Play poker and become a better business manager…

I've been playing poker on my smartphone quite a bit lately – just against the machine, not the on-line type – and have found it a great tool for learning how to deal with risk.

Professional punters will argue that they never gamble. They take calculated risks and seek to exploit situations where the odds are in their favor. Running a business is very similar. It is a risky activity and blindly pursuing a goal without understanding and managing the associated risks will likely lead to failure.

So what is it about playing poker that helps you understand the principles of dealing with business risks?

If you play a bit of poker you come to see there are a few phases in a game:

The starting rounds, when the most aggressive players will bet high early and there is a bigger risk of losing all your money in a single hand;
The establishment rounds, when you develop a substantial bank of money and can participate in the big bets without the risk of losing everything; and
The exploitation rounds, when you establish a substantial pool of money and can take advantage of this by making larger bets, against which your competitors will often fold.

These phases are remarkably similar to the growth of a business, as you move from a start-up, through to being an established business with solid revenue, and on to becoming a major player in your respective market.

And the risk management principles in playing poker can be used in running a business.

In the starting rounds of poker it is important to build up your betting bank quickly. To get the cash flowing. All of the other players know this and if any of them increases their betting bank substantially faster than you, you will find yourself vulnerable to exploitative betting, which adds much more risk to any single bet you make.

So the right response to this challenge is to take some risks.

You can’t wait until you have a low risk hand, as that may take many rounds. You have to balance the safety of waiting for a strong hand against the risk of being left behind while your opponents build up their betting banks. You have to make a bet on hands that may often be less than perfect.

The reality is though, if you take greater risks you will fail more often. So you have to accept the likelihood of failure as part of the price of participating, and not let it rule your decision making.

In the starting rounds you will fail. You will fail because of factors you can’t control. The cards you get dealt in poker are outside your control, just like the market conditions in business are outside of your control.

If you are good at poker, you will probably only get past the starting rounds once in every 5 to 10 games. So:

Make sure you have enough funds and the nerve to come back to the table a dozen times before you expect to take home some winnings; and
Have the sense to learn from your failures and recognize the situations where you are failing for reasons within your control.

In the establishment rounds of poker your risk profile changes. You have the funds to match big bets without the risk of losing everything on a single bet. You also have the time to hold off betting until you are dealt some good cards.

It is a comfortable place to be and it’s tempting not to bet much. To limit your risks. But if you are not growing your betting bank then you will inevitably fall behind the other players. Many businesses fall into the same trap. They sit comfortably on a solid business and stop trying to grow. Before they realize it their market has shifted and their competitors have eaten away at their market share.

Moving out of the establishment phase and into the exploitation phase requires disciplined risk management strategies. Early success in the starting rounds can come with a bit of luck, but luck alone will not get you out of the establishment phase. It is during this period that getting your betting strategies right is most important (see below for more on betting strategies).

In the exploitation rounds of poker your risk position is very different. When you have a clear financial lead over your opponents you are able to press them into folding, even though they have potentially winning hands, by placing what are for them all-in bets. However it can be tempting to exploit this position of power too much and place big bets repeatedly on hands where you have poor cards. Eventually your opponents will have strong hands and start calling your bluffs. Two or three losses in this situation is all it usually takes to bring you back to the pack and nullify your exploitative financial position. So you have to continue to exercise strong judgement over how you bet.

Understand that while in the exploitation rounds the risks have shifted in your favor, they have not completely gone. The basic betting strategies still apply and the odds are only slightly more to your advantage.

Betting Strategies

Betting strategies are the main way of managing your risk in poker and they are the second largest determinate of your fate –the cards you are dealt is the first. There are a few strategies worth highlighting:

Bluffing – all things being equal, you would expect to win rounds in proportion to the number of people at the table, but bluffing changes all that. Your opponents’ behaviors change the way you bet. You need to use your experience to decide when your opponents are only bluffing. And sometimes you also need to “fake it till you make it” with your own hands. The art is to know when to bluff, as all bluff with no substance is a high risk strategy.

Take the winnings early or wait for bigger profits – Those who play Texas Hold’em will know that sometimes you can be in a winning position on the flop (when the first three community cards are put on the table), but as the next two cards are dealt your position deteriorates.* The question is whether you should bet high on the flop, at which point others may fold and you take the winnings early; or to bet moderately or even check on the flop, in the hope that other players will continue to match your bets and therefore increase your potential winnings. The latter however increases the chances that better cards will be dealt for your opponents in the final two cards. A similar situation often occurs for medium size businesses as they start to grow. Big players in the market come in with buy-out offers, and the question arises whether to sell now or to hold out for more. My view is that lots of small wins are better than a few medium to big wins, but you have to keep your eye open for the opportunities that could deliver game-winning results, in which case you take the risk.

Going “All-in” – Knowing when to go all-in (placing everything in your betting bank on the one bet) is quite an art. Stockbrokers will tell you not to put all of your investments into the one stock, and instead to spread them across a diverse portfolio. But in poker you will often be challenged to match an “all-in” call from an opponent, and if you consistently fail to reciprocate then your opponent will take advantage of that and call it more often on weaker hands. There is a lot of skill to getting this right, but in essence it comes down to risk management. You should go all-in if:
- You feel you are in a strategically dominant position – that could be more than just the cards you are holding; or
- You are on your last stand financially, but have some good cards.
Don’t throw good money after bad – If you are observant of your opponent’s tactics you will have a fairly good idea of when they are bluffing. Unless you have a strong hand yourself, don’t keep following your opponent’s raises once it is clear the odds are no longer in your favor. It is hard not to be an emotionally investor. Persistence and resilience are important ingredients of success, but so too is recognizing when the odds are stacked against you. Keep something in reserve so you can have another short in the next hand.

Success in business requires an eye on risk management, and I think playing a bit of poker can help sharpen your skills in broader areas than you might think. Just stay clear of the actual gambling sites!

* For example, you may be holding a queen and five in your hand. A four, queen and six are then dealt in the flop. At that point you probably have the best hand at the table, but as the final two cards are dealt, an Ace and a King come up and now your position looks very weak.