Memoirs of a Gambler - Poker

If you read the last Memoirs of a Gambler - Blackjack post, you'll know that my 2008 IRS Tax Rebate money, which I expect to receive soon, was spent in vain. As I once again vow never to spend money on such a fruitless endeavor, it reminded me of the many nights I use to spend playing poker. I associate poker with the lottery not because I've thought about quitting both countless times but because it is all about probability. Any good poker player knows that you never put your chips in the pot when the odds are not in your favor but when the lottery jackpot gets big like last week's $270 million dollar behemoth; one is lulled into a false sense of "pot odds". I'll discuss this in more detail later in the post.

Flashback - January 21, 2006 at the Tropicana Casino/Resort in Atlantic City, NJ

It is about 9 pm on a Saturday night and after eating at Seaside Cafe, I head over to the poker room (one of the only non-smoking havens in the casino) and cash in $200 at the cashier for some chips. After my initials were called, I was led to my seat at a $1/$2 No Limit Texas Hold' Em game. After settling in and making light banter with my neighbors, I begin to play.

After about 2 rounds of unplayable cards (at least for me), I finally get something I can play. I was dealt a JH TH (jack and ten of hearts) and sitting right behind the button I proceed to call the $5 pre-flop raise that already had 5 callers. At the flop, there was a total of 8 people who called (loose table) and the flop came 9S 2H 8H (Pot = $57). Nice, I had both a flush draw and an open ended straight draw and with a $10 bet it was a no-brainer call. Four people paid to see the turn which was the AH (Pot = $97). Sweet, I hit my flush although it was not the nuts (best possible hand). Second position bets $25, third position folds, I re-raise another $25 making it $50 total to protect my already made flush. First position folds and second position hesitantly calls. The river comes a KD (Pot = $172). Second position checks, I bet $30, he calls. I show the flush and he mucks. I can only assume that he has maybe two pair with the ace but who knows. He says "good hand" which is actually poker lingo for "You Bastard!" and I reply with the cordial "thanks". After raking in my chips, I tip the dealer $3 and begin to stack my chips.

After what seemed like an eternity of second class hole cards slowly eating away my stack (stack = $335), I finally received a gift from the poker gods. Pocket Rockets! Sweet! Struggling to maintain my poker face and sitting in third position, I raise pre-flop to make it $15 to play. Fourth position folds, fifth position calls, sixth position calls, seventh position re-raises it to $50 and everyone after folds with the raise coming back to me. I re-raise to $100, causing pretty much everyone else to fold besides me and the guy in the seventh position. He stares at me for a good minute and then goes all in making it another $210 to go. I think to myself - Nice, this is the situation I want, I have the best hand and I get to put all my chips in play, I call. We flip, he had Cowboys (Pocket Kings) and I turn over my aces. Flop turns 3D 7H 9H (Pot = $650), a bunch of rags and the flush draw wasn't an issue since we both had hearts. Turn comes JC - Nice, just one more bullet to dodge. As the dealer turns over the river card, a KS, my heart sinks, Cracked Aces, once again. The table exclaims in my sympathy as I looked in disbelief as what SHOULD have been mine was now being taken by someone else. I would feel victimized but I've experienced so many bad beats in poker than one almost feels that the rules of probability do not apply to this game. Needless to say, I quickly lost the remaining $25 on a few tilt-induced plays.

This is yet again another true story about my casino exploits. I don't really consider poker gambling because I am not playing against the house, where their games have a built-in edge, but rather against other players where the probability for winning is inherent in the cards you receive and also on the skill you possess. I would put poker in the same category as stock investing because success is usually achieved if you make the right decisions based on probabilities. The best players know when to stay in the hand and when to stay out of a hand.

When it comes down to poker or stock investing there are two elements, process and outcome. Process is the strategy that you apply and outcome is the result that occurs. Since poker is a game of probability, there are two outcomes for both the "right play" and the "wrong play". When the right play is made and the player wins, it is "the way it should be". When he loses, despite doing all the right things, it is a "bad beat". When a player makes a wrong play and wins, it is attributed to "dumb luck" and he's usually look down upon by the other better players. When the wrong play is made and the player loses, he gets what he deserves. Most people only focus on the outcome, "Who cares if you make the right play and go home broke, I'll rather make the wrong play and be a winner!", because the results are what really matters and are more tangible. In the long run this type of thinking is detrimental because one starts to attribute a good result as being synonymous to a good process. Since process ALWAYS trumps outcome, this type of thinking will cause you to eventually lose all your money because you have been mislead to think that the "wrong play" is the "right play" just because you won a hand using it. Probabilities always pan out in the long run. The same can be said about stock investing. Those who use unsound strategies to pick stocks become positively reinforced in their process when they make money but in the long run, they tend to lose more money than they make because they only chase performance instead of focusing on developing a sound strategy. Fund managers that do have a sound strategy (ie. Warren Buffet, George Soros, Peter Lynch) may have down months or years but their long term track record is unparalleled. Casinos are the same way, even though most casinos have only a 1-2% edge on all casino games, in the long term they always win.

With all games involving probabilities, there will be times that you will lose despite doing everything right. That is why you never put all your eggs in one basket for investing, gambling, day trading or anything else you do. Capital preservation is paramount when probability is involved because a 2% chance of failure can still happen and when it does, you want to able to play another day. When you only play the probabilities that are in your favor (making the right plays), it will always lead to superior outcomes it the long run. So if you want to win, don't focus on the results but rather on a sound strategy. Play like the house and play the "right way".

Now back to the issue of big jackpot lotteries giving a false sense of "pot odds". According to this website devoted to probabilities surrounding the Mega Millions lottery, the odds of winning are 1 out of 175,711,536. So it is common to assume that as long as the jackpot is above $175,711,536, it makes sense to play because the payout is higher than your probability of winning. But most big jackpots, after all the taxes that are deducted, are never above that probability and when you account for the increased chance of multiple winners for big jackpots (since a lot more people play), the probability doesn't even come close. Also, according to government statistics, there are about 1.3 deaths per 100 million vehicle miles (1 in 76,923,076). So if you drive half a mile to the store to buy the lottery ticket and drive half a mile back home, your chance of getting killed or killing someone else is 2.5x more likely than winning the Mega Millions Jackpot. For those who drive even further to buy tickets or those on motorcycles, I don't even want to do the calculations. In conclusion, according to probabilities, Mega Millions Jackpot lottery is a fool's bet (I'm sure the lottery winner from Georgia disagrees).

Truthfully speaking, I wouldn't be surprised if I end up spending more money on lottery tickets in the future because "hey, you never know".

Recommended Reading: Winning Decisions: Getting It Right the First Time by J. Edward Russo and Paul J. H. Schoemaker