How Winning Can Mean Losing in Poker and Life

[From: http://www.time.com/time/health/article/0,8599,1953205,00.html]

You can learn a lot about gambling if you're willing to analyze 27 million hands of online poker. Don't have time for that? No worries; sociology doctoral student Kyle Siler of Cornell University has done it for you. His counterintuitive message: the more hands you win, the more money you're likely to lose — and this has implications that go well beyond a hand of cards.

Siler, whose work was published in December in the online edition of the Journal of Gambling Studies and will appear later this year in the print edition, was not interested in poker alone but in the larger idea of how humans handle risk, reward and variable payoffs. Few things offer a better way of quantifying that than gambling — and few gambling dens offer a richer pool of data than the Internet, where millions of people can play at once and transactions are easy to observe and record. (See 10 things to do in Las Vegas.)

To gather his data, Siler used a software system called PokerTracker and directed it to collect and collate information on small- medium- and large-stakes games. He limited the games to no-limit Texas Hold 'Em with six players in order to eliminate at least some extraneous variables. It was in the course of crunching all that information that he found the strangely inverse relationship between the number of hands won and the amount of money lost. He also noticed that it was novice players who lost the most.

The reason for the paradoxical results was straightforward enough: the majority of the wins the players tallied were for relatively small stakes. But the longer they played — and the more confident they got — the likelier they were to get blown out on one or a few very big hands. Win a dozen $50 pots and you're still going to wind up far behind if you lose a single $1,000 one. "People overweigh their frequent small gains vis-à-vis occasional large losses," Siler says.

Small-stakes players also tend to do better with small-denomination cards. A pair of jacks may easily beat a pair of fours, but people who don't gamble much tend to win more with the fours — or with any cards from twos to sevens. That's because the cards' modest numerical worth is easy to understand: they're valuable but not that valuable. When you get into the more rarefied air of eights to aces, you may start losing perspective and putting up more money. "Small pairs have a less ambiguous value," Siler says. (See more about casinos.)

So what does this have to do with you if you don't gamble? It's the wrong question because, actually, you do. Investing, driving, buying a house and merely crossing the street are all acts that involve discernible risks and uncertain rewards. The more small returns you get from your small investments in stocks, the likelier you are to make — and lose — a big investment. The more times you get behind the wheel and speed a little bit, the likelier you are to speed a lot — with deadlier consequences.

"These kinds of calculations are made every day," says Siler. "Adultery is another good example. People get away with it countless times but they get caught just once and they lose everything."

And unlike the risks at the poker table, where your losses are just yours, in the larger world, you can take down a lot of other people with you. "Organizational malfeasance in general depends on this kind of risk analysis," says Siler. "Look at a place like Enron. People took a lot of small chances and won, then took big chances and lost big." Indeed, Siler points out, during the recent financial crisis, an entire nation — Iceland — went bankrupt in a similar way, trusting high-risk, high-reward investments that quit paying off.

While walking away from the poker table can be easy, walking away from life — and all the risks and rewards it presents you — is not an option. But in both venues, the rule should be the same: gamble only what you can afford to lose — and know when you're approaching those stakes.