to fill up on the river; by midnight, he’s lost another $2000. He knows that there’s no coming back from this. It’s double or quits time. Move up or cash out. For good.”

“He heads across to Binions and takes everything he has out of his strongbox before putting his name down on the No Limit list. When a seat becomes available he sits down with $2,460 avoiding eye contact with players probably glad to see him there. A loser at the table. Better than that, a man who used to be somebody. Someone to say you’ve beaten.”

“The first few hands pass without incident before there is a raise and then a re-raise before him and he looks down and sees aces. He thinks for a while; frowns; gives the impression that he’s considering his options, knowing full well that this might be the last hand of poker that he ever plays. Then moves all-in. I guess his opponents saw it for what it practically was: the last play of a desperate degenerate. They call him. His aces stand up against their queens and jacks. And suddenly he’s trebled through and on a roll.”

“Two more wins later and he’s on $10,000 for the first time in two years and ordering Evian.”

“After three hours at the table he’s in the zone. Making great reads. Laying down straights. Playing like the young man he once was. Acute. Alert. In the moment. And once again, the money’s rolling in: $20,000, $25,000, $30,000, back down to $20,000 before doubling through to $40,000. Some berate the last gasp of a long-term loser. Others don’t begrudge their losses having taken so much from him for so long.”

“Sitting up straight, his hubris and bravado now restored announces his intentions. ‘Ah know ah’m gettin’ lucky and you know ah’m gettin’ lucky and ah know you know what’s happening here but let me make it very clear: Ah’m gonna play tonight until ah make two hundred thousand. Then ah’m up. I’m out. And gone for good. Ah’m not going til that happens so… who wants to donate to mah fund?’”

“Sensing that he’s not joking, the players start to laugh and relax into the game. He might be playing well, he might not. Sometimes it’s hard to tell. But one thing is obvious, he’s getting lucky. Some have to think hard to remember a rush like it. His pairs trip up, his middle pins hit, he flops quads twice! The point is that if he’s really gonna sit there til he turns $2500 into $200,000 he’ll be there for quite a while. Long enough, they reason for his luck to turn and the hours to take their toll on his ability to make any kind of meaningful decision. They place their faith in the long run and take him on; happy to lose money in the meantime.”

“But the long run in this game is pretty long as we know” my mentor said, taking a sip of his coke “and that rush never ended.” He just kept on making money: $50,000, $70,000… $55,000 then a huge pot which took him up to $120,000! But still he didn’t walk away.”
“Why not?” I asked.
“Because he had a goal, I guess. I don’t know for sure. By two in the morning, he was physically and mentally spent but still resolved to make it to the $200,000 mark. I guess he saw it as his retirement fund. Enough to buy a small farm in Wyoming. Enough to never have to play the game again. Enough to move on. His price of freedom. I don’t know.”

“Then after nearly 6 hours of play, he looks down and sees aces once again and once again two players raise it up. Once again, he re-raises, this time to $6,000, a price which one young player calls and another more experienced player passes up. The flop comes 3 K 10, his opponent checks, he bets $12,000 and his opponent raises it by $30,000 more. At this point, in a different game you might well throw your hand away.  The check raise is so powerful there that – well what you gonna put him on? Ace King?”

“I don’t know, I don’t know the opponent.” I say. “King Ten is possible. A pair of tens in the hole. Even a pair of kings is possible I guess.”
“They’re all possible. Everything’s possible. The guy could be stone cold bluffing. Reckoning that if all you have in this world is $120,000 you don’t want to bet $30,000 of it on anything but the holy nuts. The question’s not what’s possible but what’s likely and how likely. Given all the likelihoods, what would you do?”
“Once again, I don’t know the way the other guy plays but… how much money does the other guy have?”
“Correct. How much money does he have. Not a question we would usually ask but in this case, playing with our entire bankroll on the table… crucial. The other guy has $96,000 left on the table. We have just over a hundred. If we lose everything on this hand we’re back down to $6,000. Exactly what we had 12 hours ago. Our bankroll for the last 3 years. So what would you do?” He paused. Probably waiting for an answer which never came.

“What he did was to go all in. Again. He reasoned that either a pair of aces were the best hand there and then or that by pushing $100,000 into the middle of the table he would do a good enough job of persuading his opponent that they were. He was wrong. In reality it was a nothing bet. If his opponent had less than a pair of aces he would have folded, more and he would have called. As it was, the young fella barely paused for breath before calling the bet for everything he had and turning over two kings. Trips.”

At this point in the story, what you need to understand is that our man has a pair of aces – a hand he started with in his first two cards – but his opponent has used the king in the middle of the table together with his two kings to make three of a kind, Kings. A better hand. The best hand, in fact, at this point in the hand: “the nuts” – so-called because in the early days of poker when one had the best possible hand, one would bet the nuts from the wheels of one’s wagon outside; literally the proverbial “keys to the Porsche”.

Crucially, though, Texas Holdem is played with seven cards in total from which the best five cards play. This means that two cards are yet to be dealt out into the middle of the table and with two aces left in the deck and two chances yet to hit one of them (to give him three aces) our man had a 10% chance of winning by the last – or river – card.

“People said that as the dealer made to deal the turn neither player moved a muscle. Probably terrified by the potential loss or gain ahead of them, they just stared impassively as the next card came out – a 2 of diamonds. While the young gun was now a 95% favourite he’d played long enough to know that this was not a certainty. By any means. As the dealer burnt the last card, the old man stopped him and addressed the table, earnestly, his Texan drawl more noticeable than ever:

‘Whatever the river… ah’m staying. Ah’m leaving here with $200,000.’ People felt genuinely moved by his resolve and belief. They knew deep down at that point that that was now unlikely but hell… they’d all seen much crazier things happen at a poker table. They rooted for the underdog but sensed the inevitable…”

“The point is, son” my mentor placed his empty glass on the table “you come to me tonight and you tell me that you’re feeling sorry for yourself. That you’re missing flops and draws and everything’s awry. Next time you feel like that, you remember this man’s story. You think how it must feel to come so close to having everything you ever wanted for the last 10 years and seeing it snatched away on the turn of a card. Don’t tell me that the luck just ain’t with you, man, if you need luck you’re not playing right!” After a three month run in which I found it hard not to hit my hand I felt suitably ashamed for complaining about a bad five days..
“What happened in the end?” I mumbled out of curiosity. My mentor paused…

“Sonofabitch caught his ace on the river and won himself a $233,000 pot. Went from $2,500 to 100 times that in less than a working day.”

“More remarkably, he went on to do exactly what he said he would. He didn’t play another hand, didn’t try and ride his luck, he just got up and fetched a chip tray to take his winnings to the cashier. Once there, he had it counted and recounted then bundled into Benjamins. To the cashier’s astonishment, he even closed his strongbox, signed out, put the cash into his pockets and walked casually out of the casino – the eyes of the whole poker room upon him.”

“He only had two hundred and thirty thousand on him but he must have felt a million dollars as he walked out that door and into the warm night air.”

“Once outside, he took a deep breath and allowed his shoulders to sink by two full inches. What to do now? He looked up at the clear sky above him at the billion twinkling stars that you used to be able to see in the desert night sky before they erected that Freemont Street Experience thing and took the first step of the rest of his life.”

“A split second later the night bus applied its brakes with a screech but could stop from hitting him at forty miles an hour. Paramedics arrived but pronounced him dead at the scene. Police arrested a couple of people who went round picking up some of the hundred dollar bills that blew out of his coat and wafted around the sidewalk.”

“If he hadn’t gotten so lucky he would probably still be alive today.”

My mentor poured himself another glass of coke before offering me one from the jug which the waitress had left at our table. A lot of the ice had melted so I declined.

“Because if I Don’t I’ll Die”

Lawrie Tallack is now an actor which is a rare career progression when you consider that he was once a fighter pilot in the RAF. A veteran of the gulf war and 200 parachute jumps, Lawrie was no stranger to taking calculated risks!

One evening his Commanding Officer came in to warn them that they would be making a jump the next day from a high altitude balloon. “Don’t worry though boys” he said “it’s really not that different to what you’re used to. Just bear in mind that when you jump it really is a long way to fall before you open up.”

“And then he paused” Lawrie recalls “and seemed to relive a traumatic memory or something before reiterating that it really really was a long way to fall.”

For some reason, Lawrie went to sleep that night unnerved by what was intended as a pep talk! After hardly sleeping at all during the night, he went to his superiors and informed them that he could not bring himself to do the jump. In short, he refused.

In blackjack there is a (fairly common) situation in which you have 16 and the dealer has a 7 or higher showing. Given that you’re trying to make 21 without going bust only a 5 or lower will improve your hand. A 6, 7, 8, 9, 10, Jack, Queen or King will bust you. And yet the book (that is the guide to basic strategy which has been worked out according to the inexorable maths) tells you to hit – to take a card. It feels so counterintuitive. And yet the book is adamant: you must hit the hand. Why?

The bottom line is that you are in a terrible position there. Not as terrible as being in a plane hurtling to earth but you have 16 – the worst possible total – and the dealer has a 10 (let’s say). You are going to lose a lot of money in this situation on the average. The VALUE of this situation is negative. BUT you will lose LESS money in the long run than by standing pat. Yes you will bust yourself 8 times out of 13 but the times you will improve will win it for you enough times to outweigh those losses.

The point is that in everything we do we need to take a Long Term approach. Even though by hitting the 16 we may bust and it’s going to be painful, it is the right thing to do. Sometimes doing the right thing is hard. It will be painful. But it’s right because the alternative is MORE painful and therefore risky.

There are definitely risks we cannot afford to take. But there are also risks that we cannot afford not to take. And not taking any “risks” is the greatest risk of all.

After his refusal to obey an order, Lawrie’s disciplinary hearing was inevitable and effectively the conclusion was foregone. You can’t refuse to do a jump in the RAF. Loving his job and desperate not to lose it, Lawrie pointed to his exemplary record in the services, all of which they said had already been taken into consideration. They had – they said – his safety at heart:

“What if you were in a plane Tallack hurtling towards the ground at terminal velocity and had to eject hmmm? What would you do then? We have to know that you would put your safety first.”
“Well of course I would. I’d eject insisted Lawrie. But they were unconvinced.
“How? How do we know that?”

To Lawrie the answer seemed perfectly obvious. “Because I know that if I don’t… I’ll die!” He said.

Posted 11:00am by Caspar and filed in Decision Making, Risk

Two Become One

Thomas Crombie Schelling is one of the more interesting unsung heroes of the twentieth century. Awarded the Nobel Memorial Prize in 2005 for “having enhanced our understanding of conflict and cooperation through game-theory analysis” it was he who suggested a phone line between the leaders of America and Russia during the height of the Cold War so that they could talk to each other rather than take the ultimate sanction at times of uncertainty and push the button that would obliterate mankind.

History, alas, only really makes legends of people who save us from chaos, not those who prevent it from ever occurring in the first place.

As a man tasked with advising on how to save our species, Schelling thought a lot about why we do what we do. As a man who found it hard personally to kick the addiction he had to nicotine he also found it important when it came to saving himself.

In 1978 Schelling wrote a brief, fairly unresearched paper for the American Economic Association in which he considered the subject of his addiction through a very specific lens: the rationale of his decision making processes. As part of the National Academy of Sciences who deemed addiction irrational and helpless Schelling was compelled to conclude that it wasn’t and set about considering the problem in a different way.

He recounts a story about being a young boy, impressed enough with Admiral Byrd’s Antarctic expedition that he decided to go to sleep that night with one too few blankets in an attempt to toughen him up against the cold. That decision he says was “made by a warm boy”. The boy who awoke every night too cold to retrieve the blanket used to curse the warm boy who by the following bedtime, got to make the decision again and invariably did in the same way!

“I didn’t realise then how many contests of that kind, some pretty serious, I would eventually have with myself, trying to stop smoking, to exercise, to meet a deadline or to turn off an old movie on TV”

Taking, first, the example of a “Christmas Savings” scheme which pays less return than a normal savings scheme but which serves to protect the saver against their future instincts he relates a series of similar situations in which people make decisions which indemnify themselves against Short Term desires in the future: hiring a personal trainer to prevent us from shirking the last two reps in the gym or placing our alarm clock across the room to stop us from going back to sleep.

These measures appear to be necessary, he concludes because of a continual struggle inside all of us between different decision makers who regard the decision from different points in time. Not just the person who stands there in the moment – although they often end up shouting the loudest. But also the person who will have to live with the decision in 5 seconds, and the person who will consider it tomorrow and the person who will have to pick up the pieces in 2 months from now and the person who may have to live with the memory for years.

So what can we do to intervene? Are we powerless as this struggle rages in inside ourselves – merely crucibles for battle to take place? I believe not. As someone who had to motivate himself to get up every morning and embrace short term failure on a daily basis, I believe I learnt what it takes to intervene and take control. And the best part of it is that it doesn’t inherently involve becoming someone different.

Crucially, it doesn’t involve, as many self-help books would have it, overcoming your fear of failure. Indeed to try and deny our fear of failure is to deny what makes us human. It is to try and remove the very force which drives the Lincolns, Dysons, Edisons and Ungars on to win. Fear of failure is the most motivating force we have… we just have to redefine our definition of failure. Specifically we have to make failure a Long Term phenomenon.

As a poker player, if your greatest fear is the pain of losing a pot, well then you’ll probably never play a hand. But if you fear not making your rent at the end of the month well then that fear of Long Term failure will keep you playing late into the night while you enjoy all the positive Expectation offered by inebriated tourists who will, of course, sometimes win.

Fearing the pain of regret more than the pain of rejection means taking decisions because of the thrill of the cheer rather than the fear of the boo. It means having a goal to aim for and allowing the achievement of that goal to become what is important. It means turning up the volume on the future you and fearing the pain that they will experience if they fail more than the pain which the present you will feel if they do.

“The definition of hell is dying and the person that you are getting to meet the person that you could’ve been.” Anon.  That’s fear of Long Term failure. And that’s a mindset that in any other context we would call driven and ambitious.

We’ve hosted a struggle between the person we are now and the person we’ll be in the future every day of our lives. Whenever we make any decision, in fact. And the reason that we have taken all the risks we ever have is because at some point our future selves have shouted loudest and we’ve glimpsed the future that they’re going to have to live in. And we’ve found ourselves asking a crucial question…

“What if I never…?”

“What if I never ask her for a drink? What if I never set up on my own? What if I never buy a property? What if I never take this meeting? What if I never tell him how I really feel? What if I never try this new way? What if I never take this opportunity? What if I never seize the moment? What if I never do any of the things I talk about and plan…?  What will my life look like then?”

The fear of meeting the “person we could have been” has spurred a thousand of us to take a million risks. Not all of them successful. Not all necessarily even good. But at least we’ve taken action. Because in the words of John F Kennedy “There are risks and costs to a programme of action, but they are far less than the long-range risks and costs of long term inaction.” Just ask IBM. Or Western Union. Or Xerox. Or any of the men and women whose names we’ll never know because they never tried and failed, or succeeded, to achieve the dreams they dreamed of or live the life they never got to know. Because they bought into an illusion: the illusion that the Long Term never comes and that this decision, now, is all that really matters and failure would be a risk they can’t afford to take.

There are risks and consequences associated with Short Term action. But they are not as great as the Risks and Consequences of Long Term inaction. We know this. For this is the reason we do anything.

The Illusion of the Irrelevance of the Long Term

In the early 80′s a riddle did the rounds which had everyone stumped for a few days until the solution followed shortly afterwards. Considering this was before you could forward something to a group in Outlook, ideas used to propagate themselves very quickly in those days. The riddle went like this:

3 MEN GO INTO A MOTEL. THE MAN BEHIND THE DESK SAID THE ROOM IS $30,
SO EACH MAN PAID $10 AND WENT TO THE ROOM. A WHILE LATER THE MAN BEHIND THE DESK REALIZED THE ROOM WAS ONLY $25, SO HE SENT THE BELLBOY TO THE 3 GUYS’ ROOM WITH $5. ON THE WAY, THE BELLBOY COULDN’T FIGURE OUT HOW TO SPLIT $5 EVENLY BETWEEN 3 MEN, SO HE GAVE EACH MAN A $1 AND KEPT THE OTHER $2 FOR HIMSELF. THIS MEANT THAT THE 3 MEN EACH PAID $9 FOR THE ROOM, WHICH IS A TOTAL OF $ 27. ADD THE $2 THAT THE BELLBOY KEPT = $29. WHERE IS THE OTHER DOLLAR?

The answer – which I must confess eluded me for ages – is that there is no $30. Each man pays $9 for the room which equals $27, plus the $2 equals $29. Simple. But the illusion is a powerful one.

In the same way, the powerful illusion is that every decision we make is important and that we never get the chance – like a share trader who makes dozens of trades a day, or the poker player who plays dozens of hands an evening – to get to the medium term. But we do.

No poker player gets to play any exact hand more than once. But you still make the decision that is right according to the Long Term every time, and that way you make a profit. No trader gets to invest in the exact same share with the exact same future prospects for the exact same price twice. But by investing with the best long term expectation in a series of inherently independent situations you give yourself the best chance of making the best Long Term return.

I understand that some decisions feel so big that we’ll never ever reach any kind of long term and so the best policy seems to be to play it safe. Putting your children through school; setting up your own business; buying your own home; getting married; going back into training; getting divorced; being completely honest with your team… the list is endless. And that’s the point.

While we look at the present and the future from one position at the point of making a decision… it all looks very different in the rear view mirror. Eventually the numinous truth of the illusion catches up with us and we realise that each monumental mountain was really only a molehill – only one of many problems that we had to overcome; just part of a continuum which eventually became a Long Run.

And those of us who explored the opportunities and took the risks in a calculated way will, eventually, have received what we expected (or Expected) and deserved. And those of us who eschewed them and feigned satisfaction with the safer option experience a pain much greater than the pain of setback or Short Term failure… in the Long Run they experience the agony of regret.

And the most amazing thing about it all? The most amazing thing is that we know this. That’s why when we have to make a difficult decision we feel torn… we feel torn between the person we are now and the person we know deep down that we’ll become in time. And that is the struggle that takes place inside us all whenever we make a decision. Long Term vs Short Term: the us we are tonight and the us we’ll be tomorrow.

Fundholders, Salespeople and Timeframe of Judgement

“Don’t worry Mr Berry, I can assure you that these fund managers are put through their paces rigorously. Not only do we meet them and psychologically profile them every 3 months or so but we are inspecting their results practically every day.” It was with these words that my investment advisor for a well known financial services company lost my custom in his attempt to sell me the virtues of their “fund of funds” investment practice.

I know from my work with investors in other similar well-known organizations that there are several fundamental problems with entrusting your money to people who work for institutions. Some people will tell you that the problem is that the money isn’t theirs and therefore they don’t care enough about it. This is not the problem. Or certainly not the only problem. Just as problematic is the fact that because they are accountable to others they care too much! About the Short Term, at least!

This isn’t entirely fair. There are some great companies out there with whom to entrust your savings and obviously there are equally big problems with investing it yourself such as plain old ignorance and your own personal fear of failure.

But ask any analyst what are the essential problems with his traders decisions and he will tell you: despite a billion dollars of IT telling them exactly what to do, professional investors still go and make emotional decisions. Most notably, they sell appreciating stocks too soon and depreciating ones too late. Why?

Because anyone who buys or acquires an asset (like a stock or share but hopefully the regular reader of this blog will think more broadly than this) that goes up in price will experience a pretty small increase in their overall utility or happiness as the price of that asset increases.

Let’s imagine for a moment that you are operating in an environment where your short term results are scrutinized. Lets imagine that someone (could be your manager, could be your fund-of-funds manager, could be your shareholders, it doesn’t really matter) sees the increase that you have just enjoyed as a green number on your screen or balance sheet. Looks good. Everyone’s happy. The problem is that you know that all the information you have is telling you to hold on to that asset because it’s Long Term value of Expectation is good and positive. It could go down – possibly even to below the buy price. But it could go up. Perhaps significantly so…. But it could go down.

And then that green number is would turn red. And all your congratulations would be rescinded. And the good first impression which you initially created would be called into question. So, despite the fact that everything is telling you to hold onto that asset the law of diminishing marginal utility means that as it does so you have more and more to lose and proportionately much much less emotionally to gain. So what would you do in a rational-emotional sense while it’s still green?

Conversely, let’s imagine for a moment that the price of the asset falls soon after you purchase it. You experience an initially quite severe loss of utility as you now have an ugly red number on your screen or in the wrong column on your balance sheet. What do you want to do deep down right now? Get rid of it sure. But that’s just going to bank the loss and preserve it for posterity and everyone to see. What do you really want to do in this situation? That’s right. Exactly what Nick Leeson wanted to do. You want to get even on the deal. You want hold on to it. Because even though all the information is telling you that this thing has a negative future Expectation… it could… it could go up. Maybe even back above the buy price. It could become a green number!

If it goes down it will just become a bigger red number, “well” you think, “you’ll deal with that when the time comes”. Your results for the day/week/month are going to be reviewed this afternoon, you decide to hold onto it just in case it goes up before then and turns green. Although it doesn’t.

What was the problem here? You work for an investment bank. And yet you’re making the emotional decisions which are not profit maximizing and therefore not serving your clients effectively. Why is that?

The problem is one of outlook, corporate culture or individual mentality. In the example cited, I am stressing the essentially Short Term nature of your assessment in a world where it is Long Term results that ultimately matter. Again, the Long Term is no particular time frame but just whatever your overall goal is. If someone could guarantee you that you’d make a 23% return this year you wouldn’t care what the results were in week two! By evaluating you on irrelevant results, the culture is forcing you to make rational-emotional decisions, of the kind that brought down Barings Bank.

These are the same rational-emotional decisions which persuade a poker player to quit for the evening because he’s made a sum of money with which he’s happy even though his opponents are drunk and effectively giving it to him in the Long Term. Of course, there is nothing to say that the next hand won’t give those same drunkards a four of a kind against your aces full, but that doesn’t matter. Your Long Term Expectation is positive. Quitting is effectively losing you money even though it may look like you’re saving it. And I’ll say it again, this isn’t just happening at the poker tables of Las Vegas, it’s happening every day with billions of dollars at stake. Short term accountability is costing you and me money! Oh the irony!

If you Want to Succeed you Must be Prepared to Fail

“Choose a dojo.”

With these words, at the beginning of Chapter 1 of Step 4 of his bestselling book, The Game, Neil Strauss lets us into a little secret of the world of the Pick-Up Artist (or PUA) which none of the other writers on the subject will tell you.

If you’re not familiar by now with the principles outlined in this particular book then it is unlikely that you are a man between the ages of 14 and 34. If you are a woman between those ages then you have more than enough reason to familiarize yourself with them because if you don’t then you leave yourself exposed to having them used on you to get you into bed.

The principles or “methods” themselves are currently being sold for literally thousands of dollars at weekend boot camps around the world to horny young men who are attracted to the promise of getting to sleep with a girl with whom they would otherwise stand no chance. But there is a secret that they will not learn there…

The secret is not that the methods he is paying top dollar for do not work. They do. Just as there is an effective way of selling cheese (which convinces the prospect that there is a high probability that they will accrue the pleasure they desire for an appropriate investment of money) there is an effective way of selling oneself as a potential mate. And it works.

But just as the best way to win as much money in a poker game as possible is to play every single hand, so the best way to get a girl to go home with you is to ask as many as possible.

Actually, we must remember the principles of the calculated risk and Expectation theory. A professional poker player plays about 10-20% of hands and it is really after the decision to play that the real work begins. Playing every hand is a surefire way to win the most money – by giving yourself the chance to win the most pots. But it is also a surefire way to lose the most overall. The aim of poker, it should be remembered is not to win money but to make money.

In much the same way, the art of seduction as presented, clinically and rather misogynistically, in The Game is to pick your target (much like a poker hand) which gives you a positive Long Term Expectation and play it effectively. As with poker there are definitely ways of playing the game which are better than others, but by conceding that you can choose a dojo, Strauss is effectively saying that the method you adopt is not the most significant thing about your choice to become a PUA. What is significant is that – like a poker player – you have made a decision that in order to achieve your Long Term goal (in poker making rent at the end of the month, in seduction getting laid) you are prepared to fail in the short term.

It’s very difficult to get a figure as to the kind of percentage of Short Term failure you need to embrace from any of The Game’s many acolytes around the world. Most of them now have a large financial interest in convincing you that their method will incur you the least. In poker there are definitely different strategies: some people win 65% of hands they play but the pots are small, other people win 20% of hands played but the pots are large. Both strategies can make a profit. Both can make a Long Term loss. There are no magic bullets. Although, in general, it is perhaps unsurprising given what we know now that the players who play “fast” lose more than their fair share but make the biggest Long Term gains.

In the same way, the guys who are prepared to be shot down in flames at various points in any given evening in the bars and clubs of Los Angeles are the guys more likely to be walking home with the Victoria’s Secret model at the end of the evening – the perfect 10s as they’re called.

Actually, Timothy Ferriss makes a staggeringly elegant, but strikingly insightful, point in his book The 4 Hour Workweek which is that it is actually often easier to “close” a 10 than a 7 in situations such as these (I realise how horribly sexist all this is) precisely because everyone is chasing 7s while no one has the courage to even approach a 10.

In this way, while there will undoubtedly be setbacks and rejections, the people with the courage to bear these actually end up exploring an area which no one else is, and reap the attendant benefits and Long Term returns of doing so.

Being Different is Difficult

“Worldly wisdom teaches us that it is better to fail conventionally than succeed unconventionally”.  John Maynard Keynes in The General Theory of Unemployment.

Yes, standing out from the crowd is difficult at the best of times, let alone at times of pressure or war.

The Space Shuttle Challenger disaster occurred on January 28, 1986, when Space Shuttle Challenger broke apart 73 seconds into its flight, leading to the deaths of its seven crew members. The spacecraft disintegrated over the Atlantic Ocean, off the coast of central Florida, United States at 11:39 a.m

Extensive analysis after the disaster found that disintegration of the vehicle began after an O-ring seal in its right solid rocket booster (SRB) failed at liftoff. The O-ring failure caused a breach in the SRB joint it sealed, allowing pressurized hot gas from within the solid rocket motor to reach the outside and impinge upon the adjacent SRB attachment hardware and external fuel tank. This led to the separation of the right-hand SRB’s aft attachment and the structural failure of the external tank. Aerodynamic forces promptly broke up the orbiter.

The Bay of Pigs Invasion (known as La Batalla de Girón in Cuba), was an unsuccessful attempt by a U.S.-trained force of Cuban exiles to invade southern Cuba with support from U.S. government armed forces to overthrow the Cuban government of Fidel Castro. The invasion — planned and funded by the United States government beginning in 1960 — was launched in April 1961, less than three months after John F. Kennedy assumed the presidency in the United States. The Cuban armed forces, trained and equipped by Eastern Bloc nations, defeated the invading force in three days and the event accelerated a rapid deterioration in Cuban-American relations. This was exacerbated the following year by the Cuban Missile Crisis.

What both of these apparently unconnected disasters from the history of the United States have in common is that in each case – after the event – a majority of senior people admitted to having grave reservations about the wisdom of the decision to execute in the way and at the time they did. Why did no-one speak up? Ultimately because of the law of diminishing returns. Because ultimately people made a decision based on the fact that there was less to gain from being different than there was to lose. Even if they were right!

In 1990 David Sharfstein and Jeremy Stein looked at the tendency of financial fund managers to invest in the same stocks as one another, something counterintuitive when you consider that part of the job of an investor is surely to convince your clients that you are outperforming your competition. Clearly, fund managers had calculated that given that most investors didn’t know what was a good investment – according to Keynes’ diktat – the best way of proving that a strategy was good was that it was the same as other strategies. This was their way of using Cialdini’s “social proof” to gain trust and confidence or what we would describe as a high probability assessment of success on the part of potential and current clients.

In this way, fund managers were saying that in an uncertain market, there was less to be gained from the potential relative gains that would result from being different than there was to be lost by the potential losses of the same strategy. The necessity to convince investors of their competence ironically resulted in them not being able to demonstrate that competence effectively.

And so it is with the need to report to shareholders. Broadly speaking in UK industry today, the traditional corporate model which divides ownership and control and shackling it with increasingly cumbersome requirements of accountability is resulting in corporations in which no one is prepared to stand out and suggest that what they’re doing might not be right simply because they have too much to lose by doing so. Corporations are giving their boards a healthy package of remuneration once they get into their middle age by which time they have a family, a nice house and lots to lose… and then it tasks them with making decisions in the shareholders best interests… decisions which in an uncertain world, might not actually succeed in the variance of the Short Term… and then asks them to report every three months or so long before the Long Term has kicked in…

Well what would you do? And why? And what is the effect on corporate decision making as a result?

Posted 02:56pm by Caspar and filed in Decision Making, Innovation

The Origins of Fear of Failure

The Law of Diminishing Marginal Utility basically says that the more that we have of something (as denoted by increases in the Quantity measured on the horizontal axis) the less and less additional satisfaction we get from each additional unit of it.

At its simplest level this just means that if you eat a big bowl of ice cream, while each spoonful is making your tastebuds tingle as your dopamine is released when you start… about halfway through you’re probably a lot less keen on the taste of ice cream and each spoonful is giving you less and less satisfaction.

Clearly this is the case for ice cream because eventually you will feel sick, but it is also the case for many things: it would be nice to have a Ferrari but if you had 10 Ferraris most people who read this would probably not get the same happiness from the 11th Ferrari as you got from owning the first one. It would be nice to go on holiday but you probably wouldn’t be getting the same utility from the 66th day as you got from the first one. And even where money is concerned, while it would be nice to make a million pounds, but Warren Buffet almost certainly doesn’t get the same thrill of making a million pounds after having made thirty six thousand of them already that we would. Indeed as Arnold Schwarzenegger once said “Money doesn’t make you happy. I’ve got fifty million dollars. I’m no happier than when I had $48.”

The effect of this apparently irrelevant aspect of our psychology however could not be more profound when it comes to the decisions that we make. In other posts I’ve referred to the way in which otherwise rational people like Stuey Ungar and Nick Leeson made apparently insane decisions because of the allure of the upside and the limited downside associated with them. They gambled as a result of their emotional situation at the time. Well this is the opposite. Diminishing marginal utility means that most of the time we actually get LESS pleasure from our gains than we get pain or potential pain from our losses.

This muted upside and exaggerated downside in our Emotional Expectation calculation is what stops a lot of us from achieving the Long Term results that we want: we are scared of losing what we have in order to gain what we desire. Often, that is because we don’t even know what it is that we desire. Sometimes we do but we’re not prepared to lose what we have in order to achieve it in the Short Term.

Sometimes this fear is good. It’s what stabilizes our society. America’s delinquent youth don’t fear the downside as much as weedy academics – which is why they label them irrational and uncontrollable. It’s fashionable now to blame the parents, of course, but what it they’re not scared of what they’re parents have to say or do.

If Nick Leeson had been a little more frightened of his Mum or Dad then maybe Barings bank would not have gone the way it did. Likewise, if Kenneth Lay or Jeffrey Skilling had feared the eternal flames of hell a bit more then maybe they would not have tried to swindle their shareholders out of millions and embrace their own personal and corporate downsides to quite the same extent.

But there is a downside to this fear too. And it is a downside which costs similar shareholders a great deal more in the Long Run than a couple of corporate frauds no matter how massive and illegal they have been in recent years. The fact is that much more pervasive fraud is occurring every single day in boardrooms and offices every single day in companies across the world as leaders make decisions in direct contravention of the legal requirement to operate at all times in the shareholders best interests. They don’t. They don’t even come close to doing so. They operate largely out of a sense of self-preservation and fear of short term failure. I certainly would if I were in their situation and had the weight of quarterly shareholder reports bearing down on me on a daily basis. These are not the conditions necessary to motivate people to take the necessary risks to be the best at what they are doing.

On the last bend of the women’s BMX event in the 2008 Olympics British cyclist Shanaze Reade gave up a certain silver medal place in order to overtake the leader and push for gold. She failed, came off her bike and went home without a medal or – she says – any regrets. She was prepared to lose what she had in order to gain what she desired.  Would she have done the same had she had to report her results to a group of shareholders at the end of every race? Shanaze Reid went into that race as the world champion and the out and out favourite. And she got to that place by consistently being prepared to lose what she had in order to gain what she desired.

The ability to lose what you have in order to gain what you desire ultimately this is what will define your ability to achieve what you want – whatever that may be. The question is how do we embrace that mindset in poker, business and life?

Stu The Kid and the Rational Emotional Mind

About twice a week, I have the privilege of working with leaders in the UKs public, private and third sectors in my “Risk Taking and Decision Making” seminars. In addition to giving them what I hope are some interesting, sometimes inspiring, insights into Risk, Uncertainty and why they do what they do, we also have a lot of fun. Specifically, we play a game very similar to (but obviously not actually) Deal or No Deal in which the people in the room are asked to BUY the box from me, rather than SELL it to me as they being asked to do on the television show.

I sell in a number of different ways: sometimes an auction, sometimes a negotiation, sometimes a closed envelope bid. But no matter how I sell it, the same phenomenon happens every single week. At the beginning of the session, I give them a specific number of poker chips (their scarce resource) and inform them that the team or individual at the end of the session with the most number of chips will get cheered and free drinks all night (depending on the client, you’re not allowed to do this in the civil service). The losing team, however, will be booed! They think I’m joking so I repeat myself. The losing team will be booed. It’s amazing how the promise of a cheer and a boo focus the mind of competitive colleagues but focus it they do and when it comes to sell the box… everyone… and I mean everyone… values it completely differently. Why?

In order to understand this, let’s consider the story of Stu “The Kid” Ungar. Born on the Upper East Side in 1953 to Jewish parents Stu was exposed to gambling at a young age. By the age of 10 he had won his first local gin rummy tournament and soon after he dropped out of school to play full time, earning thousands of dollars in the process. Rummy – a game with as much variance, or short term luck, as poker – is theoretically difficult to dominate, but Stu managed it. He didn’t just beat his opponents, he destroyed them mentally.

One night he beat Harry “Yonkie” Stein, the man widely regarded as the best player in the world before Stu came along, so consummately that Stein gave up the game soon afterwards. Soon afterwards, no one would play him. He had to offer handicaps to people to get them to take up the challenge but even that didn’t work so he moved to Las Vegas and took up poker.

The first time he ever played No Limit Texas Holdem was in the he won the World Series of Poker main event in 1980. He won it. And came back in 1981 and won it again! During the course of his career he played in 30 tournaments with buy-ins of $5,000 or more against the best players in the world and won 10 of them! He was the best of all time, and he knew it. As he himself exclaimed: “Some day, I suppose it’s possible for someone to be a better no limit hold ‘em player than me. I doubt it, but it could happen. But, I swear to you, I don’t see how anyone could ever play gin better than me.”

During the course of his life he is estimated to have won more than $30m at the poker table including the $1,000,000 first prize for winning the 1997 World Series, the third of his three titles in the big one. He was found dead in his room of a cocaine overdose in November 22 1998. He had just $882 to his name. His friend Bob Stupak took up a collection at his funeral to pay for the services.

Stuey Ungar was one of the quickest and most brilliant statistical minds ever to play the game. He used to shout out probability calculations across the card table to two decimal places. He knew every probability there was to know and those that no one knew he calculated in seconds. He took the most brilliant calculated risks that the game has ever seen but he died practically broke after having lost everything on dice and horses.

How could a man with more understanding of Expectation than anyone who ever lived repeatedly and willingly throw millions of dollars away in the course of a lifetime?

The reason cannot be the different probabilities involved or even the different  possible potential outcomes, but the meanings we apply to the those outcomes. And they are different for everyone.

Most people go into a casino with a certain sum of money in their pocket which they are willing and happy to lose. “I have £50 for the evening” they say “and then it’s home to bed.” So the potential emotional downside for them is limited. They went intending – or at least agreeing – to lose £50 so when it happens it is no big deal. The meaning they have decided to place on that loss is minimal. But the upside… oh the upside…

Dopamine is a neurotransmitter commonly associated with the pleasure system of the brain providing feelings of enjoyment and reinforcement which motivates a person proactively to perform certain activities. Dopamine is released (particularly in areas such as prefrontal cortex) by naturally rewarding experiences such as food, sex, drugs, and neutral stimuli that become associated with them.

Dopamine is good because by reinforcing the things which keep us alive, (giving those things an emotional upside) we continue to make decisions which give us a release of dopamine. The meaning or value we apply to the feeling that dopamine induces is positive although we are largely out of control of this process. The drugs that trade illegally in our society are, not surprisingly, those which also precipitate a release of dopamine into the body.

Now we start to get an insight into the life of an addict who is getting massive dopamine highs from his wins and almost no emotional lows from his losses. Stu Ungar’s intense and detailed knowledge of the mathematics of his investments on the nags were irrelevant to him. Because that was not the part of his brain that was doing the deciding. And the part of him that was didn’t care about the losses. He just lived for the wins.

Labeling Stu Ungar however as irrational, however, or bemoaning the kids who are apparently immune to the threat of tougher sentences or even a greater likelihood of being caught is to completely miss the point, however. These people are not irrational in the sense of being unpredictable or insane or delusional or unaffected by the consequences of their actions. Far from it. There is research showing evident links between aggression and dopamine because obviously before the development of a justice system there was as much of an evolutionary advantage to being aggressive and defending one’s life as there was to taking risk and exploring new territory.

No, It’s not that Ungar or delinquent teens in America are irrational. That’s not the problem. Indeed, the problem is quite the opposite. It is that they are intensely rational, constantly weighing up upsides and downsides and probabilities thousands of times a day, like the rest of us. The problem is not the absence of a calculation, it is the INPUTS into that calculation. It is the meanings that they place on those outcomes that are the problem.

More specifically it is that for whatever reason, the thought of losing a hundred thousand dollars didn’t bother Ungar any more than we’d be bothered by the thought of losing 50 pence and thought of going to prison doesn’t bother a portion of American teenagers anymore than it bothers us to be stopped by police for having a headlight out. Conversely, the thought of winning half a million (away from the poker table) gave Stu Ungar shivers of excitement and the thought of beating someone and stealing their wallet still gives some people a rush of dopamine which kept their prehistoric ancestors alive.

We can argue about what causes the particular meanings and values which these people place on the different possible outcomes until the cows come home, the fact is that these people are not being irrational any more than the acquisitions team of one of the world’s biggest companies who told me once that quite early on in their final confabulation, despite the mass of data thrown up by the due diligence someone in the room would pose the question “how do we feel about them?” In other words “OK, what meanings do we place upon these numbers?”

In another room full of senior executives culled from the upper echelons of British industry there is a different decision to make: how much to give me for my box. With offers varying hugely across the room, it’s clear that despite their similar backgrounds and capabilities we have a room full of people here who place very different meanings on the upsides and downsides involved.

I personally find this endlessly interesting because of course there isn’t even any money at stake, just status or reputation given that they are effectively just playing a game with their colleagues. Some of them – perfectly reasonably – don’t really care about it arguing that “they’re just poker chips” and therefore are often prepared to bid whatever is necessary for the chance of opening the most lucrative box. Others, though they might not like to admit it, care deeply and don’t want to do anything which might mean they have the least at the end of the day. As one participant exclaimed as he banged his fist on the table, exasperated with the collective decision-making of his colleagues: “What are you lot most driven by… the thrill of the cheer or the fear of the boo?”

As I remarked at the time, a better examination of why we do what we do in poker, business and life is actually hard to find: what are you most driven by? … the thrill of the cheer or the fear of the boo?