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.

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.

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.

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?

Great Decision Making

By the time you read this post, it will likely be out of date. As I write these words, the world is bracing itself for a Greek euro exit – according to The Independent. They may well have another election. They may not. The simple fact is that – right now – no one actually knows. We’re looking at events without the benefit of hindsight which you – the reader – looking back, obviously enjoy.

Hindsight is a wonderful thing. That’s been said before. But interestingly, no matter how much one values hindsight consciously, it’s so easy to undervalue its effect on us at a subconscious level and assume that the way that something turned out was the way it was always destined so to do.

Imagine a magician shuffles a deck of cards, places all 52 of them onto a pool table and asks you to bounce the white ball around the cushions until it comes to rest near one. You have a free choice as to which you think is nearest. The magician thinks for a moment and announces that it is the nine of hearts. Absolutely incredible. How on earth does he do it? He turns them all over to reveal 52 nines of hearts. Of course. Easy. That is the only way such a remarkable trick could be performed. And so obvious looking back because – you remember now – that he omitted to show them to you before performing the illusion.

You project yourself into the body of the person you were ten minutes ago with the knowledge you have now and cannot believe that you didn’t guess something so self-evident. But the fact is that before you found out the secret you were oblivious to the crucial information, it was anything but obvious.

Before the launch of the space shuttle Challenger – according to the Rogers Commission – NASA were aware of the design flaws of Morton Thiokol’s O-Ring but failed to address it properly. Remiss of them, of course. But obviously they didn’t know that it would lead to an explosion. It was imperfect – as probably was everything else involved with the extraordinary endeavour of propelling man into space. The commission looked back at events as we look back on the magic trick and cannot understand how someone could have made such a mistake because they cannot imagine what it must have been like to have operated without the information that they subconsciously simply take for granted.

As regular readers of this column will know, I make a living talking to companies about all aspects of risk and decision making using poker as my metaphor. At the end of a lot of such sessions, I’ll often host a poker game for participants and usually deal a table myself. I work with some of the UK’s best managers. They make demanding decisions everyday, with limited information and uncertain futures. But everyone reacts the same when – after having folded a ten and a three in the first two cards – the next three cards are ten, ten, three, thus potentially throwing away a full house. “Why are you bothered?” I say as they berate their bad luck “Because I would have won the hand” they cry. “But you did the right thing with the information you had available to you” I protest.

Again, consciously they understand the facts but subconsciously they chastise themselves for doing something so apparently stupid! It’s bizarre when you stop and think about it. It seems to be the most natural thing in the world to judge a decision not by its intrinsic quality but by the outcome – known only after the event.

Of course the opposite of this is something very challenging to our twenty first century sensibilities: that – away from the hypothetical baize of the poker table – there is such a thing as an intrinsically good decision irrespective of the outcome. That seems so counterintuitive as almost to make no sense. How can the right decision be one which in actuality ends in failure? Is it possible to judge people independently of short term, noisy and irrelevant results? I would say that it is but that it is so difficult and demanding as to be way beyond the desire – or ken – of most people in management today.

About six weeks ago, the sports section of a UK newspaper debates the suitability of Kenny Dalglish to continue to manage Liverpool in light of their appalling run of results around that time. It is generally by all contributors agreed that Kenny is in trouble but that their place in the FA cup final is protecting him: victory in that would probably save him, defeat would likely consign him to history. But win or lose that 90 minute game he is still the same man with the same essential talents. The question fundamentally is whether – for all his skills and shortcomings – he should continue in the post. Not what result he gets on that particular day? Surely?

The journalists concerned apparently believe that that result – above all others – will reveal to us how good a manager Kenny really is. As though the result of a few balls bouncing one way or the other give us greater insight than, for example, going to the training ground to see Dalglish talking to his players or (hypothetically) questioning him for a morning on his tactical responses to opposition formations.

This is tantamount to judging the playability of ten-three in poker by the result of that particular hand. It is openly allowing short term results to decide the answers to much deeper, more challenging concerns and exposing us to the biases of hindsight when judging events and the quality of our decisions given what we knew without its benefits.

It’s a utopian cry to get away from being a results-based world, I know. But in a world which moves as fast as this one does; where in a couple of days literally everything can change, it is essential. By the time you read this you will know the outcome of the decisions you’re making as I write it. But a long time before that, you should be able to say how intrinsically good they actually are. Can you?

Posted 01:57pm by Caspar and filed in Decision Making

The Speed of Trust

It’s not easy being a professional poker player. On the plus side, admittedly there is an unparalleled amount of autonomy and an absence of accountability: no boss, no clients, no shareholders to report to. On the other hand, it’s one of the few jobs where you can do everything right and come home down overall on the day. It’s a world in which you can win at the table only to be mugged on the way back to your hotel room with your winnings in your money belt. The risks extend way beyond those which you can logically calculate in a 52 card deck. No wonder it was once described as a hard way to make an easy living!

The most trying tribulations are often the little things that you wouldn’t necessarily think about – like what you put as your profession on your passport if you want to go on holiday to Dubai. Getting car insurance is difficult, income replacement is obviously impossible! This week, as if all that were not enough, I was refused a bank account.

The meeting was embarrassing and awkward in the way that we’re all used to in the call centre economy of 2012. Obviously the person I was talking to was not to blame. He was not the decision maker in the way that he would have been 20 years ago. He just typed my details into a computer and it dutifully said “no”.

With the exponentially increasing processing power of computers, such impersonal and data-based decisions make perfect sense. On the aggregate, they trump intuition and, of course, they’re cheaper to churn out. The behavioural biases of human judgement are replaced by the cold hard calculations of an algorithm which does not demand sick-pay or annual leave.

Somewhere, a computer processed my credit score – a function of my living arrangements and financial repayments in the last 6 years – and reckoned that there was a high probability that I would run up an overdraft and abscond. It doesn’t know who I am or what I’ll actually do any more than Amazon knows what I want to read when it recommends books that I might enjoy. But – like Amazon – it compared the data it has on me with lots of people like me and made a probability assessment which, in my case, was not good.

The link between such an assessment and the world of gambling is, historically, a close one. In the 16th Century, renaissance Italian mathematician, physician and compulsive gambler Geronimo Cardano laid the foundations of the language of probability in a work which gave more attention to his recommendations for ways to cheat at games of chance than it did to the new and revolutionary branch of mathematics that he’d produced. More famously, the creation of expectation theory was Fermat and Pascal’s solution to the Problem of the Points, posed to them by another gambling addict, in this case their friend the Chevalier de Méré.

It’s hard to overstate the importance of such works. In the creation and application of the language of probability, Cardano, Fermat and Pascal along with numerous others in the years that followed (Laplace, Huygens, Bernoulli) laid the foundations for the industrial development of the instruments of modern finance that have profoundly shaped the world in which we live. It is a long time since their formulations found their apotheosis in the world of high finance rather than the lowest of all low culture. So what on earth does the skillset of a professional poker player have to bring to the world of credit assessment which so thwarted me this month?

Ultimately of course, in a hand of poker, I’m trying to do exactly the same job as the bank manager or the algorithm that has replaced him: I’m trying to assess the honesty of the person sitting opposite me. It’s significant of course that the word credit itself derives from the Latin credo, meaning trust, and poker is a rare – perhaps unique – activity in that it legalises lying, so assessments of honesty are fundamental to success. In this way though, poker just distils a process of probability assessment in which we’re engaged with each and every inter-personal encounter: does this person threaten us as we encounter them in the street; do we trust that they’ll pay us back if we lend them money?

As with most assessments that we make, the majority of the time we do it subconsciously: we match the patterns of a person’s dress, behaviour and facial movements with our database of information built up over the course of a lifetime – in the same way that Amazon matches our purchasing records with similar customers in order to assess what we’re likely to buy.

Sometimes, though, even Amazon gets it wrong and so do we. The other day I thought a guy was going to mug me on the way to my hotel room, only to find that he was running towards me to return my phone that I had dropped at the poker table! It all happened very quickly and I based my first assessment on a limited amount of information. As more “data” became available I revised my initial assessment and was more accurate as a result.

As accurate as my bank’s algorithm is in the aggregate, in my case it also got it wrong. Far from posing a credit risk, I have no desire to take on any kind of debt and every intention of depositing a six figure sum to open the account! I tried explaining this but the man on the end of the line had no ability to converse with a computer than could not take on new information.

While we call this age of big data, the amount of information contained in my credit score is actually a tiny proportion of the whole. This is not just personally frustrating for me, it is affecting the profits of companies who are relying on such algorithm assessments for their income. Sure, they’re better than the assessments made by the relatively low pay-grade personnel who inhabited these roles 20 years ago. But they can be better still – and they will be. The question is who is going to steal a march on the competition and really open up this kind of assessment to a revolution by using the kind of granular and detailed information about me that exists out there in cyberspace.

In a world of scarcity, decisions must be made that maximise ROI and reduce risk and some people are definitely better “bets” than others. But turning me – and others who exist outside the norms of a system – down is like folding to a bluff. It’s poor play and players who can exploit this inefficiency can make a lot of money.

Posted 01:44pm by Caspar and filed in Decision Making, Risk

Life’s not fair

“That’s not fair” I cried as my friend completed his set of Vine St, Marlborough St and Bow St that would eventually lead to victory that evening.

I wouldn’t have minded of course had he completed the transaction fairly and squarely but the deal was sealed with the offer of both four hundred pounds of monopoly currency and twenty pounds of actual sterling! “That’s cheating,” I shouted again. And thus began an argument which still rages to this day, twenty years on. To me, there is no debate; what he did was outside of the rules of the game. It was cheating.

I was reminded of this experience recently when, in April of this year, the FBI seized the URL addresses of the two biggest online poker sites, Poker Stars and Full Tilt. The action finally brought an end to their US operations five years after the uncertainty initially created by the Unlawful Internet Gambling Enforcement Act of 2006.

Some have viewed this definitive action to be a good thing, but the unacceptable sting for many players active on the sites at the time is that whilst Full Tilt had a reported $400m in players’ funds it only had $60m in the bank – apparently placing its faith in a kind of fractional reserve system of deposits that is likely to leave thousands of players nearly bankrupt.

“That’s not fair” they have understandably cried as two of the site’s founders are alleged  to have taken dividends of tens of millions from the site leaving the vast majority with almost nothing to show for years of play/work!

Interestingly, while what has happened is almost certainly illegal, and therefore obviously much more serious and profound than a bit of cheating at monopoly, the central problem is very similar: what happened took place outside the basic rules of the game. It still happened, however, and no amount of shouting or complaining is likely to change that fact.

The common perception of poker is that it is broadly a game of epistemic risk. Complete novices sometimes think that it is a game of deductive logic, like blackjack, that starts and ends with the likelihood of a particular card coming down. After playing the game for even just a few hours, however, it is clear that this is only a very small part of the story and that in practice playing the game involves making a series of inductive assessments about our opponents – assessments which get better with experience that leads to greater accomplishment and expertise.  In this respect, the decision-making process of poker is very like that of any other realm of life.

Where poker is unlike life is that often you are forced to make such a decision every 90 seconds or so. Given that you cannot abdicate, delegate or procrastinate during the process of making them, they are even less like a lot of the decisions we make in life which are often left unaddressed for as long as possible! Similarly, the decisions we make in poker are often very one dimensional, focusing merely on the allocation of money, in the form of poker chips, for the purposes of accumulating more in the long term. There is rarely any consideration of society or the greater good of those around you which ultimately is why I stopped playing professionally.

But where poker is exactly the same as life is that – despite a recognized set of rules by which the game can be played reasonably and fairly on a daily basis – from time to time those rules will be breached. Often, such a contravention will be unfair to one or more parties: people may lose money, in the real world they may lose things much more valuable and precious.

In The Black Swan, Taleb defines the “Ludic Fallacy” as the misuse of games to model real-life situations, but in actual fact both are a perfect metaphor for the other and Taleb goes on to say as much. Each has a set of rules which – if and when adhered to – make their play relatively straightforward and enjoyable. In games, however, people cheat and poker sites go under and in real life governments default and whole currencies collapse.

He creates the hypothetical situation of a “fair” coin being flipped ninety nine times and coming up heads every time. Two fictitious creations of the author – Fat Tony and Dr John – are asked for the chances that the next flip will also bring up heads. Dr John’s answer: “obviously fifty-fifty, independent events have no bearing on each other”. Fat Tony: “near enough one hundred percent heads” on the grounds that any coin that flips heads ninety nine times straight is obviously biased.  In other words, just because a game appears to have rules, doesn’t mean that they are – or always will be – adhered to.

(And even if they are, the probability is never an objective 50% Actually the uncertainty principle reigns even here as Dr Jeffrey Hamilton demonstrated accidentally in October 1972 when in a lecture on probability in the University of Warwick he tossed a 2p coin and was astonished as everyone else to witness it land on its edge!)

The effect of such a consideration in the game of poker has the interesting effect of making it much more a game of aleatory or unpredictable – some might say unquantifiable – risk. The probability that the next card is an ace is arguably far less significant in our overall calculations than the chances that the game we’re playing is somehow rigged, or the likelihood of being robbed on our way to the carpark or the probability that the website on which we’re playing doesn’t actually have our money in it, or… who knows what?

When such breaches occur, we may feel aggrieved; we may be moved to protest; we may seek revenge and we may be justified in any and all such responses. But, hopefully, there is one thing we know for sure above all else… from time to time such things will happen. They will. Life… is unfair. And any long-term strategy that does not account for such possibility must surely be inherently flawed in some respect. If we play the game assuming that nothing unfair and outside the rules of the game will ever happen then we’re not playing the game particularly well.

The only question is what will we do in response? Will we have factored such events into our analysis and strategy? Or will the memory of such events still hurt twenty years on?

Posted 01:01pm by Caspar and filed in Decision Making, Uncertainty

Taking Risks on Life’s Journey

The first thing to understand about betting on a roulette table is that when you bet red, at the simplest level, the casino is betting black. And neither is more likely than the other. Indeed, according to some people’s definitions of the word, casinos are “gambling” in the same way that their punters are.

They’re not, of course, which is why most people use the word “gambling” incorrectly and why we need to calibrate our terms when we talk about this complicated but fascinating subject. Every time the wheel is spun, however, uncertainty reigns and nobody but nobody can tell you with any certainty what the result is going to be. It is the visibility of uncertainty in a casino – as opposed to its often invisible nature in life – that makes it such a wonderful little laboratory in which to study the way people that people react to it.

As a young man I never took drugs, bungee-jumped or even placed a bet. Activities associated with risk just never appealed to me. Then, aged 26, – quite out of the blue – I quit my job as a reasonably successful writer for film and television to become a professional poker player.

This was long before poker became the multi-billion dollar industry that it is today. In 1999 poker was the preserve of a few eccentrics and iconoclasts who had either never known any other “career” or who had dropped out of one because it wasn’t offering them the thrills they dreamed of as a child. I guess I fell into the latter category.

With hindsight, it was the best career move I ever made. I learnt more from three years in Las Vegas than any other single formative experience. Playing poker for 10 hours a day 6 days a week for three years certainly taught me a thing or two about risk and just how little most people understand it.

Most people assume that – as a professional poker player – I was a gambler but the fact is that “gambling” is the act of placing a bet where you have the worst of it. In the long term, if you “gamble” you will lose money. Playing poker professionally is not about gambling but taking a series of “calculated risks” with the aim of making a healthy long-term profit at the end of the day.

Isn’t that the aim in business too? What poker players call “bets” business people call “investments” but the uncertainty is still there. We live in an increasingly uncertain business world where it is impossible to guarantee the outcome of anything.

In my seminars I demonstrate how to bet on the roll of a die and make money – even though you lose five times out of six – and explain why professional sports bettors aren’t looking for the horse most likely to win. The implications of that often changes the way people view risk forever.

Operating a business in the knowledge that you will be profitable in the long run, even though some of your investments will fail, is something that the best companies in the world have known for many years: companies like 3M, HP, and Google have created cultures that encourage risk taking and accept failure as a necessary part of their calculations. They don’t sweat the short term any more than a casino manager sweats when someone wins a lot on roulette in one evening: they know that the house will bust them in the end, just as the great company knows that great ideas will always be produced by a healthy culture of innovation and adaptation.

After three years in Vegas I came home to England and effectively became an entrepreneur. I know that I could not possibly have done this without the knowledge and skills that poker gave me and it is a pleasure for me to foster discussions around this whole area with people in business today.

Posted 12:27pm by Caspar and filed in Risk, Uncertainty