Note:Only two months between posts...I'm getting better!
This past week, everyone's been talking about AIG and it's bonus packages. There was also minor discontent with the AIG payout to banks, which is slightly linked to this whole affair. I can understand the concern of the average american regarding these payments and bonuses...for about a day. I fully expected them to snap back to their senses after a good night's sleep...but as the week ended with no end to the protests, my amusement turned to discomfort. I read about the government proposing new taxes targeted at taking back the bonus money and I wonder if we aren't back in the dark ages.
Many issues here. Let's touch on the lighter side of this whole affair first. The media as expected have really done it this time. To see what I mean, I refer you to the following webcomic:
1000 times
The everyday cynics will see why this is not just funny, but sad as well. Because you see my friends(those of you who go through life wearing the ridiculous rosy tinted glasses), this is how easy it is to manipulate the way people think. Oh, I'm not making things up. Sometimes, it can be really hard to tell the difference, even when you're told it's different. I refer to exhibit B:
dollars and sense
Ok funnies aside, let's get on to the main theme: the bonus packages for executives and employees. Remember how we smirked when Tommy Lee Jones said these lines in 'men in black'"(well I did anyway)
"A person is smart. People are dumb, panicky dangerous animals and you know it. Fifteen hundred years ago everybody knew the Earth was the center of the universe. Five hundred years ago, everybody knew the Earth was flat, and fifteen minutes ago, you knew that humans were alone on this planet. Imagine what you'll know tomorrow."
People ARE dumb. At least, in a mob. There's this self-reinforcement in mobs where the members assure each other whatever idiotic theory they have is correct. And america right now is a mob. A big one. OMG AIG EXECS ARE GETTING BONUSES FOR LOSING MONEY! INBAL! NERF! H4X!
Well screw you America. Those people DESERVE the bonus. They have contracts that say they deserve the bonus. AIG owes them the money, and they got it fair and square. It's a fucking contract. You see, what's scary is...you KNOW I'm right, you idiotic Americans. You KNOW they deserve the money. Refusing to pay them would be like refusing to pay for your house after living in it for a year because you think it's overpriced. (an action I'm informed is not out of question for our peers in US)
You can see that Americans clearly got their logic warped here, so consumed with indignition. The simple proof is the bank payout referred to in the first paragraph. Hello...AIG OWES the banks money. The bailout was given to AIG so it wouldn't go under. And to prevent that, it needs to pay off it's debts. And you're complaining they use the bailout money to pay off debts? HUH? Oh I see...you don't mind them paying off AMERICAN banks. It's the European banks getting a slice of your money you object to. Kind of unfair, but strangely familiar coming from you guys.
See, I don't care how the execs performed. I don't care if the banks getting payments from AIG are run by osama's minions. AIG owes money, and needs to repay it's debts now that it has money. How would you like it if you worked as a contract worker for a year with the understanding that at the end of the year, you'll be paid in one lump sum...only this year, the company didn't quite make as much money as the last, and you're told to fuck off when you ask for your paycheck? Or from the banks' perspective, you buy insurance from a foreign insurer...meet with a car accident, but can't get your payout from the insurer because you're not Nigerian?
When you hire someone, you tell him he doesn't get paid if he doesn't perform to par. That kind of arrangement is so strange you'll probably need a lengthy contract to cover it. You can fire him after 3 months for lack of performance, but you still have to pay him for the 3 months.
Ok, I can still handle this with amusement as long as it was just the rednecks imploding with anger as I first assumed. Then I hear the government wants to get involved and create taxes specifically targeting those AIG execs. The United States government, supposedly leader of the free world, wants to target specific people of their bonuses! Bonuses, I repeat, they totally deserve(it's in their fucking contracts)! That's like creating a special tax bracket only for warren buffet because he made money off some government deals. That's not a powerful enough analogy... It's kind of like kicking your pal in the nuts and robbing his wallet because you just lost money to him in a round of poker. He won it fair and square, but dammit, it's YOUR money(and he cracked your aces with kings to boot).
The next couple of weeks should be interesting. Wonder if we'll see more idiotic mob behaviour.
Sunday, March 22, 2009
Wednesday, January 21, 2009
Dinner with Changs
Oh, dinner was ok.
It's what I observed during dinner that I want to talk about here.
First, the background:
We were in this 15 seater restuarant. Seats were arranged side by side bar counter style. It was a relatively popular restuarant, so the queue can get pretty long. Changs and I waited about 45 mins to get seats ourselves.
So this group of 4(2 couples) were waiting in line when 2 seats opened up. The gentlemen urged the ladies to take their seats first as the couple eating next to the empty seats appeared to be finishing up. The proprietor of the store(obviously more experienced in these matters) advised against it as they frown on...nay....absolutely hate people who change seats as it screws up their order procederes.
Being smart independent youngsters, the ladies took their seat anyway. Then, disaster struck. Across the room from the girls, another couple vacated their seats. The two guys had no choice but to occupy those seats. 5 mins later, the seats next to the girls emptied, and the guys naturally requested for a change of seats. They were surprised to be told they could not change their seats.
Why did I find this scenario interesting? Well, it illustrates perfectly why some people act like perfect morons and some come across as inflexible assholes. Let's look at it from the customer's point of view first:
1) two seats are open. They have already waited an hour outside the store. Obviously they are reluctant to wait longer for a 4 seater to open up.
2)ladies first(which was downright silly btw). There's being polite, and then there's just poor planning. The girls sat down first
3)The guys got a seat far removed from their female companions
4)A seat opens up next to the girls.
5)Logic dictates that it's natural the guys should be allowed to sit next to the girls, right?
BUT from the store's POV:
1) two seats are open. They want to be effecient. It is not effecient for them to sit 2 people who will obviously not be eating at optimal speed if they have to wait for their companions to get a seat. They prefer an isolated couple to get the two seats, and warn the party of 4 that they may get split up
2)party of 4 appears to weigh the merits and decide to split anyway
3)everyone's eventually seated. Crisis averted
4)Guys ask for change of seats.
5)Store obviously refuses, seeing as they have ALREADY warned the guys this would happen and they took the risk anyway.
Viewing the situation on both sides, it's obvious that the store was right not to reseat them. If you're still wondering why the store was right, you need to think about this again.(hint: people need to be made to pay the price if they choose to take risks)
But we face these situations on a daily basis in a different form. I guess my point here is to try to look at a situation from the other party's side more often.
For eg, how often have you concluded that decisions made by your superior made absolutely no sense and was totally ineffecient? Most of the time, it's because you're standing on a different level and can't see all the balls in the air. Your boss may choose to keep you in the air longer than neccessary simply because he needs time to catch the other balls. He's ineffecient only from your viewpoint. That doesn't mean he's incompetent. He just has other stuff to consider.
Another example would be the government. I've lately been reading alot of complaints about government policies. People have been huge on sarcasm when it comes to counter-intuitive policy making. It would help alot of these people actually stopped to think from the gov's perspective once in a while.
It's what I observed during dinner that I want to talk about here.
First, the background:
We were in this 15 seater restuarant. Seats were arranged side by side bar counter style. It was a relatively popular restuarant, so the queue can get pretty long. Changs and I waited about 45 mins to get seats ourselves.
So this group of 4(2 couples) were waiting in line when 2 seats opened up. The gentlemen urged the ladies to take their seats first as the couple eating next to the empty seats appeared to be finishing up. The proprietor of the store(obviously more experienced in these matters) advised against it as they frown on...nay....absolutely hate people who change seats as it screws up their order procederes.
Being smart independent youngsters, the ladies took their seat anyway. Then, disaster struck. Across the room from the girls, another couple vacated their seats. The two guys had no choice but to occupy those seats. 5 mins later, the seats next to the girls emptied, and the guys naturally requested for a change of seats. They were surprised to be told they could not change their seats.
Why did I find this scenario interesting? Well, it illustrates perfectly why some people act like perfect morons and some come across as inflexible assholes. Let's look at it from the customer's point of view first:
1) two seats are open. They have already waited an hour outside the store. Obviously they are reluctant to wait longer for a 4 seater to open up.
2)ladies first(which was downright silly btw). There's being polite, and then there's just poor planning. The girls sat down first
3)The guys got a seat far removed from their female companions
4)A seat opens up next to the girls.
5)Logic dictates that it's natural the guys should be allowed to sit next to the girls, right?
BUT from the store's POV:
1) two seats are open. They want to be effecient. It is not effecient for them to sit 2 people who will obviously not be eating at optimal speed if they have to wait for their companions to get a seat. They prefer an isolated couple to get the two seats, and warn the party of 4 that they may get split up
2)party of 4 appears to weigh the merits and decide to split anyway
3)everyone's eventually seated. Crisis averted
4)Guys ask for change of seats.
5)Store obviously refuses, seeing as they have ALREADY warned the guys this would happen and they took the risk anyway.
Viewing the situation on both sides, it's obvious that the store was right not to reseat them. If you're still wondering why the store was right, you need to think about this again.(hint: people need to be made to pay the price if they choose to take risks)
But we face these situations on a daily basis in a different form. I guess my point here is to try to look at a situation from the other party's side more often.
For eg, how often have you concluded that decisions made by your superior made absolutely no sense and was totally ineffecient? Most of the time, it's because you're standing on a different level and can't see all the balls in the air. Your boss may choose to keep you in the air longer than neccessary simply because he needs time to catch the other balls. He's ineffecient only from your viewpoint. That doesn't mean he's incompetent. He just has other stuff to consider.
Another example would be the government. I've lately been reading alot of complaints about government policies. People have been huge on sarcasm when it comes to counter-intuitive policy making. It would help alot of these people actually stopped to think from the gov's perspective once in a while.
Wednesday, December 17, 2008
Poker and trading
They're the same, really. I've long thought that all aspiring traders should learn to play a few hands of poker before moving on to the big game in the markets. But lately, I've been thinking the reverse may also be true.
See, in games of uncertainty such as these, we strive to play the game of optimal odds. It's simple math. If I do something profitable often enough, I should end up ahead in the long run. The problem with this is, this basic principle is often ignored.
How often have you heard the phrase "I'll pick a better spot to go all-in. No point gambling on a coin flip"? This approach is well and good when you're in the "coinflip" as a 49-51 dog. Forgoing the opportunity to take the 1 percent edge when you're ahead is just wrong in a cash game.
A 1 percent edge. Know how hard card counters work to get that kind of edge? It dawned on me on the ride home today that I have done my friend, Mike, a great disfavor in the past by not correcting him on this error in thinking. There is no "better spot" to shove when you're ahead, no matter how small the edge. There are only "other spots".
But what has this got to do with trading? Well, to be absolutely honest, this is in part a rant on the chains that have bound my research for the past year. Poker and trading live is pretty much the same. But the difference in pace would really open the eyes of many who have engaged in one but not the other. My above point on minute edges is but one of the many small things poker players should notice, but don't.
My thoughts are a little jumbled now(it's 520am, US markets have just closed), so bear with me if this post is particularly hard to keep track of.
First off, I find that traders understand precious little of what risk is. Poker players tend to relate to it more(though, as with mike's example, they understand it, but at the same time...don't). What is risk? Some people think it's the probability of you blowing up(for the poker players, that means busting your bankroll). Others think it's the maximum amount of money you can lose for a specific trade(traders) or hand(poker players). Few understand that there's really no difference in the two schools of thought.
See, risk isn't something we measure and tag a unit behind. It's really a floating value. If the risk of you busting your bankroll is reduced, the risk VALUE of your current hand goes down as well. They're related. You'll still risk the same monetary value, say $25...but risking $25 from a bankroll of $300 is different than losing from one of $3000. It's this floating value of risk that has doomed many a fund in the recent months. The mathematicians understand you can't define risk in a quantitative way. That's why they developed the concept of variance. The business types however, control the purse strings...and they want a number. Numbers make them happy. Abstract equations remind them of the advanced math classes they failed until they discovered accounting math. It's easier to sleep at night when you KNOW the books tally. Profits always on one column and losses always on another. We like simple things. The problem? We're really just making up the numbers we fill in the risk column. They're a close approximation MOST of the time. But most of the time doesn't quite cut it. Not when the cost of an error is unbearable.
So what's so important about understanding what risk really is? After all, losing $25 is ALWAYS a bad thing. And here's where we jump to the other side of the story...the traders. First thing you'll pick up when you start learning to trade is the concept of drawdowns. Basically, drawdowns bad, winstreaks good. In poker, we call it a bad streak. The more astute(or pretentious) of us will identify it correctly as variance. As poker players, we understand drawdowns are a part of the game, and it should only affect money management...ie, we do not change our game just because there is a big drawdown. We just change our betting sizes.
And here is where the rant begins. I've always been limited by the "need" to reduce drawdowns. The mathematician in me screams everytime I'm told my backtesting of a strategy indicates a drawdown that was "too big". Well, in the firm's defence, it makes perfect sense....no client would feel comfortable watching a 100million account shrink to 60million in 3 months. But that really isn't how strategies should be developed. It's ironic in a way. The cardinal rule of trading is to avoid curve fitting. The second most important is avoiding huge drawdowns. It's not hard to see that the two rules conflict.
So why am I pulling poker players into this? It's simple. There's alot to be learned from the blindsides of both camps. Just in case the poker kakis are gloating over how much of a grasp of statistics they have over the professional traders, keep in mind my first example of mike folding his AK against QQ after everyone has limped in because "he can pick a better spot".
I'll probably be coming back to these blind spots for both parties in the near future. There's lots to be discussed on this topic.
See, in games of uncertainty such as these, we strive to play the game of optimal odds. It's simple math. If I do something profitable often enough, I should end up ahead in the long run. The problem with this is, this basic principle is often ignored.
How often have you heard the phrase "I'll pick a better spot to go all-in. No point gambling on a coin flip"? This approach is well and good when you're in the "coinflip" as a 49-51 dog. Forgoing the opportunity to take the 1 percent edge when you're ahead is just wrong in a cash game.
A 1 percent edge. Know how hard card counters work to get that kind of edge? It dawned on me on the ride home today that I have done my friend, Mike, a great disfavor in the past by not correcting him on this error in thinking. There is no "better spot" to shove when you're ahead, no matter how small the edge. There are only "other spots".
But what has this got to do with trading? Well, to be absolutely honest, this is in part a rant on the chains that have bound my research for the past year. Poker and trading live is pretty much the same. But the difference in pace would really open the eyes of many who have engaged in one but not the other. My above point on minute edges is but one of the many small things poker players should notice, but don't.
My thoughts are a little jumbled now(it's 520am, US markets have just closed), so bear with me if this post is particularly hard to keep track of.
First off, I find that traders understand precious little of what risk is. Poker players tend to relate to it more(though, as with mike's example, they understand it, but at the same time...don't). What is risk? Some people think it's the probability of you blowing up(for the poker players, that means busting your bankroll). Others think it's the maximum amount of money you can lose for a specific trade(traders) or hand(poker players). Few understand that there's really no difference in the two schools of thought.
See, risk isn't something we measure and tag a unit behind. It's really a floating value. If the risk of you busting your bankroll is reduced, the risk VALUE of your current hand goes down as well. They're related. You'll still risk the same monetary value, say $25...but risking $25 from a bankroll of $300 is different than losing from one of $3000. It's this floating value of risk that has doomed many a fund in the recent months. The mathematicians understand you can't define risk in a quantitative way. That's why they developed the concept of variance. The business types however, control the purse strings...and they want a number. Numbers make them happy. Abstract equations remind them of the advanced math classes they failed until they discovered accounting math. It's easier to sleep at night when you KNOW the books tally. Profits always on one column and losses always on another. We like simple things. The problem? We're really just making up the numbers we fill in the risk column. They're a close approximation MOST of the time. But most of the time doesn't quite cut it. Not when the cost of an error is unbearable.
So what's so important about understanding what risk really is? After all, losing $25 is ALWAYS a bad thing. And here's where we jump to the other side of the story...the traders. First thing you'll pick up when you start learning to trade is the concept of drawdowns. Basically, drawdowns bad, winstreaks good. In poker, we call it a bad streak. The more astute(or pretentious) of us will identify it correctly as variance. As poker players, we understand drawdowns are a part of the game, and it should only affect money management...ie, we do not change our game just because there is a big drawdown. We just change our betting sizes.
And here is where the rant begins. I've always been limited by the "need" to reduce drawdowns. The mathematician in me screams everytime I'm told my backtesting of a strategy indicates a drawdown that was "too big". Well, in the firm's defence, it makes perfect sense....no client would feel comfortable watching a 100million account shrink to 60million in 3 months. But that really isn't how strategies should be developed. It's ironic in a way. The cardinal rule of trading is to avoid curve fitting. The second most important is avoiding huge drawdowns. It's not hard to see that the two rules conflict.
So why am I pulling poker players into this? It's simple. There's alot to be learned from the blindsides of both camps. Just in case the poker kakis are gloating over how much of a grasp of statistics they have over the professional traders, keep in mind my first example of mike folding his AK against QQ after everyone has limped in because "he can pick a better spot".
I'll probably be coming back to these blind spots for both parties in the near future. There's lots to be discussed on this topic.
Sunday, November 9, 2008
Minibonds Fiasco
So anyway, I think everyone's sick of hearing about the minibonds by now. I know I am. Throngs of greedy ignorant people complaining they're not getting money for free. Really makes me sick when I think about it.
See, what happened was, these people obviously made it through life without understanding how risk works. It's amazing, really. Given their supposed ignorance on how to treat risk, I would have assumed the average complaining investor would not have survived past his 20th birthday. Apparently, donkeys get really lucky outside of the poker table as well. It appears a lot of these "investors" actually managed to hit retirement age.
Seriously, the angry mob has managed to convince practically everyone that the risk of the investment was high BECAUSE the investment eventually went south. That's ridiculous, akin to crying out that using a bridge is dangerous after witnessing a collapse. We're talking about educated and experienced people who are so caught up with their emotions, they can't detect this obvious fallacy in the argument.
Personally, I'm hoping the banks end up not compensating anyone. A disaster happened, and the least we can all do is learn from it. I've talked to people, and apparently, the lesson they learnt here is not to trust everything you hear from a salesman. REALLY? It took losing your life savings to learn this one? Again I wonder at the life expectancy of these investors. The real lesson here is the importance of diversification. I'm really hoping this point will drive home in the months to come, as we're not out of the woods yet on this finanacial crisis.
See, what happened was, these people obviously made it through life without understanding how risk works. It's amazing, really. Given their supposed ignorance on how to treat risk, I would have assumed the average complaining investor would not have survived past his 20th birthday. Apparently, donkeys get really lucky outside of the poker table as well. It appears a lot of these "investors" actually managed to hit retirement age.
Seriously, the angry mob has managed to convince practically everyone that the risk of the investment was high BECAUSE the investment eventually went south. That's ridiculous, akin to crying out that using a bridge is dangerous after witnessing a collapse. We're talking about educated and experienced people who are so caught up with their emotions, they can't detect this obvious fallacy in the argument.
Personally, I'm hoping the banks end up not compensating anyone. A disaster happened, and the least we can all do is learn from it. I've talked to people, and apparently, the lesson they learnt here is not to trust everything you hear from a salesman. REALLY? It took losing your life savings to learn this one? Again I wonder at the life expectancy of these investors. The real lesson here is the importance of diversification. I'm really hoping this point will drive home in the months to come, as we're not out of the woods yet on this finanacial crisis.
Procrastination Sucks
Wow I can't believe I've managed to procrastinate posting for half a year. Here's to hoping I post more regularly.
Or happy new year in advance if I don't
Or happy new year in advance if I don't
Sunday, April 6, 2008
Rule of four and two : common mistake
This is really one of my chief money makers in our live games, and thus very -EV explaining the mistakes I've seen many of you make with this seemingly easy to apply rule. Still, in the interest of improving everyone's game, let's take a look at the common mistakes a lot of you make.
Defination
The rule of four and two state that the chances of you winning on the hand is roughly equivalent to the number of outs you hold multiplied by 4 on the flop and 2 on the turn.
Easy enough to remember? Chances are, you have been applying this rule wrongly.
Let's start by understanding how we get 4 and 2 in the first place.
On the flop, there are 52-3-2 unknown cards. That's 47 cards that are mucked, burnt, dealt out or left in the deck. Since the cards are in a quantum state, the fate of each individual card doesn't matter. On the flop, there are two cards to come. that's 1/47+1/46 chance of hitting each of your outs. Add that together and you get roughly 4/100 = 4% per out. If you have 5 outs, your chances of winning by the flop is 4X5 = 20%. Simple enough. You can work out the rule of 2 yourself.
Let's take the most common misuse of this rule, the nut flush draw. What most of you have done really, when holding the nut flush draw is apply the basic concept of the rule. If 20 dollars is in the pot and someone bets the pot, you quickly apply the rule and decide you're getting correct odds at 1:2 to call the flop and see the turn. Now we know that calling a pot sized bet with a flush draw can't be correct, so where did the problem arise?
That's where most of you guys lose money. You took the rule and never bothered to understand how it worked. This rule only works if you are ALL IN on the flop or turn, respectively. You can't call 1:2 on the flop and 1:5 on the turn. That's only for all ins! You don't magically have twice the chance of drawing to the flush on the turn card than on the river. The double odds are because you are already all in and paying for TWO cards and not one.
Defination
The rule of four and two state that the chances of you winning on the hand is roughly equivalent to the number of outs you hold multiplied by 4 on the flop and 2 on the turn.
Easy enough to remember? Chances are, you have been applying this rule wrongly.
Let's start by understanding how we get 4 and 2 in the first place.
On the flop, there are 52-3-2 unknown cards. That's 47 cards that are mucked, burnt, dealt out or left in the deck. Since the cards are in a quantum state, the fate of each individual card doesn't matter. On the flop, there are two cards to come. that's 1/47+1/46 chance of hitting each of your outs. Add that together and you get roughly 4/100 = 4% per out. If you have 5 outs, your chances of winning by the flop is 4X5 = 20%. Simple enough. You can work out the rule of 2 yourself.
Let's take the most common misuse of this rule, the nut flush draw. What most of you have done really, when holding the nut flush draw is apply the basic concept of the rule. If 20 dollars is in the pot and someone bets the pot, you quickly apply the rule and decide you're getting correct odds at 1:2 to call the flop and see the turn. Now we know that calling a pot sized bet with a flush draw can't be correct, so where did the problem arise?
That's where most of you guys lose money. You took the rule and never bothered to understand how it worked. This rule only works if you are ALL IN on the flop or turn, respectively. You can't call 1:2 on the flop and 1:5 on the turn. That's only for all ins! You don't magically have twice the chance of drawing to the flush on the turn card than on the river. The double odds are because you are already all in and paying for TWO cards and not one.
sunk costs and you
I've been meaning to write about this really cool topic for awhile now. I've procrastinated because I know it's going to raise many questions and take a long time to explain, but here goes.
I'm kinda hoping everyone here knows what sunk costs are, and how they relate in poker. Here's a brief explanation : When you put money into the pot to raise, call or bet, that money is considered your sunk cost. It's money you won't get back again unless you win the pot(investment pays off). In gambling circles, it is considered wise to think of money put into the pot as no longer yours. This helps the average player understand the line drawn between sunk costs and available capital. Inexperienced players lose more money because they consider the money put into the pot as still theirs and thus necessary to protect.
But I digress.
The point of this post is really to discuss two really cool concepts every poker player needs to understand : The sunk cost fallacy and sunk cost dilemma.
Sunk cost fallacy
This is the more common problem. As discussed above, the sunk cost fallacy is the phenomenon of throwing in more good money after the bad. Say you have AK, and re-raised original raiser 15XBB pre-flop and got a caller. You miss the flop, and it gets checked to you. You C-bet about 25XBB and get raised. At this point, let's assume you know you're beat. You've just put in 40XBB into the pot and you're facing a 40XBB raise. The weaker players will occasionally succumb to the sunk cost fallacy. They're thinking : I've put in so much money already, it's just silly to throw this hand away. Especially when there's still a chance I can draw out!
It's easy to kid yourself in this scenario. Hell, I've seen even above average players succumb to this temptation on occasion. I would not be honest if I claim never to have done it myself. Still, if this is a major leak in your game, it would do you well to plug it ASAP. It's not hard to identify, and more often than not, throwing the hand away could make the difference between a winning session and a losing one.
The sunk cost fallacy is not unique to poker players, or even gamblers. One of the biggest fiascoes in recent history demonstrating this mindset was the Concorde experiment. Millions of dollars poured into the development of a super sonic passenger jet before it was determined that the idea was unprofitable. But because millions had already been spent, the sunk cost fallacy clouded the minds of the government entities behind the project. It was more than a decade later before mounting losses forced them to pull the plug.
Sunk cost dilemma
This is the juicy one. It's also the more dangerous of the two, because it happens so often in poker. First, a description:
The sunk cost dilemma is the situation whereby an opportunity is given in various timeframes to decide on the action to proceed or withdraw...and the optimal solution at each of these steps while being to proceed, will actually lead to an overall loss in value. It is in essence the direct opposite of the sunk cost fallacy. Because sunk costs are not taken into consideration, every decision made appears to be optimal, but ends up being detrimental to the overall project.
Now let's consider this in a poker situation(and you'll soon see why this is the more dangerous of the two in poker).
Consider yourself holding KQ of spades on the button. Someone raises preflop and you smoothcall. Flop comes A68 with 2 spades. The guy bets about 1/2 the pot. Assuming you know for certain he has an ace, and your only real chance of winning is hitting your flush, we know your odds of winning this hand is about 33% at best. This is a common situation. You do a quick mental calculation, and realise you will need real odds of at least about 1:6 for a call to be profitable. You already have 1:3 currently, and you believe your implied odds will make up for the rest, so you call. The turn doesn't make your flush, and now he continues to bet 1/2 the pot. You look at the rest of his stack and determine he's going to pay off the flush if you hit. You still need 1:6 real odds, and you think you have it, so you call.
Ok, what was wrong with that?
Conventional poker wisdom(ABC poker) says that so far, you've been playing good mathematical poker. You've been playing the odds correctly. But alas, you have already fallen for the sunk cost dilemma. This may sound really wierd to those of you who play poker mathematically, because this runs counter to the conventional theory. But let's look at what's happening again, this time with a slight twist.
Let's assume the pot was 30 dollars on the flop. Calculating forward, we know the effective stacks here were 120 on the flop after he bets the 15 dollars(half pot). In the scenario above, we are HAPPY he has the 120 left, because that allows us to draw profitably on the turn after we missed. But what if he had shoved on the flop instead with his 135 dollars into the 30 dollar pot? You most certainly would not have had the odds to call it. Not by a long shot. What's the difference between the two scenarios, really? Experienced players will probably explain it away by saying the pair of aces could have got away from the hand if the flush hit on the turn. But they can't really place a value on that option. It's just a way to explain away the uncomfortable discrepancy.
The truth is, we are blinded by our insistence of not taking into account sunk costs. We know taking into account sunk costs invite trouble via the sunk cost fallacy, and so we disregard it, trading it for the lesser evil of the sunk cost dilemma. But that's just the problem. Most of us were taught to look out for the trap of the sunk cost fallacy, but how many of us were actually warned that avoiding the fallacy traps us with the dilemma? Our very confidence of having avoided the pitfalls of the fallacy makes us more vulnerable to the dilemma. It happens all the time in mid-project budgeting, and sure as hell happens often in poker.
It is not what we do not know that dooms us, but what we think we know...and are wrong.
I'm kinda hoping everyone here knows what sunk costs are, and how they relate in poker. Here's a brief explanation : When you put money into the pot to raise, call or bet, that money is considered your sunk cost. It's money you won't get back again unless you win the pot(investment pays off). In gambling circles, it is considered wise to think of money put into the pot as no longer yours. This helps the average player understand the line drawn between sunk costs and available capital. Inexperienced players lose more money because they consider the money put into the pot as still theirs and thus necessary to protect.
But I digress.
The point of this post is really to discuss two really cool concepts every poker player needs to understand : The sunk cost fallacy and sunk cost dilemma.
Sunk cost fallacy
This is the more common problem. As discussed above, the sunk cost fallacy is the phenomenon of throwing in more good money after the bad. Say you have AK, and re-raised original raiser 15XBB pre-flop and got a caller. You miss the flop, and it gets checked to you. You C-bet about 25XBB and get raised. At this point, let's assume you know you're beat. You've just put in 40XBB into the pot and you're facing a 40XBB raise. The weaker players will occasionally succumb to the sunk cost fallacy. They're thinking : I've put in so much money already, it's just silly to throw this hand away. Especially when there's still a chance I can draw out!
It's easy to kid yourself in this scenario. Hell, I've seen even above average players succumb to this temptation on occasion. I would not be honest if I claim never to have done it myself. Still, if this is a major leak in your game, it would do you well to plug it ASAP. It's not hard to identify, and more often than not, throwing the hand away could make the difference between a winning session and a losing one.
The sunk cost fallacy is not unique to poker players, or even gamblers. One of the biggest fiascoes in recent history demonstrating this mindset was the Concorde experiment. Millions of dollars poured into the development of a super sonic passenger jet before it was determined that the idea was unprofitable. But because millions had already been spent, the sunk cost fallacy clouded the minds of the government entities behind the project. It was more than a decade later before mounting losses forced them to pull the plug.
Sunk cost dilemma
This is the juicy one. It's also the more dangerous of the two, because it happens so often in poker. First, a description:
The sunk cost dilemma is the situation whereby an opportunity is given in various timeframes to decide on the action to proceed or withdraw...and the optimal solution at each of these steps while being to proceed, will actually lead to an overall loss in value. It is in essence the direct opposite of the sunk cost fallacy. Because sunk costs are not taken into consideration, every decision made appears to be optimal, but ends up being detrimental to the overall project.
Now let's consider this in a poker situation(and you'll soon see why this is the more dangerous of the two in poker).
Consider yourself holding KQ of spades on the button. Someone raises preflop and you smoothcall. Flop comes A68 with 2 spades. The guy bets about 1/2 the pot. Assuming you know for certain he has an ace, and your only real chance of winning is hitting your flush, we know your odds of winning this hand is about 33% at best. This is a common situation. You do a quick mental calculation, and realise you will need real odds of at least about 1:6 for a call to be profitable. You already have 1:3 currently, and you believe your implied odds will make up for the rest, so you call. The turn doesn't make your flush, and now he continues to bet 1/2 the pot. You look at the rest of his stack and determine he's going to pay off the flush if you hit. You still need 1:6 real odds, and you think you have it, so you call.
Ok, what was wrong with that?
Conventional poker wisdom(ABC poker) says that so far, you've been playing good mathematical poker. You've been playing the odds correctly. But alas, you have already fallen for the sunk cost dilemma. This may sound really wierd to those of you who play poker mathematically, because this runs counter to the conventional theory. But let's look at what's happening again, this time with a slight twist.
Let's assume the pot was 30 dollars on the flop. Calculating forward, we know the effective stacks here were 120 on the flop after he bets the 15 dollars(half pot). In the scenario above, we are HAPPY he has the 120 left, because that allows us to draw profitably on the turn after we missed. But what if he had shoved on the flop instead with his 135 dollars into the 30 dollar pot? You most certainly would not have had the odds to call it. Not by a long shot. What's the difference between the two scenarios, really? Experienced players will probably explain it away by saying the pair of aces could have got away from the hand if the flush hit on the turn. But they can't really place a value on that option. It's just a way to explain away the uncomfortable discrepancy.
The truth is, we are blinded by our insistence of not taking into account sunk costs. We know taking into account sunk costs invite trouble via the sunk cost fallacy, and so we disregard it, trading it for the lesser evil of the sunk cost dilemma. But that's just the problem. Most of us were taught to look out for the trap of the sunk cost fallacy, but how many of us were actually warned that avoiding the fallacy traps us with the dilemma? Our very confidence of having avoided the pitfalls of the fallacy makes us more vulnerable to the dilemma. It happens all the time in mid-project budgeting, and sure as hell happens often in poker.
It is not what we do not know that dooms us, but what we think we know...and are wrong.
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