How Poker Can Help Us Make Courageous, Fact-based Decisions

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DataDrivenInvestor

9 min readMay 31, 2021

**Photo by Michal Parzuchowski via Unsplash**

I was never a professional poker player, but for many years I was a regular in cash games. In 2005 I had even managed to build up a substantial poker bankroll. So, like Matt Damon in Rounders, I made my way to the desert that summer to play in the $10,000 main event of World Series of Poker (WSOP) to see if the $7.5 million prize for first place had my name on it (spoiler alert: it didn’t).

Despite not making me rich nor becoming my full-time profession, poker has taught me a lot about analyzing alternatives and making sound decisions. That’s because at its heart, poker is about making the best possible decision from incomplete information, which is just as crucial in business as it is in cards.

Sound decision-making is so pivotal, Ericsson has made “fact-based and courageous decisions’” one of the five focus areas of its wide-reaching cultural transformation program, which it launched in 2019. Even former Amazon CEO Jeff Bezos has spoken at length about the role effective decision-making had in Amazon’s success — especially making fast and bold decisions.

So, let’s dive in and see what the most popular card game in the world can teach us about making courageous, fact-based decisions.

Risk vs. reward

To start with, a good decision must consider risk and reward. You may have heard the poker expression, ‘never draw to an inside straight.’ That’s because it’s a play that will only be successful on average once every 12* times. But that doesn’t automatically mean it’s a bad play. It just means the reward must be great enough to outweigh the risk.

There is a statistical approach for modeling this kind of decision called expected value (EV). In simple terms, EV calculates the cost of all the ‘bad bets’ you would have to make on average to win a hand, and then compares it with how much profit you will make when you do win. If that value is positive, the bet has a positive EV.

In the case of an inside straight, if it costs $10 to call a bet, you will need to make a profit of at least $110 when you won to make it a break-even bet from a risk-reward standpoint.

How can we apply this to business? Let’s say there is a venture that would cost $100,000 to pursue and, if successful, would make the company $300,000. That might seem like a good bet, but what if there was only a 20 percent chance of succeeding? On average, that venture would lose $20,000.

However, imagine if that same venture could earn a $500,000 profit the 20 percent of the time it was successful. Then it would make a $20,000 profit on average.

While it’s rare in poker or business to have such precise information, the process of estimating costs, potential proceeds, and the likelihood of different outcomes is extremely useful for making deliberate, logical decisions that balance risk and reward. Doing so also has at least three additional benefits:

You can share your assumptions with others, who can provide their insight and potentially help you make even better decisions.
It can give you the confidence to move forward with a bold (but good) decision you might otherwise pass up.
It gives you tangible analysis to demonstrate to customers, your boss, and other stakeholders how you reached your conclusions. This is much more powerful than an unsupported opinion.

Don’t go broke

If you’re playing poker in a cash game and your bankroll is sufficient for the size of the game, then you should rarely pass up a bet that you believe has a positive EV. Over time, it won’t matter if you win or lose a given hand. If you continually make positive-EV bets, you are assured of making money.

This concept changes in poker tournaments, though. Unlike in cash games, in most tournaments you can’t just buy more chips if you lose your whole stack. When you’re out of chips, you’re out of the tournament. So, the general rule is to avoid making bets that could cause you to go broke. You still want to make positive-EV bets, but if a bet would risk all or most of your chips, you should fold many hands you would otherwise play, especially early in the tournament.

To help explain these concepts, I reached out to 13-year poker pro Tim Acker, a very successful and respected player in both cash games and tournaments. Here’s what Tim had to say about his approach in poker tournaments:

“One thing recreational players fail to realize is that they should not play too many speculative hands [in tournaments]. There’s no point in risking chips just to try and ‘hit something big’ and continually throw away chips in spots you could’ve easily avoided in the first place.”

He goes on to say that when it comes to really big bets, “It’s very rare to be risking your entire stack early-on in any tournament. I’ll always have a massive advantage when those chips go in. No need to risk your whole stack unless it’s close to a sure thing.”

This same concept applies in business. You want to pursue as many ‘good bets’ as possible, but bets that could put you out of business or irreparably harm your company should be avoided, even if the potential upside is significant. Bezos famously calls these “ one-way door decisions “, meaning there is no going back if the decision turns out badly.

When it’s right to take a chance on going broke

Back in 2005, I not only played in the World Series of Poker (WSOP) main event, I also played in a $3,000 No-Limit Hold’em tournament that had over 1,000 entrants, making the payout for first place nearly $700,000.

After a full day of play in the smaller event, I was not only still in the tournament, I had the third-most chips of the 71 remaining players. Then, the hand below developed where another player and I bet all of our chips, putting me at risk of getting knocked out of the tournament.

Even though I was risking my tournament life, at the point when our chips went into the pot I had a 97 percent chance of winning the hand**. Since I was such a big favorite, it was clearly the right decision to put the chips in. But what about situations that aren’t so black and white? When is it worth taking a big risk?

Here’s Tim again on when he’s willing to put it all on the line during a tournament:

“Later on in a tournament [when the pots are bigger to start each hand], it’s better to make a play that has a chance of success than to wait and just put off the inevitable. You have to decide if you’re there to last longer or to win the game.”

It can be worth making a big bet that has the potential to put you out of the game if:

You determine the risk of failing is very low, such as going all-in when you’re a big favorite to win the hand
The downside of not making the bet is worse than the risk of making it, such as late in tournaments when the amount in the pot to start the hand gets really big and you have to gamble to avoid running out of chips

Don’t be results-oriented

In my hand above, once we got our chips into the middle, the next two cards were a 7 and an Ace, giving my opponent an extremely unlikely full house, and I was sent home in 71st place. Despite the horrible outcome, no reasonable person would suggest I should have folded my hand in that spot. Yet we do almost exactly that all the time in business.

Over my career I have seen many cases where a very senior leader was being challenged about a decision or approach they were taking and they said some variation of, “If I’m doing it so wrong, how come I’m making so much money?!?”

While those leaders were overseeing profitable organizations, that doesn’t mean they were right. Maybe they could have been making even more money if they considered the advice they were being given. Or perhaps they could have fixed a flawed approach before it became the reason they started losing money. By using their positive results to deflect challenges to their thinking, they were depriving themselves of valuable insight and undermining their ability to learn.

Likewise, when decisions turn out badly, people tend to automatically assume this indicates poor judgment by the person who made the decision, without really assessing the decision-making process that was used.

This is called ‘ resulting,’ and it’s a common mistake we all make. Instead, we should judge decisions on the process that was followed given the information that was available at the time.

Ericsson’s big bet

Let’s look at an example from Ericsson’s recent past to show these concepts in action.

When President and CEO Börje Ekholm took over in early 2017, the company’s financials had been slumping. Therefore, one of his first tasks was to cut costs as he worked in parallel to implement Ericsson’s new focused strategy. However, while cutting costs overall, Ekholm decided to increase R&D spending.

Four years later, the approach has paid off, with Ekholm announcing in late 2020 that the company’s turnaround was complete: “Our investments in technology have positioned us as a leader in 5G… We now have a sound, profitable, and more agile business, and this will enable us to take the next step [and] focus on growth with real confidence.”

Just looking at the results, increasing R&D spending seems like it was a no-brainer. At the time, though, there was intense pressure on Ericsson to cut all costs, including in R&D. Here’s what Ekholm said about how he came to that decision:

“By having the customer in focus it becomes clear that competitive solutions based on leading technology is our raison d’être. So instead of slimming down on R&D we increased our investments to strengthen our technology position. Today, Ericsson’s position is strong, and we are a leader in 5G.”

It was a big bet, but one they deemed as: 1) having a big potential payoff, 2) having a high probability of success, and 3) essential to the company’s future. Given the information they had, it was a risk they felt they had to take. Fortunately for Ericsson and its customers, they were right.

What is Tim’s take on Ericsson’s big bet? “It’s like offensive vs. defensive strategy in poker. Cutting cost is defensive, and investing for the future is offensive. There isn’t always a sure thing. If I have a choice, I prefer to be on the offensive.”

The end game

There are many more poker concepts that can apply to every-day decision-making, but I’ve found the four covered here to be especially useful. Let’s summarize:

Always consider risk vs. reward
Avoid taking risks with potentially catastrophic downside; but
Be willing to make a big bet when you’re confident in your analysis and

it has a small chance of failure; or
the downside of not taking the risk is even worse

4. Be process-oriented; do not judge the quality of decisions by their results

Following these guidelines will not guarantee you will always make good decisions, but it will help improve your decision-making process and increase your odds of success in the future.

Follow me on LinkedIn or Twitter to see the content I’m reading (and sometimes writing) on leadership, strategy, empathy, and wellbeing. And to learn more about career opportunities with a company that values fact-based, courageous decision-making, visit Ericsson’s Careers page.

*Rounded from once every 11.75 times (4 cards out of a remaining 47 can complete an inside straight draw).

**When the money went in, I knew I was probably winning, but I didn’t know I was a 97 percent favorite to win. Based on the information I had before I saw my opponent’s cards, I estimated I was about an 85% favorite. Situations rarely get much better than that in poker, and that was more than enough to put the money in.