Uncertainty, Tough Decisions, and Poker

I am a rationalist, probably to a fault, but it is who I am. I like certainty, in a decision making process I will always seek data, knowledge, facts, truth. Making decisions based on gut feelings, or hope is generally not my style.

As a founder of a startup, and in life in general, I frequently have to make decisions about what plan of action is best, should we raise money now, or not. Should we work on this little feature, or this big feature, or this bug, or this other bug? Should we change the direction of the product, or should we keep pushing through with what we've got and see if it works out?

The trouble is, finding data, and absolute truth is frequently impossible. We don't, and probably can't, know what the best decision is, but we have to do something. This situation often leaves me stuck. I want more data. I want to think about it more. I want to get to the point where I know I am making the correct decision, with data. But that's impossible, so I am stuck.

Poker

When playing poker, more often than not you will have a middling hand. Not a sure fire winner, not awful, but still possibly a winner depending on what everyone else is holding, and what cards come out on the table.

Take the following situation as an example:

  • In your hand you have a Heart.
  • On the table, there are currently 3 Hearts.
  • Your opponent has bet $100, and to see the river card (the final community card in Texas Hold 'em) you would need to call his $100.
  • If the river card is another Heart you will have a flush, which will be the winning hand, but if it's not you'll almost certainly lose.
  • Do you pay the $100 or not?

If we do the math, we can determine that of the 52 cards in the deck, we've so far seen 6 (the 2 in our hand, and 4 on the table). This leaves 46 cards. We know that 9 of those are hearts. That means that the odds of the final card being a heart are 9/46, about 20%.

This is as far as my understanding of poker statistics has ever gone, and at this point we are stuck, just like I get stuck in my startup. A 20% chance is okay, but it's not great. At the same time, this might the best hand we've had for a while. If you seek certainty, like I do, you'd probably fold. But if you only ever bet on the very best hands, you're probably not going to be very successful at poker.

We need a better strategy for dealing with uncertainty that improves our poker success, but without resorting to risky "gut feelings".

Pot Odds

There is a concept in poker that I recently learned about, (from this awesome RadioLab episode) called Pot Odds. The pot odds are the ratio of the amount that is currently in the "pot" (the amount you would win if you were to win the hand) with the amount you have to pay to continue playing.

So in our example, if there is currently $500 in the pot, and we need to pay $100 to call our opponents bet, the pot odds are 500:100, or 5:1. This means that (assuming you don't run out of money), you would only need to win one out of every six hands like this and you would break even. And if you can win one out of every five, or better, you are actually making money even though you lose four out of five bets!

Now we are making progress! We have an inkling of a strategy that allows us to knowingly lose some bets and still come out on top, as long as we win enough of the right bets.

If we combine the pot odds with our chance of winning, we can see that in this situation we should bet. Our hand has a 1 in 4 chance of winning (25%), and the current pot odds say that as long as we have a better than 1 in 6 chance of winning we will be making money! So bet!

It is important to note, that we have to take a long term view of the game for this strategy to work out. We will not win every hand, but if we play enough hands, and bet when our hand odds are better than or equal to the pot odds, then in the long run we're winning.

In the words of Annie Duke:

It's not about winning the hand all the time, it's about winning the hand enough of the time.

That embracing of uncertainty does some really wonderful things for you.

If you are in a situation where you only have to have the best hand 25% of the time, if you are playing well you are going to have a bad hand a lot of the time

It's okay, it's actually irrelevant.

But, startups?

How can we use this information in daily decision making? Well we now have a strategy that explicitly allows us to make some decisions that don't work out, as long as the cost of the decision, balances out with the potential pay off.

It's clearly much harder to calculate specific odds on decisions outside of poker. But if we can at least estimate then perhaps we can find some zen in making uncertain decisions.

If it will cost us $100, or takes us half a day, and has a 1 in 10 chance of making us $2000, then we should probably go for it, as long as we keep making a lot of similar decisions (and as in poker don't run out of money!)

I am already finding that viewing the world, and my decisions in this way is helpful. No longer do I have to be 100% certain that this is the best feature to be working on right now. If I am 50% sure, and it's only going to take half a day, then why not?

As long as I keep making "good bets", enough of them should work out so that I'll be on top in the long run. And as a bonus, no longer do I need to beat myself up so hard when things don't work out, because I have up front accepted that not everything will work out.

This post was inspired by Are you sure? an episode of Radiolab, which is by far my favourite podcast, if you haven't heard it, go listen!

Similar ideas also appear in the fantastic Thinking, Fast and Slow by Daniel Kahneman a Nobel Prize winning psychologist who has had a huge influence on Psychology and Behavioural Economics.