30 Sep Playing poker and running a business: The decision-making process
For a while, I’ve been interested in the game of poker. I’ve read a number of books by poker players who talk about psychology and decision making (I’d recommend Thinking in Bets by Annie Duke and The Biggest Bluff by Maria Konnikova). One of the interesting things about poker is that it is a game of skill when it comes to functions of decision making and how to make decisions that are consistently applied.
A typical game of Texas Hold “Em takes about two minutes to play. In those two minutes, a person who plays the hand from start to finish could make as many as twenty different decisions. From placing an ante to analyzing if they’ll play or make a bet, the player goes back and forth several times in a single round.
Good poker players do not study the results of a particular hand, but rather the decision making that goes into that hand. Because you are dealing in mathematical probabilities of any hand as well as the probabilities of certain events happening and actions of your opponents, the key thing about a hand of poker is that you are operating in a world of imperfect information. You do not know everything. You have to make decisions based on not knowing everything and making inferences and guesses (aka bets) about what is happening in the world of that particular hand.
It is possible that your decision-making process in business, just as it would be in a poker game, can do everything right from an evaluation of the decision making and still end up with a bad outcome.
Let’s talk through an example. The second-best starting hand in Texas Hold ‘Em is a pair of kings. Let’s say you start your hand with a pair of kings and everybody else but one player folds. The flop comes up — there’s two aces and a queen. From here, there’s a lot of different things that could happen. You hold two pairs, which is a pretty good hand and a winning hand about 75% of the time. Your opponent decides to play. You both bet and you see the next card: a four. It doesn’t help you and probably doesn’t help your opponent, so it is a non-card. The last card that comes up on the river is another ace. Now, you are looking at one of the best hands in poker: a full house. You bet and your opponent bets. Now you have start wondering— what does your opponent have? They could have three aces, they could have four aces. They could have a full house of Aces and Queens or Aces and Fours. You don’t know. But, with pocket Kings, you’re looking at high probability of winning because you have a full house, aces and kings. But the small, less than 5% outcome occurs, your opponent has four aces.
Even with a full house, you lose. The lose hurts, but did you make the right decision?
Now most people would look at the situation and judge you for making a bad decision. But was it? You hold one of the strongest hands in poker — a full house with aces and kings. You don’t know your opponent is holding. The probability, given all the cards in the deck, you have over a 95% chance of winning. Until that last card comes up, that was your excellent chance of winning. Yet, it turned out bad. Why? You didn’t have all of the information.
The decision-making process that went into that poker hand was right. It played the proper probabilities, assessed the likely scenarios, and operated from there. That is a realistic decision-making process.
When you are a business owner and making decisions, you do not have perfect information. You will never have everything you need. You will be playing a probability. You are making a bet about a certain outcome. That does not mean that your outcome is going to come out the way that you are betting. But, just because you have a negative outcome, that does not mean that your decision-making process was wrong.
It is easy to get wrapped up into the notion of outcomes. That outcome thinking is what is dangerous for a business owner to be making. You are making a bet about probabilities and, unfortunately, there can be a negative outcome no matter how prepared or informed your decisions are. When business owners get spooked about negative outcomes, they tend to start to make bad decisions. By focusing on the negative outcome, you minimize the importance of a realistic evaluation of probabilities.
When you are faced with a decision as a business owner, you need to spend some time thinking about what the possible outcomes are and the probabilities that those outcomes could come to fruition.
PS: This is where a management team comes into play — even if you’re in the business solo, you should always have a reliable crew that you can turn towards to talk through problems, brainstorm solutions and get thoughtful feedback.