Money Management

More erroneous information has been written about money management than probably any other topic in poker. For that reason, I'm going to ask you to put any preconceived idea's you have about money management away right now. Just suspend them momentarily.

If you get into a coin flipping contest with someone in which every time you win - he pays you a dollar and every time he wins you pay him $5 - there is only one legitimate way to win. You simply win the first flip and quit. Or win the first and second flip and quit. Or win the first and second and third flip and quit. Etc. etc. Every money management system in which it becomes possible to win this contest includes you quitting.

Clearly, the reason that every money management system that works includes quitting is because you have the worst of it - you are by no means more likely to win using this system - it's simply a way to book the occasional win. Let's say that you set a stop loss of $9 in our coin flipping example and decided to quit whenever you were a dollar ahead.

Your results after 10 sessions might be:

1. +$1
2. -$9
3. +$1
4. -$9
5. +$1
6. -$9
7. +$1
8. -$9
9. +$1
10. -$9

I alternated between the first coin flip of the session being heads and tails - which, while unlikely in the short term, is an approximation of how your results would look in the long term. Five wins and five losses - break even huh? What a great system! At the end of 10 sessions you are down $40. Every time you won the first coin flip the session was 1 flip long - every time you lost - the session was 3 flips long. Therefore, you've played for a total of 20 flips and lost $40 - in other words, you're losing $2 a flip on average. Let's say you decided, rightfully so, that this money management system of yours was silly. You decided instead to play sessions of 20 flips/day instead. Your results would look something like this:

+1, -4, -3, -8, -7, -12, -11, -16, -15, -20, -19, -24, -23, -28, -27, -32, -31, -36, -35, -40.

And once again, you'd find yourself behind $40 after 20 flips and you're still losing an average of $2 a flip. You might find yourself taking solace in the fact that about 19 times out of 10 million sessions you'll actually be up $20 for the session, which at one session a day is about once every 1440 years. That's pretty cool. Actually - using this system, you'll actually have a winning session about once every 33,000 sessions or once every 90 years. So which system is better. The one with the stop win and loss or the 20 flip session regardless of results?

It doesn't matter - either way you lose $2 a flip. In one scenario you have a winning session every other day - and in the next scenario, you have a winning session every 90 years but your expectation is exactly the same.

Let's say, you found someone who would actually give you these odds. When would you decide to quit a session with them? Let's say you could flip a coin and get paid off twice a minute. Your expectation would be $2 a flip or $240 an hour. Would you quit after 2 minutes if you were $4 behind already? It would be ridiculous to do so and you probably see that quite clearly.

If you have honed your poker skills to the point where you have an advantage and therefore have a positive expectation - it is equally foolish to set a stop loss or win based on short term results. So are there any reasons to place a stop loss or stop win if you have a positive expectation? Actually, the answer is yes. If you have suffered losses that jeopardize your ability to stay in action at this expectation - then you should stop and move down in limits. If you started with a $5 bankroll for instance and were down $4 after 2 minutes, then I would stop and find myself a 20 cent/$1 flipping contest and build myself back up first. There are actually other reasons which would apply in poker but wouldn't apply in our coin flipping example. For instance, in our coin flipping example, your decisions don't matter - therefore, they don't contribute to your expectation - this is not the case in poker. Therefore, if a loss has affected you emotionally, your decision making process is probably also affected and as a result - you should probably quit until you can come to grips emotionally. Too, your opponents decisions don't matter in our coin flipping example either but they do in poker. If you are losing in poker, your opponent may feel invincible and play more aggressive against you. If the reason you have a positive expectation is because of your opponents' passivity and your setback has actually made him begin to play better - it may be time to quit temporarily.

Incidentally, there is one sound reason to play poker even if you have the worst of it which I have never seen or heard mentioned anywhere. There is only so much a person can learn about poker before they actually play and add experience. You are likely to make mistakes along the way as you're gaining experience and those mistakes can be costly at the poker table. If however, you feel that the only thing missing from having a positive expectation at the poker table is gaining experience - then you should accept the temporary loss today for a long future of positive expectation.

© The Poker Forum.com, all rights reserved