Managing Risk, Mindfulness and Poker

Part II
Relevance to the Current Economic Crisis
In my last newsletter I wrote about winning an on-line poker tournament where the prize was a free seat at this year’s (2008) World Series of Poker (WSOP) $10,000 No-Limit Texas Hold ‘em “Main Event”. I wrote about the significance of this event for me personally and the connections that I found between playing poker and my professional activities as a psychotherapist and executive coach. Today’s newsletter continues down that path and updates you on my tournament experience, its application to my thinking and its relevance to the recent crisis in our credit and financial institutions.
This year’s tournament had over 6900 participants. The tournament itself was spread over seven 10-hour days of poker play. The top 666 players (the last to be eliminated) each won at least $21,200 and the prizes increased to $9,100,000 for first place. I came in 780th (top 12%), played over 25 hours of poker and missed “the money” by 114 places. I was eliminated when I made a risky, but strategically correct all-in (all of my chips) bet, with a starting hand (“pocket”) of Ace, King, and lost to another player’s pocket Queens. The subsequent five cards did not improve my hand and allowed my opponent's cards to hold up.
I lost my last hand fully aware that I could lose, but also knowing that the odds of my winning, the pressure my all-in bet put on my opponents and the amount of chips I could win if the cards went my way made the bet a wise one strategically. Even though I lost the hand, I felt comfortable that I had made the right decision under pressure. I was satisfied that I acted both mindfully and strategically, not only in this one hand, but in the hundreds of hands leading up to this one. I left the tournament having achieved a terrific result and validating that my style of play both manages risk and allows me to compete successfully.
As I write this, Fannie Mae, Freddie Mac, Lehman, Merrill Lynch, AIG, Washington Mutual, Wachovia and many of our other financial institutions have either been sold or are in the process of being bailed out by our government. While the skills that are necessary to manage our financial system and its institutions are clearly not the same as those required to play poker, it does occur to me that many of the skills I use to play poker mindfully would have been useful in preventing the financial meltdown that is currently taking place. A parallel I see is that the failure of these companies was the result of the deregulation of a financial system that allowed too many of its participants to disconnect from the risk that they were assuming. Any individual or institution that plays a game/business with inherent risk, plays poorly if they are unable or unwilling to monitor the risk factors present in their activity at all times, or have a monitoring system that checks and effectively regulates their actions for them. When I play poker I do well only as long as I can keep my attention focused, modulate my moods, evaluate my odds and stay connected to the game taking place in front of me—in other words—as long as I stay regulated. Apparently too many bankers and risk managers, spurred on by competitive pressure and the absence of regulation, were unable to keep track of the business in front of them.
Mindful poker play teaches one much about managing risk. Because in tournament Texas Hold ‘em only the last man standing wins, it is sometimes strategically correct and mindful to make very big and risky bets. When I made the all-in bet that caused my elimination from the tournament, for example, I knew that my odds of winning the hand were approximately 50/50. I took this risk anyway for a variety of reasons, including that at that particular stage of the tournament my need to gain chips outweighed the benefit of saving chips (as the mandatory bets were depleting my remaining chip stack and making my continuing survival in the tournament problematic). A 50/50 bet to gain a lot of chips was actually less risky than avoiding any risk altogether and temporarily preserving the smaller amount of chips that I had left. Even though this decision eliminated me from the tournament, it was the type of decision in my game that over time reduces risk and leads to success more often than it leads to failure. I was also aware of and able to accept the consequences of my action.
The participants in our banking and credit institutions, however, seemingly played their game blinded by the opportunity to profit and seemingly blinded to the possibility of loss. As editorial writer Thomas G. Dolan said in the September 22 issue of Barron’s,
“Banks lent more money than they should have to people who were borrowing more money than they should have, mostly on the strength of the idea that real estate would appreciate enough to cover up any problems.”
A sound player would never assume, as Dolan postulates in regards to the actions of those in the real estate and credit markets that they would always get cards that are good enough “to cover up any problem.” A mindful player knows the risks and knows that no one will bail him out if he is wrong. If we are wrong we lose, if we are right we win. Our banks and credit managers should know this as well.
When high-risk mortgages and credit instruments were sold and then repackaged as “high quality,” it set in motion a disconnect between actual and represented risk. As Dolan indicated, it encouraged an assumption that real estate would only go up, despite the fact that this has never been an “up only” reality. Purchasers were willing to invest under this illusion, because it allowed them to purchase homes that they otherwise would never have been able to afford. Institutions that sold these mortgages perpetuated this fraud in order to make short-term profits that were too tempting to turn down. Our government and regulating bodies joined in, and in some cases fostered, an ideology that encouraged this process. Their ideological belief in a free and unregulated market was aligned with their denial about their own greed and their need for regulation.
Mindful poker teaches a player never to make a bet that is riskier than it needs to be. A bet should always be realistic, calculated, grounded in the relationship between risk and reward and it should always consider the position, tendencies and motives of one’s competition. Richard Bernstein, Chief Investment Strategist at Merrill Lynch said in the September 29 issue of Barron’s:
“The idea that you could remove risk from the marketplace really made people speculate. What the credit market did was to expand that speculation to the broader marketplace.”In order to be more successful in the way we manage ourselves, our businesses and our government we must never lose sight of the fact that risk is an inherent part of life. If we are to manage risk successfully, rather than speculate, we must act with our feet firmly planted, our bodies and minds calm, our attention alert and we must be able to interact in an open, interested and empowered fashion. Partisan, divisive, rigid, grandiose, magical, detached, uninterested, greedy or uninvolved approaches simply cannot be effective.