Learn to Embrace Loss Aversion
If you have followed my writing for some time, you might know that my favorite book is Thinking, Fast and Slow by Daniel Kahneman.
Thinking, Fast and Slow summarizes the research of economists Daniel Kahneman and Amos Tversky, and it shaped my entire poker career. It’s a complex book which isn’t easy to summarize. At the risk of oversimplifying, I consider it a book about decision making which shows how human beings are fundamentally irrational.
The point of reading this book is not to get rid of your irrationality. That is impossible. The point of reading this book is to understand your irrationality, and to develop systems which help you avoid some of the most common pitfalls of emotional decision making. And when you fall down a pit anyway, you will at least be able to let yourself off the hook a little easier.
Usually when a poker player comes to me seeking advice about a mental game issue, my first question is, “Have you read Thinking, Fast and Slow yet?”
I believe if you just read this book and truly understand the concepts in it, you will understand at least 80% of why playing poker is so inherently stressful. Ironically, the very fact that I am suggesting this is irrational, because the data show that only 7% of people who start Thinking, Fast and Slow actually finish it. The economist Seth Stephens-Davidowitz noted this dismal completion rate at the end of his book, Everybody Lies, and concluded matter-of-factly, “People tend not to finish treatises by economists.”
In fact, the majority of people who opened this article probably closed it after reading the first sentence and seeing that it was about some extremely esoteric book that they’re never going to read. Fortunately for me, I’ve already accepted that neither I nor my life’s work will ever be popular.
In my opinion, the most important concept in the book for poker players to understand is the cognitive bias called loss aversion. In simple terms, loss aversion describes the phenomenon that “losses loom larger than gains.” To illustrate this idea, Kahneman gives the following problem:
You are offered a gamble on the toss of a coin.
If the coin shows tails, you lose $100.
If the coin shows heads, you win $150.
Is this gamble attractive? Would you accept it?
As poker players, we are well-versed in expected value (EV) calculations, and we know this is a very profitable wager. To be exact, the expected value of this coin toss is $25.
But Kahneman observed that despite the fact that this gamble is profitable, it does not necessarily feel profitable:
To make this choice, you must balance the psychological benefit of getting $150 against the psychological cost of losing $100. How do you feel about it? Although the expected value of the gamble is obviously positive, because you stand to gain more than you can lose, you probably dislike it–most people do.
… The ‘loss aversion ratio’ has been estimated in several experiments and is usually in the range of 1.5 to 2.5. This is an average, of course; some people are much more loss averse than others. Professional risk takers in the financial markets are more tolerant of losses, probably because they do not respond emotionally to every fluctuation.
In other words, for the average person, the pain of losing one dollar is about twice as strong as the pleasure of winning one dollar. This has profound implications for professional poker players, who win and lose hundreds of bets every day.
As Kahneman suggested, I estimate my own loss aversion ratio to be much lower than 2:1. I find that coin-flip bets start to become too good to pass up at an expected value of around 5% of my investment. In other words, if I am risking $500 on a coin flip, I’d like to make at least $550 when I win the coin flip in order to make the gamble appealing, not only on a logical level, but also on an emotional level. Therefore, I estimate my loss aversion ratio to be around 1.1:1.
If I’m being completely honest, I think my pride may be getting in the way a little bit here. As a professional poker player, it’s difficult to admit to myself that I would pass up on a profitable bet purely for emotional reasons. To account for this, I’ll increase my initial estimate slightly to 1.15:1.
Now let’s take a look at my Holdem Manager database. I’m going to show some results from a roughly 200k hand sample. Over this sample, I made about $134k.
Net profits from a sample of 200k hands.
That’s great! But how did it feel? I think most poker players would not be surprised to hear that winning this money did not feel very good. In fact, it was quite stressful, even though my win rate was very high at nearly 8 evbb/100.
If we break this down into won pots vs. lost pots, it becomes a lot clearer why I had a bad time.
Won pots from a sample of 200k hands.
Lost pots from a sample of 200k hands.
The pots that I won over this sample totaled about $2.56mm. The pots that I lost over this sample totaled about $2.42mm.
$2.56mm / $2.42mm = 1.06
The ratio of my wins to losses was only 1.06, well below my estimated loss aversion ratio of 1.15!
Therefore, even though I made money, it didn’t feel that way. In fact, I actually felt more pain by making this money than I did pleasure, despite the fact that, being a veteran poker player, I have become significantly desensitized to financial losses.
So how do we combat this? Well, we don’t. Again, the point is not to overcome cognitive biases, it is to understand them. In this case, we simply need to understand that being a professional poker player sucks, at least on an emotional level.
I heard a story recently that I really liked. A man bought a fixer-upper house and realized the plumbing was a disaster. He called two plumbers to look at the job. Both plumbers came, shook their heads and said, “No way. I’m not doing this job. I don’t care what you pay me.”
The man was discouraged, but he called a third plumber. The third plumber came, looked at the job, and said, “Okay, no problem.”
“No problem?” the man replied. “Isn’t this going to be a pain?”
The plumber responded, “Yeah. Everything I do is a pain.”
I love that.
If you want to be a successful poker player and have any sort of longevity in this career, you’ll probably need to take on the mindset of the third plumber. If you go into each session understanding that it’s going to be emotionally painful no matter what you do, and that it is simply a result of how your brain is wired, you may have an easier time accepting the pain and moving on from it.
The key point is you can’t go around the pain. You can’t simply grit your teeth and ignore it. If you end every session in an emotional deficit, and you do not find some way to process those emotions, the pain will accumulate. If you let the pain accumulate for long enough, you will develop trauma, which will lead to burnout.
This process will accelerate in proportion to the stakes you are playing. You may be able to cope with the swings at 200nl or 500nl for years, but if you try to play 2000nl or 5000nl, you’ll be toast in a matter of months. This is a real shame, because the other thing that increases in proportion to your stakes is your income.
So next time you sit down for a session, try telling yourself, “This is my job and I accept that it’s usually going to suck.” At the end of your session, when you find yourself grimacing as you replay the largest pots that you lost, remind yourself about the expectation you set, and allow yourself to process and let go of the pain rather than wallow in it. You have to let go of the hands you played in this session in order to make space for the hands you will play in your next session.
Yeah, today sucked. Tomorrow will suck, and the day after that will probably suck too. Every day you show up and embrace the suckage, and every day you win.
