Who's the patsy?

In Texas Hold’em poker, each player is dealt 2 cards. Then 5 community cards are dealt in 3 stages: 3 cards (“turn”) → 1 card (“flop”) → 1 card (“river”). The goal is to win the “pot” by making the best 5-card hand from any combination of these 7 cards.

At each stage, the probability of winning changes depending on the community cards revealed. Skilled players calculate each new probability and bet accordingly. They might lose to an unlucky river card. But over time, they usually win.

Poker teaches useful life lessons:

  • Expected outcome

  • No sunk costs

  • Who’s the patsy?

If you’ve been playing poker for half an hour and you still don’t know who the patsy is, you’re the patsy.

-Warren Buffett

Expected outcome

Expected outcome equals probability of winning multiplied by potential reward. Let’s say your hand has a 20% chance of winning, the pot is $100, and it costs $5 to play the hand. Your expected outcome is 20% X $100 - $5 = $15. In other words, this is a good bet.

In life, seek bets with high expected outcomes and which you can afford to lose. For example, starting a side business with low start-up costs.

Business is easy. If you’ve got low downside and big upside, you do it. If you’ve got big downside and small upside, you run away.

-Sam Zell

No sunk costs

Once people invest time, money, or effort in something, they feel compelled to keep doing it—even if the odds are against them. Psychologists describe this “sunk cost fallacy” as throwing good money after bad. Professional poker players train themselves to disregard sunk costs. They re-evaluate probabilities with each new card.

In life, it’s hard to walk away from sunk costs, like a failing business or bad marriage. The “revolving door test” imagines walking away and leaving everything behind. Would you walk back in again?

For example, Intel is the world’s largest manufacturer of microprocessors. But Intel started with dynamic random access memory chips (DRAMs). In the 1970s, DRAMs accounted for 90% of revenues. By the 1980s, this had fallen to 3%. But Intel was still spending 33% of its R&D budget on DRAM technology.

For years, CEO Gordon Moore and COO Andy Grove debated exiting the DRAM market. But Intel was emotionally attached to the technology it had invented. Finally, Grove said, “I recall going to see Gordon and asking him what a new management would do if we were replaced. The answer was clear: Get out of DRAMs. So, I suggested to Gordon that we go through the revolving door, come back in, and just do it ourselves.”

When the facts change, I change my mind. What do you do, sir?

-John Maynard Keynes

Who’s the patsy?

At the poker tables in Las Vegas, overconfident tourists are easy prey for professional players. The amateurs don’t realize how badly they’re outclassed.

Whether it’s poker, investing, business, dating, buying products, or using social media apps, there are professionals competing against you. Don’t be a patsy. Train yourself to ask: What is my edge? Why should I win? Who are the hidden sharks?

For example, Charley Ellis managed Yale University’s endowment fund from 1997 to 2008. He advises against buying individual stocks:

Watch a pro football game, and it’s obvious the guys on the field are far faster, stronger and more willing to bear and inflict pain than you are. Surely you would say, “I don't want to play against those guys!”

Well, 90% of stock market volume is done by institutions, and half of that is done by the world’s 50 largest investment firms, deeply committed, vastly well prepared—the smartest sons of bitches in the world working their tails off all day long. You know what? I don't want to play against those guys either.

Instead, Ellis recommends investing in low-cost index funds. You win by not playing against professionals.

The reason you land on YouTube and wake up 2 hours later asking “What the hell just happened?” is that Alphabet and Google are basically deploying the best supercomputers in the world—not at climate change, not at solving cancer, but at basically hijacking human animals and getting them to stay on screens.

-Tristan Harris

Who can you trust? Almost no one…You are engaged in a life-and-death struggle with the financial services industry. Every dollar in fees, expenses and spreads you pay them comes directly out of your pocket.

-William Bernstein


Sunk cost. (2021, March 27). Wikipedia. https://en.wikipedia.org/wiki/Sunk_cost

Roth S, Robbert T, Straus L. (2015). On the sunk-cost effect in economic decision-making: a meta-analytic review. Business Research. 8: 99–138.

  • A meta-analysis of 45 studies found that sunk costs influenced economic decision-making (effect size = 0.50)

Burgelman RA. (1994). Fading memories: A process theory of strategic business exit in dynamic environments. Administrative Science Quarterly. 39(1): 24–56.

  • In the 1970s, Intel pioneered technology for dynamic random access memory chips (DRAMs)

  • By the 1980s, DRAM revenues had fallen from 90% to 3%, but the technology was still receiving 33% of total R&D investment

Ellis CD. (1975). The Loser’s Game. Financial Analysts Journal. 31(4): 19–26.

  • In expert tennis, 80% of points are won

  • In amateur tennis, 80% of points are lost

  • Professional tennis is a Winner’s Game, where final outcome is determined by activities of the winner

  • Amateur tennis is a Loser’s Game, where final outcome is determined by activities of the loser

  • The strategy for winning a Loser’s Game is to lose less

  • For investing, this means the best strategy is low-cost index funds

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