Author: William Pottenger

When I was growing up, my friends and I played no limit Texas hold ’em. Every weekend, my closest two friends and I would invite the neighborhood over to one of our houses for a poker tournament. And, nearly every time, one of the three of us would win. It didn’t take us very long to realize that in the long run, you can win at poker. Unlike the slot machines or the horses, there is a great deal of strategy and skill involved.

Here are the basic rules to the game: (1) players are dealt two cards facing down, (2) there is a round of betting, (3) three communal cards come face up, (4) there is another round of betting, (5) a fourth card comes up, (6) a third round of betting ensues, (7) a final card comes followed by a final round of betting.

The betting in no limit hold ’em is unique to all other poker games. This may be part of the reason it has been such a commercial success. According to a report from The New Yorker, before online poker site Full Tilt Poker went out of business, it was doing a billion dollars of business each year. The game’s increasing popularity can be attributed to the televised games and digitization of poker. I think people find it so enthralling to watch because on any given hand you can risk all of your chips by going “all in”. This is part of the reason poker, unlike games such as black jack or checkers, remains unsolved.

A computer cannot beat a human because it struggles to calculate the uncertainties involved in the game. It is a game of imperfect information. Calculating the odds, observing betting patterns and utilizing instincts can all be useful tools to determine the strength of an opponent’s hand. However, there is no fool proof way to determine the two cards of your opponent.

This leads to many complications. If you do have the best hand, how much do you bet to extract the maximum value from the other players? If you have a poor hand, what are the chances you can successfully force everyone else out of the pot? And, is it worth the amount you would have to risk to achieve your ends?

Now, this is a finance and economics column, and there is an interesting comparison which can be made between the stock market and poker. The basic connection, which I see in both poker and equity investing, is that you are looking for value. For example, say you have four diamonds on the flop and the other person in the hand bets $200 into a $600 pot. There is approximately a 36 percent chance of you completing your flush and your getting 3:1 pot odds on the bet. Therefore, this is a good call to make. Over the long run, making this call will earn you about 3 percent returns.

In the stock market, you might look more closely at the intrinsic value of a company rather than its relative value to determine the likelihood of a stock going up. Just like in poker, there are a wide range of investment strategies in finance that are implemented to successfully yield returns. Over the long run, a poker player or portfolio manager is judged according to their success. I realize this philosophy cannot always be applied to life, but I find both poker and investing to be entertaining escapes from daily routines. Furthermore, I think this is one reason why people enjoy sports so much . It is result-oriented, black and white, unlike life, which is far more complicated than poker or the stock market.

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