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What’s Money Worth? Part I

Money is funny stuff. Everybody wants it, most of us don’t have enough of it (or don’t think we do) and, oddly, when people suddenly manage to get a lot of it, they typically do not grasp what they have, do not understand it and don’t know what to do with it.

Money confounds economists who are supposed to know all there is to know about it. It confuses social scientists who try to analyze how people think and feel about it. People, it turns out, are annoying critters; they often don’t do what the theories say they should. Economic theory is based on people making decisions using logic and rationality. They don’t. It is based on the idea that a dollar is worth a dollar. It isn’t, as strange as that may sound.

Money also happens to be the engine of poker. It makes the game go. Poker just can’t be played without money …. although a game played for clothing has a certain allure. So, do social scientists have anything to tell us about this essential element in the game? Or, perhaps, do poker players have any insights into money that might be useful to economists or psychologists? I’m not sure what the answer is but it’s worth a bit of a ramble.

The first thing to appreciate is that money is ± asymmetric. There is a compelling asymmetry in the subjective worth of money. A loss of a decent chunk of change, say $500, is a lot more negative than an equivalent win is positive. This effect shows up even when the money is imaginary. People asked to imagine various gains or losses and judge how this will make them feel, report that even the thought of a large loss makes them feel uncomfortable. Imagining the loss of $10k is very negative; imagining a similar gain is good, but not as good as the loss is bad. In short, a dollar isn’t always worth a dollar.

The implication is that people are, for the most part, “risk averse.” They tend to avoid risk because of the fear of being made miserable by a loss. We are all risk averse to some extent but those who find losses the most distressing avoid risk whenever they can. I have a good friend who is smart and a very good game player. She is aggressive and ruthless in every game we’ve ever played. But she won’t play poker. Not because she won’t win. With time and experience she’d likely become a formidable player. It is because she is extremely risk averse. Just the thought of losing even a small amount of money makes her unhappy. So, wisely, she doesn’t play.

It’s also not hard to find folks at the other end of this spectrum. We all know poker players, sports bettors, high-rolling horse handicappers or, as we’ve all discovered recently to our collective pain, bankers, mortgage company CEOs and commodities traders who are at the other end of this continuum.

But patterns are discernable. For example, low-stakes players, for the most part, look different from those who play at higher stakes. These low-stakes games are very popular and filled with players who never move up. These folks are almost certainly moderately risk averse. They will have some measure of tolerance for loss; otherwise they wouldn’t be playing poker at all. But their aversion to a large loss keeps them from moving up.

Interestingly, the negative emotions here often don’t have a lot to do with money. I’ve known players who have successful businesses but find losing $200 at poker so painful that they won’t play above $2-$4 limit, even though $200 means nothing in the larger frame of their lives and they routinely risk far more in business dealings.

Note the lack of rationality here. Money in business feels different than money in poker. Moreover, if we limit the discussion to poker their behavior still doesn’t make sense. The better players should, according to classic theory, move up. But few do, likely because of the negative emotions that accompany just the contemplation of a large loss.

In passing note that this asymmetry is one reason why you should work to lower variance. High variance gives you big wins and big losses. The wins don’t gain you as much, psychologically speaking, as the losses are costing you. If you lower variance you diminish the emotional downside without having as much impact on the upside.

Then there are those who live at the far end of the spectrum. Recently, Internet star Tom (durrrr) Dwan issued a million dollar challenge. The details aren’t important (although they involve Dwan actually risking $1.5 million because he offered his opponents odds on the final outcome). Here’s what interests me. Tom is young (born in 1986). One million dollars is a lot of money. The average annual income for a family of four in the United States is around $40k. Tom is putting on the line what the average family makes in 25 years, for a game of poker.

To understand poker played at these levels we need to realize that here money isn’t worth anything.

I don’t know Tom but I’ve known more than few with this style. What I suspect he is really putting up is the challenge, the desire for action, to take risks, to be considered the best. In short: ego.

As British essayist and poet Al Alvarez noted in his brilliant classic, The Biggest Game in Town, the chips aren’t “really” money; they’re just the way to keep score.

My last example here is John Myung. John’s an old adversary who once hit a 1-outer to knock me out of a tournament three spots from the money. A couple of years ago he took down the Showdown at the Sands for one million dollars. He took the cash, bought a house and invested the rest to guarantee an education for his kids. That’s John’s notion of what money is worth.

I’ll be very interested to see where Messrs Myung and Dwan are in ten or fifteen years.

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