By Charley Swayne| September 12, 2012
Here’s how to know if you’re the fish or the shark at the table.
When poker pro Phil Gordon was skyping with my Strategic Decision Making class, a student asked him what his favorite hand to play was. Phil’s reply: “Any hand I’m playing against Charley.”
There’s a big difference between good and great. I am a good poker player. Phil is great.
Phil has made the transition from being a business leader–he’s a former Netsys executive–to a professional poker player. Just the same, poker pros can transition from cards to business–their strategies are applicable to both.
Here are some lessons anyone–even non-poker aficionados–can apply throughout their careers.
In the most popular form of poker, Texas Hold’em, you are dealt two cards you can see but your opponents can’t. This is the point where the player has control of the situation–she decides to be in the hand or fold. In business you have maximum control at the start of any situation. You either respond to the email or you don’t. You either see the sales rep or you don’t. You either hire him or you don’t. You are either in the hand or you fold.
Poker is a game of position. In poker parlance the person who has “the button” is the one who gets to see what everyone else does first. The button moves after each hand so everyone eventually has the button. President Harry Truman would make a decision after he received information from everyone else. As a poker player, instead of calling it “the button,” the President called the position “the buck”–thus his worldwide know phrase “the buck stops here.” We all know the power of position in negotiation. If the other party declares what he wants first, you have the power of position. You have information he doesn’t.
Poker players use a few simple math concepts when deciding to stay in a hand or fold. Decisions are based on expected value and while the calculation doesn’t ensure that every hand will be profitable, as long as players play hands with positive expectation and fold those with a negative expectation, over the long run they will be profitable. Here’s the formula: Expected Value = (Probability of winning)(pot size)–(Probability of losing)(amount of call)
For example, if a player holds two cards of the same suit and there are two cards of a similar suit on the board to make a flush, she uses expected value to make the correct mathematical decision. Suppose we’re at the river–one more card to come. The probability of winning is calculated: Probability of winning = (Number of cards that will make the flush)/(Number of unknown cards)
The number of cards that will make the flush is 9 (The 13 flush cards in the deck less the two in her hand and less the two on the board). The number of unknown cards is 47 (There are 52 cards in the deck, less the two in her hand and the four on the board).
Probability of winning = 9/46 = .2
The probability of losing is 1.0–the probability of winning or 1.0-.2, or .8. The size of the pot can be seen and she knows how much she must call to stay in the hand. Suppose the pot is $600 and it costs her $100 to call.
Expected Value = (.2)($600)–(.8)($100) = $120–$80 = + $40.
The expected value is positive, therefore the player calls.
How about the exact same situation but now she must call $200?
Expected Value = (.2)($600)–(.8)($200) = $120–$160 = – $40.
The expected value is negative; therefore, the player folds.
The poker pro knows several shortcuts to this equation (their language includes “pot odds,” “hand odds,” and “outs”), but underlying every calculation is expected value. She stays in positive expected value situations and stays out of negative ones.
The formula for business:
Expected Value = (Probability of success)(profit to be made)–(Probability of failure)(amount of future investment)
What the poker pros do is exactly what we do in business when we use decision trees with probabilities and likely profit assigned to each branch. We crank the numbers and, if we use math alone to make the decision, choose the one with the highest expected value.
The professional watches and learns how his opponent plays and her comfort zone. Then he doesn’t play in his own comfort zone; rather, he adjusts his play depending on her style. In poker, the pro uses a PATL matrix. P stands for “passive,” describing a player who doesn’t raise much. A is “aggressive,” a player who raises a lot. T is “tight,” one who doesn’t play many hands, and L is for “loose,” a player who plays lots of hands.
Now compare that to the business CEO’s PATL matrix. The P, passive, is one who invests moderately. The A, aggressive, is a businessperson who invests heavily. The tight CEO invests in only a few products, while the L, loose, is one who invests in many products. In business we need to know the comfort zone of all of our competitors and then, as opposed to doing what is comfortable for us, adjust our product investments to take maximum advantage of our competitors’ style.
When a professional poker player has an excellent hand, she wants as many opponents in the hand as possible. She also gets her chips in the pot slowly during each round of betting and never bets so much her opponents fold. Her objective is to make the pot as big as possible and will attempt to get all of her chips in during the last round of betting.
In business, when we know we have a superior product that no competitor can match, we do not have to adopt the enemy syndrome and knock everyone else out during the introduction phase. Rather, we can employ the same approach as the poker greats, enticing competitors to invest in promotion and advertising, expanding the market during introduction and early growth phases. Then, during the later growth phase, we get all of our chips in the pot and go for market domination.
The best poker players in the world often base their decisions on what the opponent has, not what the poker pro has. How? The greats learn how to look at everything through their competitor’s eyes. This is the most important lesson one can learn from poker. Getting into the moccasins of others and not just knowing what they are thinking, but why they are thinking what they do. When a manager or CEO sees things though the eyes of customers, employees, stakeholders, and competitors, he or she will discover the “the truth in their error” and “the error in our truth.” Decisions then become much easier.
I may never be the poker player Phil Gordon is, but the more I study how the great poker players think, the more I see how the lessons of poker can be applied to making smarter business decisions.
Charley Swayne is the author of The Shark and the Fish: Applying Poker Strategies to Business Leadership (ECW Press 2012).