Risk Analysis Lessons from Poker: How Face-to-Face Communication Can Help You Better Read Risk Tolerance

“Jimmy D isn’t going to put his tournament life on the line for an all-in bet,” said Jimmy D for the third time. Again, referring to himself in the third person.

It’s not often that you get to interact with someone who refers to themselves in the third person, but it’s always a treat. First there is the look; greased back hair, aviator sunglasses, shirt with the collar popped open and high, with chest hair for days. Then there is the attitude, personified with a gold medallion necklace that just screams “I’m Jimmy D, fool!”

Jimmy D was my opponent at the final table of a no-limit Texas Hold’em poker tournament at the Belterra Casino in Florence, Indiana. It had been a long day of monotonous play, but I was doing well and made it to the final table of players. I could taste the win, and that sweet, sweet money.

This was a big prize in the thousands.

If you don’t know me, I am a risk manager by education, training and experience. I could give you the technical answer about what a risk manager does, identifying, prioritizing, and managing an organization’s risks and opportunities, but I prefer this quote from “Game of Thrones”:

“Don’t fight in the North or the South. Fight every battle everywhere, always, in your mind. Everyone is your enemy; everyone is your friend. Every possible series of events is happening all at once. Live that way and nothing will surprise you. Everything that happens will be something that you’ve seen before.”

Risk managers try to prevent bad surprises and exploit good ones. But what is a “surprise” anyway? We are trained to think of “risk” in terms of frequency and severity, probability and impact. Probability leads to the objective, quantifiable side of risk management. Is this a “500-year flood” risk corresponding to an annual exceedance probability of 0.2%, or a “100-year flood”?

The folks who do that analysis are the actuarial types, and you must watch for them at the poker table. You just know they can count cards and keep a running total of everyone’s odds. Those folks do very well at online poker, where all you can see are the cards, and all you have are the odds.

But that’s fighting with one hand tied behind your back and it’s also why I don’t like online poker.

There is also a subjective side to risk management that is more akin to behavioral economics. You see, knowing their odds, not everyone will make the same decision. One person’s idea of a severe impact can be another’s “meh.” This is the part of poker I like, sizing up people and their tolerance for risk.

Back to Me and Jimmy D

In Texas Hold’em poker every player receives two down cards as their personal hand, and then there is a round of betting.

Three community cards are then “flopped” on the table and another round of betting occurs. The next two community cards are turned over one at a time, with a round of betting after each card. These rounds are called the “Turn” and the “River.”

In Hold’em, each player is trying to make the best five card poker hand utilizing their two cards and the five community cards on the table.

I am staring at a King and Queen in my hand. The Flop comes and it is a King, 2 and 8. I am certain I have the highest hand. I make a medium-sized bet to try and scare away the smart folks and bleed the fools.

Most fold, one or two call the bet, and then it comes to Jimmy D. He says with confidence “Jimmy D does not think you have the goods, kid,” and re-raises me with a large bet. I know I likely have the highest hand, so I call.

Then comes the Turn and a 7. Rinse and repeat.

I am first to act and make another medium-sized bet. Everyone folds, except Jimmy D, who again announces in the third person that “Jimmy D thinks this kid is without the goods,” and he re-raises with another big bet.

I call and am deep into my stack of chips, but I still have him.

Then the River. This must be where the term “River Rat” comes from, because there is an Ace on the table, and I know that rat Jimmy D has likely made a pair of aces. I check instead of betting, and Jimmy D makes the expected large bet that confirms my suspicions.

“Jimmy D has the goods” and is playing the odds.

The odds are I flopped Kings and slow played them for too long and Jimmy D has lucked his way into a pair of aces. Odds are I have two choices, call, and lose the hand big or fold and limp away somewhat less broke.

But then like magic, I hear Jimmy’s D voice in my head from earlier in the day: “Jimmy D isn’t going to put his tournament life on the line for an All-In bet.”

Jimmy D was an excellent card player but he had played the same way all day. He was super aggressive until faced with the prospect of an “All-In bet.” Jimmy D did not possess the risk tolerance to slide all his chips on the table.

Calling or checking Jimmy D’s bet would lead to me losing the hand. However, if I could make Jimmy D think I had a pocket pair of 8’s and had been slow playing triple 8’s from the flop, he might fold.

So, I stiffened my back and said confidentially “All-In!”

Jimmy D sat there flummoxed for 15 minutes, grumbling under his breath, until they called time and he was forced to fold. I won!

He turned to me and said, “Dammit, you didn’t have nothing, kid.” My reply, which is the lesson of this little parable, was this: “Maybe I had the cards, maybe I didn’t, but I watched you all day and the one thing I did have was the knowledge that ‘Jimmy D lacked the courage to call an all-in bet.’ ”

Back in Class

I first told this story at Butler University to a group of students tasked with running real-life businesses as a class project. Most of the teams wanted to sell products with the Butler logo on them and needed approval from Lindsey in the university’s licensing department.

I had 120 students across three sections, and all of them proceeded to send her an email asking how to get licensing approval. It was a disaster.

Lindsey was so overwhelmed with emails that no one’s stood out. Further, most lacked the context or information she would need to approve their idea. It would have taken hours to respond to each email outlining what was missing.

That is, except for one team, whose CFO walked over to see Lindsey. The CFO could immediately see on Lindsey’s face that she was overwhelmed. (Apparently, some new professor had neglected to instruct business students not to email blast her.)

The CFO was able to offer an apology and some charm, make her laugh, then outline their idea. That team quickly saw a confused face and adjusted their message in real time. Instead of waiting to be email response 89 of 120, they knocked it out in real time.

I was impressed. But also disappointed in myself. I should have explained ahead of time that if you want to effectively convince someone of something, do it face to face. Don’t ever deprive yourself of your most powerful tools: charm, guile and a nice smile.

Changing Times

As someone born in 1978, I strongly believe in the notion of being part of a micro generation of Analog and Digitals natives referred to as Xennials (people born between 1977 and 1983).

This is a super small cohort of 25,000,000; however, we have one of the greatest superpowers of all the generations! Those who straddle this digital divide are bilingual! We are fluent in Baby Boomer and can speak conversational Gen-Z. We can dial a rotary phone and we also know what blockchain is.

The first two years I was in college, it was all typewriters and chalkboards. Then in my junior year, it turned to email and online. Every year after that, the balance between analog and digital has shifted further to the latter. Twenty-three years into my professional career, I can say the first half was about reaping the benefits of this new online world.

Then my phone stopped ringing because no one calls anyone these days. Then I would see people walking like zombies, staring at a screen, even on icy steps in January. Every third person is driving on their phone.

No one is fully enjoying life, because they are too busy documenting it.

I know this list sounds like an “old person” complaining about “these kids today.” And you know what, maybe there is a little of that. Except change has never come this fast before. The pandemic has accelerated existing trends in remote work, e-commerce and automation by years, maybe even decades.

Don’t get me wrong, I like the post-pandemic world of remote work. For me, it has taken the workplace from a medium security prison to more of a 24/7 work release camp with an iPhone ankle monitoring bracelet. I enjoy the work-life balance this brings … at this stage in my life and career.

I am not so sure I would have had the career I did had I graduated into a remote or even hybrid working environment. I was a 1980’s latchkey kid, weak on manners and social mores.

If I hadn’t been constantly in front of, and gently mentored, by wonderful folks like Jeff Hoke and Dennis Zwink, I would have surely been fired for my lack of “soft skills.” Was it less fun being in the office every day? Heck yeah! I worked long hours, with a long commute, while working on my master’s in risk management.

Those were the hardest years of my life. I would have given anything to drop my commute and not have to be in the office … at the time.

Looking back now, no deal! I would have lost too much time being mentored “live” by Dennis. I would have missed out on special projects and promotions that resulted from chance conversations, networking and happenstance.

I have existed long enough to see the return on that investment. I understand, through the benefit of hindsight, what was truly gained and lost by having to be in the office.

Similarly, playing poker online is merely a shadow of the experience of playing it live.

It’s ironic, Jimmy D was a Baby Boomer and yet he would have defeated his much younger opponent online. It was only through face-to-face interaction that I could harness all my senses and call his hand. But what if people stopped playing poker live for so long that they forgot why it was better?

My hope is those of us who have the gift of seeing the world both ways, online and in print, pre- and post-pandemic, will continue to bridge together those generations who may be further away from each other.

Sometimes you need to adapt, and sometimes you need a reminder that there is wisdom in the “old ways.” &