With Europe teetering on the brink of financial disaster – there are no shortage of poker analogies in the press. Terms like ‘all-in’, ‘bluffing’ and ‘raising the stakes’ have become a regular part of the financial reporters arsenal. In some ways it is great to see how far poker terminology has crept into day to day language. At the same time I can’t help feeling that, well, they have got the analogies and poker references all wrong… In fact looking into the similarities between your average global financial crisis and a game of poker, there are just so many better descriptions and parallels that could illuminate the readers of finance articles. So, putting aside your bluffs, all-ins and, erm, stakes for a moment… allow me to draw some real parallels between Europe and Poker.
#1 – Poker Staking, Backing The Wrong Horse
In poker there is a big business in allowing other people to play with your money. This is called ‘staking’. What happens is a wealthy person will agree terms with one or more poker players to provide all or part of their poker bankroll on a profit-share basis. Any losses will usually result in ‘make-up’, where the player accepts more stake money, and makes up for the losses with his future profits. This is a high risk business, with big profits from a few players offsetting those who go bust (or simply disappear!). Looking at the Euro countries as a whole, we can picture Germany as the rich person… staking the economies of Spain, Portugal, Ireland and so on. The trouble is, these are all losing players. Every time Germany stakes them, they win less money than the original stake – putting them back into make-up. The solution to this in the eyes of some is simply to lend them more and more money… however this results negative returns too, so the amount of ‘make-up’ with Germany just increases… and increases… and increases. Poker players know there is a lot of variance in the game – they also know that backing losing players with bigger and bigger money will not miraculously turn them into winners.
#2 – Money In The Pot Belongs To The Pot
When making a decision during a poker hand, it is important that the math work out from the point you are making the decision onward. Novice players are often biased by the amount of money they already put into the pot. If they already bet 1000 chips on the flop, then they are less inclined to fold later in the hand than if they had not contributed. Sure, the size of the pot and remaining chips will sometimes create scenarios where it is correct to continue. The concept is that the expected value of your play should be based on the odds and winning chances at the point the decision is made – not on whether you feel ‘committed’ to the pot because you already put a lot of chips in on earlier betting rounds. …see where this is going with Europe? The ECB already spent billions on bailing out Greece (soon Spain too). They committed to a course of action which is having little real effect – since the debt / deflation cycle is already biting. The poker analogy is that this money is already in the pot, it has gone. The expected value of future decisions should be independent… except the glorious leadership of the ‘nanny-cracy’ which is the European Union feel committed to the pot by the money they already bet.
#3 – Credible River Bluffs
Many people think that an ‘all-in’ bet is the strongest bet you can make in a poker game. This is not necessarily true. In fact all-in bets are often easy to deal with – you calculate the size of the pot and your estimated chances of winning the hand against the range of hands that player might make this bet with - and go from there. A scarier bet in poker is one which carries the threat of an even bigger bet on later betting rounds. Say you face an expert player who bets 500 chips on the turn. You are not sure whether your hand is good at this point, and very few cards could come which would improve your chances… you look up and see that he has 2500 chips left in his stack – if you call this bet, then you can be sure that you will face an even tougher decision on the river when he bets again. The reason that 500 chips was scary was the threat of 2500 later – with very little chance of new information that would make your decision clearer… good players often fold in these situations, even if they think their hand might be a slight favorite on the turn. Now, how is this one analogous with Europe? Well, the LTRO and the EFSF are, according to many comments, nowhere near big enough to solve both the bank solvency and sovereign debt issues… the problem is that nobody really believes that Europe have enough chips left to follow up with a bigger bet on the river… making the turn bet far too easy to call!
Writing this article gave me the idea that I should look at the potential practical effects for players should there be a disorderly break up of the Eurozone… let me have a think on that one and see if I can come up with something. Comments are closed on this blog, however I will add this article link to our Facebook Page, where you are free to disagree!
GL at the tables, Mark
Submitted by Planet Mark on Mon, 06/18/2012 - 10:28