As fun as they are, games are a phenomenal way to learn. We use ‘educational’ games to teach toddlers their shapes and colors, we use similar games in school to encourage students to learn math and read.
Why stop?
The two games that I am convinced are probably the most valuable to learn for your career & financial success are poker and chess.
Chess is great for learning strategic thinking and how to think several steps ahead (but that is not what this post is about so I will leave it there).
Poker, if learned correctly, will teach you the concept of expected value (risk & reward), how to read people, and how to keep your composure through the chaos of life. And you will learn to do all three of these simultaneously.
With these three fundamental skills you will have a much better chance of managing your career and your investing over the long term and avoid pitfalls that could derail your financial journey.
First – if you have no idea how to play poker / what poker is check out this link. If you know a lot about poker I am specifically talking about Texas Hold’em as that is what I am familiar with, but I’m sure all the versions have similar elements.
Calculating Expected Value
In poker, knowing what the probability of achieving your desired hand is can be critical to deciding whether or not to continue playing a hand. If, for example, you have the Ace and 5 of hearts in your hand, and the first three cards on the board (the flop) show two additional hearts, you have around a ~35% chance of hitting a flush (5 cards of the same suit) by the time all 5 cards in the middle are face up. If you are certain that you will win the hand if that additional heart comes out giving you an Ace high flush, then you have at least a ~35% chance of winning the hand. In addition, you have a possible chance of winning even if that heart doesn’t come up if there is another A / 5, or your opponent just has a worse hand.
As a result, you know that if there is $90 in the pot and you are required to bet $10 to continue playing, then you should place the bet. The reason being that you are risking $10 with the possibility of winning $100. Anyone with better than a 10% chance of winning should continue playing.
As a tangent – the way you can calculate your odds of hitting your flush to be ~35% are as follows:
Set-up – You have A heart, 5 heart and the flop brings out 2 other hearts and a spade
What you need – You need one of the 9 remaining hearts (there are 13 cards in each suit) over the next two cards. There are 47 cards you have not seen after the flop (first 3 center cards) and there will be 46 after the turn (4th center card). I am only looking at the scenarios where one of the next two cards is a heart, not both.
The odds – The odds of hitting your flush on the 4th card itself are 9/47 = 19.1% and if it doesn’t occur on the turn then 9/46 = 19.5% on the river (5th center card). Putting those together you have 19.1%+((1-19.1%) * 19.5%)) = 34.9%
Shortcut – Because you have to do this so fast in poker, the speedy way to calculate these odds are to take the number of cards left in the deck after the flop that make your hand (the outs) and multiply them by 4 (9 * 4 = 36) or the number of outs after the turn and multiply them by 2 (9 * 2 = 18) and that will approximate the percentage probability.
Anyways – enough of that math tangent. The point is you want to evaluate a series of scenarios, understand the probability of them occurring, your odds of success should they occur, and the potential payout. You also want to do all of this in a short amount of time while giving nothing away about your hand, and reading the faces of the others at your table.
It’s a lot but gets you really good at intuitively understanding risk vs. reward and making decisions based on limited information.
The core concept of understanding the expected value of any given bet – e.g., the probability of each outcomes times the consequence (upside / downside) of that outcome can be used across a wide variety of things in your life.
First is your career
As an example – when you are deciding whether you want to start your own company, you want to understand the odds of success (and there are definitely shades of gray here) times the potential upside if it’s successful vs. the scenario where you stay in your current job and have a very high probability of more limited upside.
If you are earlier in your career, the odds of success with a startup are likely lower, but so is the opportunity cost. Additionally, the learnings you get from the process are more valuable to your future career regardless of the success.
Second is your finances
Understanding expected value can be extremely helpful in understanding your asset allocation and expected returns. Returns in investments exist because you are being compensated for taking on some risk. If you increase the risk you take (invest in riskier assets, borrow money, etc.) you can increase your return. You need to understand what the possible fan of outcomes is and if you are okay with the risks you are taking. This will make you a lot more comfortable in the long run when things go wrong because you have planned for the scenario and proactively taken the risk, knowing this was a potential outcome. You will also be unlikely to take any risks you are not comfortable with.
The similarity of thinking in investing and poker is likely what has made so many famous investors / business professionals interested in the game. There are many examples here including Greg Jensen (Bridgewater), Cliff Asness (AQR Capital), Ken Griffin (Citadel), and many many more.
Reading people
Understanding the mathematical probabilities in poker is the first step, but many other games of chance can teach you this as well (e.g., blackjack). The complexity associated with the interpersonal interaction is what makes poker such a valuable game to learn. People are not always perfectly rational actors. Just because someone’s expected value in an action is negative doesn’t always mean they will not take it, and just because someone has the best hand, doesn’t mean they will always win.
In fact, having a good understanding of people can narrow your expected fan of outcomes and allow you to better make decisions in poker.
For example, if someone placed a large bet after a potential flush hit the board, you may know that means they don’t have a flush because they always bluff in that manner when they don’t have a hand and try and hide their hand when they do with a smaller bet. In that case, even if you have a low flush (let’s say a 5-high flush), you can increase your confidence level in winning the hand because you are reasonably confident that your opponent does not have a flush.
Poker teaches you to observe the behavior of those around you and use that to your advantage. This skill is invaluable in a business setting, where understanding behavior can help you gain faster promotions, negotiate better deals, and take risks more effectively.
This can also help you navigate the market, where prices are determined by supply and demand. Sometimes prices will be way out of whack because its people who invest at the end of the day, not robots, and we are not always perfectly rationale. Just think about the meme stock spike that we saw over the last few months or Dogecoin’s monumental rise in value (that’s $50 billion in market value for something that was created basically as a joke).
Keeping your composure
Last, but certainly not least, poker teaches you to deal with the random chance in life in stride.
No matter how much math you know, you are still taking a risk when you play a hand. Even if your odds of success are 99%, there is a 1% chance your bet fails (I have a friend with a bad habit of having unlikely events go his way on the final card, the river.
A perfect example of this is when you have an Ace high flush (the highest flush) on the flop (first 3 cards), and you end up losing to a full house because the turn / river are paired cards….that one will sting a bit.
If you lose your cool when that happens against you, you will likely spin out and lose many more hands that you should not have lost because you will be much easier to read and will make bad decisions.
Learning to take a bad beat and move past it is an extremely difficult skill, but it’s one that will let you overcome a wide variety of things that you’ll face in your daily life:
- A stock market crashing after you have finally started investing
- A messed-up work deliverable
- A failed startup venture
It applies everywhere. Staying calm will allow you to not only weather the storm, but potentially come out of it with success. For example, when stocks crashed in March 2020 you could have panicked, assumed the bull run was over and sold everything. Even knowing that the stock market should always have a positive return in the long run, it’s difficult to watch your net worth crash like that. If you had stayed calm, you may have realized that it was actually the perfect opportunity to buy more and come out of the pandemic with a sizeable return.
Hopefully this has convinced you that poker is a game worth learning. If you are interested in learning more about the game a few resources that I have seen and really liked are linked here:
The Big Game (YouTube): This one is basically like a reality TV show (and honestly more enjoyable). There are countless hours of footage of the best poker players in the world playing and talking about their strategies. After you have read the rules and played a few times, this is a great way to start seeing what poker could look like. They play pretty aggressively, but it’s a fun introduction to the game
Twoplustwo poker: Great poker strategy site that covers an extremely wide range of poker topics
Essential Poker Math: Great book on poker math that really breaks down the various scenarios you will face and teaches you how to think about them
Let me know what other games I should be playing
Readwritemoney
