Businesses are faced with innumerable risks. Compliance issues, reputational degradation, economic changes (affecting sales or access to labor), and things such as Hurricane Ida or Covid-19 are just a few such possibilities that pose serious threats to a business’ health and longevity. Here are five ways utilizing the power of poker can help develop effective risk management.
1. Identifying risk
The first step to mitigating risk is identifying the potential for problems. Poker players pinpoint risk through the practice of game selection, scouting out the best locations, conditions, and opponents to play, therefore giving themselves the highest chance of success.
Which tournaments have a slow structure that allow me to press my advantage without risking all my chips? What table has players I can read? Where can I play the exact stakes I’m comfortable with? These are all forms of risk identification.
Using historical data from similar businesses as a reference point, you can identify risk by estimating the likelihood and consequence of issues your business may encounter (even for Knightian Uncertainties.) Risk types will vary by the size and nature of each business but a rule of thumb is to plan exhaustively to avoid unwelcome surprises later on.
2. Thinking in utiles
A utile is a unit used to measure happiness in different states of the world. Would you flip a coin where a “heads” meant I paid you $10,001 and a tails meant you paid me $10,000? If you’re like most people, you would not.
This is because even though the flip is actually advantageous to you in dollar terms, you lose more utiles by becoming $10,000 poorer than you gain by becoming $10,001 richer. Humans, including shareholders, are inherently risk-averse and with good reason. Layoffs and losses hurt more than growth helps.
Poker tournaments teach us to think in utiles through the concept of an independent chip model. Prizes in a poker tournament are awarded in the order players are eliminated. Because players are rewarded for outlasting their opponents, chips lost are more valuable than chips gained. Playing tournaments familiarizes us with the level of reward we need to assume risk under a utilite framework
The most direct and effective method of managing risk for businesses is purchasing insurance. Insurance eliminates the possibility of complete disaster, but costs slightly more than the average business gets from use.
3. Buying insurance
Poker players insure their chips by adhering to bankroll management and using in-game techniques to reduce variance (the downswings and upswings of poker). Bankroll management is the practice of playing for stakes low enough that you have a cushion of buy-ins in reserve in case you get unlucky. Moving up and down in stakes relative to the size of your bankroll is paramount to minimize your risk of ruin.
Poker players also commonly default to less risky play, all other factors being equal. These strategies come with a slight cost. On average, you might win more playing higher stakes you are not bankrolled for, or sometimes the lower-variance option may be suboptimal. But similar to paying the slight cost for your business’ insurance, the value of sustainability and protection is far greater than the costs of being careful.
4. Prizing information
Information is a prized commodity in today’s business environment. Certain risks, like brand defamation or dangers in the workspace, can be curbed by streamlined methods of communication. And the difference between transparent versus misleading financial information can sway investors toward or away from funding a company’s next round.
Poker players know the risk of preventable mistakes is drastically reduced by having as much information as possible before making a decision. To manage the risk associated with information asymmetry, poker players greatly value the chance to act last. Calling this “playing in position,” adept players will go so far as to play four times as many starting hands when they get to act last than when they have to act first.
Leaders with a background in poker will make the most informed decisions they can, factoring in not only their company’s interest, but also the actions and incentives of other key players.
5. Maximizing expected gains through quality assurance
Risks businesses face can be mitigated by increasing the win of the average case scenarios and improving the result of the worst case scenarios. Both these goals can be achieved through quality assurance. By regularly auditing the products, systems, and service of a business, emerging risks are found quicker and defective goods are ferreted out before they go to market.
Poker players constantly undergo mental pruning and in-game litmus tests to assure the quality of their plays. The beauty of poker is that the game is grounded in math and game theory, so players can defer to logic when they don’t have a strong gut feeling. By studying the fundamental theory of poker and checking in with poker peers, players can rest assured their strategy will win out over luck in the long run.
Poker empowers us to take bold, yet calculated risks. Poker Power is teaching women worldwide how to play poker to build confidence and business skills. Master strategy, negotiation, live reads, and more alongside other women who are learning the game. Find out how the power of poker can give you the skills to master risk. Will you take a chance on poker?