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.

Inventors, Innovators and Timeframe of Judgement

Orville and Wilbur Wright are generally credited with having manned the first powered flight. They probably did but to credit them with having single handedly invented flight is not terribly fair to the other people at the time who did much to advance the general level of knowledge . The Wright Brothers have their place in history but, like everyone, they stood on the shoulders of giants.

One of the people who was struggling to achieve that first flight was a gentleman called Langley. Unlike the Wright brothers, Langley was regarded as a serious scientist of his day. The Wright brothers were bicycle mechanics. Langley’s research into powered flight was funded by the US State Department. The Wright brothers funded themselves using the proceeds of their bicycle workshop. Langley’s engine was far superior to the Wright Brothers’ in terms of its power to weight ratio. If you were a contemporaneous observer, you might well conclude that Langley was the more likely to achieve the goal. But he didn’t. In fact he gave up before the Wright Brothers even succeeded. Why?

Because Langley was a serious scientist. Every time he had a successful or unsuccessful experiment he had to publish the results in a paper for all to see. And he was scrutinised and judged. On this short term  results. And it was painful for him.

The Wright Brothers, however, made their own progress in their own time working from out of their workshop just as Steve Jobs and Larry Page and Sergey Brin and William Hewlett and David Packard worked out of their garages. They even turned down funding from Carnegie in order to preserve this independence so that they were judged NOT on their Short Term setbacks but their Long Term results. And what a result it was.

Accountability to shareholders and individual risk aversion results in businesses who hear the messages of excellence but aren’t really prepared to replicate the conditions that incubated and nurtured it. Deciding on a long term goal is essential but more essential is accepting – collectively as a team – exactly what short term failures are going to be permitted in order to achieve it.

Just as someone who goes into a casino accepts that this £50 is going to be lost. All the desire in the world to achieve the Long Term goal won’t make it happen if the individual or the team or the department or the company are not prepared to lose some of what they have in order to gain what they desire.

For most of us in most organizations Failure is NOT an Option. This is good. Long Term failure should not be encouraged or even accepted. But the Long Term is out goal. It’s our objective. It’s a criteria and metric for success. It’s what we want. It’s our motivation.

And if our Long Term goal is demanding enough and stretching enough. If it is going to write history and shape the future… if that is not an option…

Then Short Term failure is a necessity.

Posted 04:05pm by Caspar and filed in Innovation, Risk

The Impact of that Low Frequency High Impact Risk

I’m often fascinated by the fact that people perceive poker players as gamblers but people making business decisions outside a casino as sane, calculated risk-takers. If only that were true! Negative expectation bets are placed around the boardroom table just as often as the poker table. It’s just that every time a company goes pop, it’s considered to be an exceptional event that cannot possibly repeat itself in that form.

Consider for a moment a hypothetical game of roulette in which every number across the table appears to be offering a 20% return. Put your money on black and red comes up… you get 20% back. Put your money on 12 and 33 comes up… you get 20% return. Feels good, but there’s a catch.

In this apparently profitable game, if the 00 hits two spins in a row, you will be liable for 1000 times whatever you have on the table on that spin! Be clear about this… if you have $50, you will owe $50,000! OK, you reason but the chances of 00 hitting twice in a row are incredibly slim. 2.7% x 2.7% to be precise or 0.072%, roughly 7 in 10,000 spins. At 30 spins an hour, you could happily play all month without reasonably expecting it to happen! But what is your Long Term Expectation now?

Well for every dollar you invest in this situation now:

99.93% of the time you’re going to win $0.20 – that’s an upside Expectation of $0.199

0.07% of the time you’re going to lose $1000 – that’s a downside Expectation of – $0.70

Thus, giving you an overall expectation of $0.199 – $0.70 which equals – $0.5001. We’re losing nearly half a dollar for every dollar we invest.

Traditional risk management is about the need to prepare for this highly unexpected event. When United 93 went down in Pennsylvania, the impact extended well beyond the grief of the families of the brave deceased. It hit United Airlines too in ways that it could never have imagined. In 1992 one of the most profitable companies in the world posted the biggest corporate loss in history. The world had changed and IBM had failed to change around it. In 2008 Lehman brothers, RBS, Merril Lynch and some of the biggest financial institutions hit the wall and others, even Citigroup, came to their knees.

When Black Swans happen, their impacts can be devastating. They come from left field – from off the charts – and wipe out years of growth and achievement. The most important question, when they happen, is not could someone have prevented the risks. Naturally someone could have. Everyone can prevent something but no one can prevent everything. The real question is whether or not the risk that the organisation was taking on was priced correctly. In other words, was the company playing poker with a positive Long Term Expectation despite Short Term Losses? Or roulette, with some profitable Short Term wins but a negative Long Term prognosis?

In 1998 when the US banking sector started extending mortgages to the sub-prime sector part of the reason was definitely an imperative for profit. The oft untold side of this story, however, is that the other reason was a mandate from the Clinton administration to start making loans available to the underclass of American society. This socially well-meaning policy came with political strings attached, however. It just simply would not have looked good to charge one rate of interest to the predominantly white middle class and another – significantly higher one – to the predominantly black working class. And anyway, the economy, and house prices, were strong… So a compromise was reached. The rate of interest was perhaps not as high as it should have been, but for a long time, no one seemed to mind.

Whether or not the rate charged was correct given everything we knew at the time, the fact remains: In the same way that the world’s best skydiver could die tomorrow due to uncertainty, so can the world’s best run companies go under. In Why Most Things Fail Paul Ormerod observes that of the 100 biggest companies in the US in 1905 only 36 of them still exist today! How many of our 100 biggest companies will be with us in the next century, or the next decade… or next year?

Posted 02:14pm by Caspar and filed in Decision Making, Risk

Probability in everyday conversation

The problem with probability as a language is that it doesn’t sit well in our minds. As human beings we tend to express ourselves in single outcome terms: France will beat Scotland because they are by far the superior team… Milan will win the Champions League final now they are three goals up… Greece have no chance of winning the European Championships because they simply don’t have the players. And yet, in these, and many other cases, the spectacularly unlikely happened and one again the single outcome prediction fell down.

What’s fascinating, though, is that while our conscious minds feel uncomfortable with probability, our subconscious minds don’t appear to have a problem with the concept of uncertainty and probability in the same way.

Ask a room full of successful people what their biggest risk was (as I do as a part of my work) and you will get an array of answers from setting up their own company to moving to a different country. Every time you challenge them you ask them whether they thought they would be successful “Yes” they answer “otherwise I would not have done it.” But ask them why they chose to define it as a risk and they will very soon concede that because – one some level – they knew that they were not definitely going to be successful and that this chance of failure was precisely what defined it as a risk!

Posted 01:55pm by Caspar and filed in 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

Risk Taking in Poker Business and Life

The future is uncertain. For all of us. Hopefully one of the positive things that we all might take from the “current financial crisis” is the numinous truth of that thought. Perhaps understanding that even the money we have sitting on deposit in our current accounts is not 100% safe will serve us all well in the long run.

Continue Reading »

Posted 01:23pm by Caspar and filed in Risk, Uncertainty