The Poker Metaphor and Sunk Costs

12 05 2009

Seth Godin had another brief, biting post about sunk costs, as the number one thing they teach you in business school that is ignored.  I always enjoy his terse posts to bring about maximum effect.

However, I found myself taking issues with this post.  The principle is sound: it doesn’t matter what you spent in the past, only your expectations for the future.

I think I took issue because psychologically effects from sunk costs affects most people, including myself.  But I couldn’t help but think first of all that sunk costs are spent in the first place because of an expectation of future return, rational or irrational.  Abandoning ship, as it were, or ignoring sunk costs ignores this expectation.

The principle does still stand, for this expectation would be part of your “future” calculation.  Given Mr. Godin’s succinct nature, I feel this was somewhat lost. So, I felt it enough to take some time off an extremely busy time to sound off with a quick blog post.  After all, this is also coming from the famous author who recently wrote The Dip, saying that those who are successful are those who can push those the dip (and quit the dips that are too deep and too long).

Later, I found myself thinking about poker metaphors.

  1. Implied Odds.  Betting on a long-shot at LOWER than strict expected value, with the implication that if your card hits, you can take all your opponent’s chips.  The implication is that there is some likelihood that you will earn more than currently in the pot, which really raises your expected value.
  2. Pot Committed.  You eventually reach a point of no return, where despite a possibly low possibility of winning, the amount required to see the bet through is so small that you must make it, according to the expected value calculation.
  3. Defending Your Blinds.  Strictly according to ignoring sunk costs, this seems to make the least sense.  After all, money is money and it doesn’t matter who’s money is in there.  It may seem like an egotistical, psychological reason why you don’t want someone to take YOUR money.  However, you defend your blinds for the expected value of not being the sheep at the table that will get bullied over and over again simply because you don’t defend what you’ve invested.  Same basically as defending any bet (or any sunk cost).

The metaphor of poker applied towards business is not straightforward. I only mention these metaphors because “ignoring sunk costs” is just as convoluted.  Ignore sunk costs at your own peril, but make your calculations wisely.

One more poker metaphor, slightly unrelated: always sit down at the table with the drunk guy.  I’m not a fan of casino poker at times when the goal is to win the maximum possible, because it’s hard to beat the table rake (amount casino takes) with a table of comparably competent players.  With a drunk guy, I am, preferably two.  In other words, you win the game when you have a systemic advantage and it’s wise to heed this advice in business as well.

Gotta love those poker metaphors.