Estimated reading time: 5 minutes
Yesterday I posted part 1 of a list of lessons I learnt from playing poker. If you haven’t read that yet, I suggest you head here to take a look at that first. Today, I’ll continue my list of lessons learnt discussing variance and risk-taking.
#4: YOU CANNOT ESCAPE VARIANCE
Life is full of ups and downs, and so is poker. Sometimes you’re on a winning streak, and sometimes you’re on a losing streak, but variance is always with you. What is variance? I’m glad you asked. Or, I asked. For you, I guess. Nevermind…
In probability and statistics theory, variance is defined as:
Variance measures how far a set of numbers is spread out. A variance of zero indicates that all the values are identical.
In poker, variance is defined as:
Variance is the difference between how much money you expect to win on average and the results you are seeing in the short term.
In short, it’s the gap between what you expect to see in a hand, and what actually happens and it’s a direct result of the element of luck in the game. It’s the ups and downs, the hills and the valleys. It’s also one of the biggest destroyers of morale in a poker player’s life.
Pocket Aces (two Aces in your hand, in Hold ‘Em) has an 85% chance of winning against any random hand. That means you can expect to win 4 out of every 5 times you play Pocket Aces. But only the naive out there would expect to actually win 4 out of 5 times. Anybody who has ever lost “a sure bet” knows the pain of variance.
Unfortunately there’s just nothing you can do to avoid variance, both in poker and in life. What you can do is account for it. You do that by only risking in ways that favor you and by understanding that variance is meaningless in the long run.
Let’s take a coin flip. Statistics tell us that a coin will land on heads 50% of the time. This of course does not account for variance. You can, and will, see streaks of tails. Three, four, even five times. Statistically unlikely but not impossible. So what we do is two things:
- We understand that we’re in it for the long run. To account for this we only bet an amount that allows us to withstand the effects of variance. If we’ve got $100, we don’t bet $50 on a coin flip. The odds of getting two consecutive tails are too high. If we bet $5, we get to play more, cancelling out the effects of variance over time and getting closer and closer to that 50% win rate.
- Only bet amounts that give us positive value. If we bet $5, to win $7, we are considered to have negative value. Even ignoring variance, over enough 50% wins, we lose all our money. See the table below if you don’t believe me. When we win, we’re making $2, but when we lose, we’re losing $5. No bueno. On the other hand, if we could convince someone to allow us to bet $5, to win $12, we can be sure that over time we will make money.
|Result (No variance)||Net on bet ($)||Total remaining ($)|
|Can you see where this is going?|
In poker we do this all the time. If I know that my hand has a 25% chance of winning, and I am betting an amount of money into a pot that is more than 4 times what I am betting, then I know that I have positive value. This, coupled with only betting amounts that would allow me to play for the long run, makes sure that I am making money long term. Variance destroys you only if you can’t see past the short term. This hand. This tournament. This game.
In life, having positive value on your risks ensures a healthy return. Think long term, and the benefits are immense. Think short term, and you open yourself up to failure by variance.
#5: YOU CAN’T WIN IF YOU DON’T PLAY
After all is said and done, there is one ultimate rule that trumps all others: you can’t win what you don’t play. This is something that has served me well in everything from business to relationships to gaming.
Of all the lessons poker taught me, this is the most important and the easiest to understand. There is no statistical theory to talk about here, no crazy psychological or philosophical concepts to ponder. This one’s as simple as they come.
If you’re sitting on your ass doing nothing all day, odds are, variance or no variance, you will get nothing in return.
Life is rarely easy. I get it… it’s easier to do nothing than risk losing everything. It’s much easier for me to watch TV than stay up every night to write these posts. But playing in life, just like betting in poker, means you have to risk something for the opportunity to gain something better. I don’t risk much money on my freelance work. But I do risk my health, living on 5 hours of sleep every day. I do risk my relationship with my fiancee when I’m working and she wants to watch something or go out for dinner. I do risk my peace of mind when things just aren’t working out.
But I know, if I’m not playing, I can’t win. That’s what gives me the energy to keep fighting, so that one day I can have the freedom to watch TV and do nothing all day.
Or maybe I won’t. Maybe I’ll start playing poker again.
LIFE, ONE HAND AT A TIME
Poker is a game of luck, skill and patience that involves playing the hands you’re dealt in the best way possible to maximize your advantage and minimize unnecessary risk, while reading other players so you can get ahead. If that is not the greatest metaphor to life, I don’t know what is.