A lot of people think playing poker is all about luck, however, those that really understand the game know that there are many strategic elements to it. One of these strategic aspects of poker is risk to reward analysis. Decision making based on analyzing the spectrum of reward results based on what is risked is very tricky and usually very subjective. In poker, it is most commonly presented in what is called “pot odds” which basically involves analyzing the size of the current bet versus the total in the pot. Instead of talking about pot odds here, I am going to delve a little deeper into risk and reward analysis and how one of the opening scenes in the movie Rounders has always bothered me.
To start, let me give a quick synopsis of the scene:
The hero of the movie, Mike McDermott (Matt Damon) is a law student playing high stakes poker in an underground NYC club against Teddy KGB (John Malkovich) a Russian mob guy. They are playing Texas Hold-Em and Mike is holding an Ace and a Nine; he flops top two pair, then gets another nine for a full house: 9’s full of aces. They had played back and forth at each other and on the final card Teddy bets $50k.
Here is where my risk to reward analysis comes in. Mike has a full house, a very good hand, and there is no question that he should call the $50k bet. But how does he go about analyzing the situation? Mike thinks that Teddy KGB has a flush, a hand that Mike’s full house beats. He doesn’t think about what Teddy could have that could beat him, he is no longer even thinking about that hand. His narration in the movie tells us “but all I’m really thinking about is Vegas and the f****** Mirage.” So Mike decides to re-raise for everything he has (not just at the table, but all of his money to pay for law school as well) which at this time was only another $30k into an already very large pot. Teddy wins the hand with a better full house, aces full of nines, having been holding two aces in his hand.
What did Mike do wrong? He lost perspective of the situation and was only envisioning one outcome.
Here’s a simple table of the choices and possible outcomes to help the visualize the analysis:
| Mike Wins Hand | Teddy KGB Wins Hand | |
| Call $50k | Mike would have approx $200k | Mike would still have his original $30k |
| Re-Raise additional $50k | Mike would have approx $230k | Mike losses everything he has! |
There is also the possibility that if Mike had the winning hand, that Teddy KGB wouldn’t have called the re-raise and Mike would have the same $200k as if he didn’t raise. But we will assume that Teddy KGB would have called with the flush that Mike hoped he had.
To view this in a simplistic way: Mike risked everything he had for a possible incremental reward of $30k over the $200K, an additional 15%, but the risk was to be left with absolutely nothing. He didn’t even consider this possibility, he was thinking about Vegas! Had he analyzed the situation more completely, the better move would probably have been just to call the bet, not re-raise.
These lessons from this scene in Rounders can be applied to many business situations: Budget and Projection Planning, Product Development, Marketing Strategies, or any other cost effective analysis or ROI decision making process.
- Don’t lose perspective of a situation. There are specific details and broader issues to be considered in every problem-solving situation.
- Always consider all possible outcomes. Don’t take any result as a sure thing!
- Even on a “sure” result, be careful not to risk everything. What reward result is worth the possibility of losing everything (See #2!)?
- Comprehensive analysis is always worthwhile, even if it results in the same decision as no analysis.
Internalize these lessons. Whether in business or personal life, better decision making processes and analysis make for better results!
Oh, there is one last lesson to be learned from this scene: Never play cards with a Mad Russian!
