Sunday, March 28, 2004

What lessons can business execs learn from poker? The wrong ones, apparently

Iggy recently posted a link to an article in Fast Company titled "The B in Business Stands for Bluff". The article features the omnipresent Phil Hellmuth, who charges ten grand to lead poker tutorials for corporate gatherings. Poker, the article says, is the ultimate forum for liars. A player with a lousy hand can, through deception and deviousness, take a pot away from the player with the better hand. To quote from the article:

"In what other sport, Hellmuth asks, can the player with the least amount of skill, resources, or experience come up a winner, merely on the strength of a bluff? None, except perhaps the sport of business.

"Poker is really about reading people," Hellmuth says. "What happens when you bluff? What does it look like when the other guy bluffs? Does he look right, does he look left? Under what circumstances does he fold or call? Poker is about understanding human behavior and managing emotions--yours and the other guy's. That's huge in poker, and it's huge in business."

As odd as it might seem for the Poker Brat to extol managing emotions, I fully endorse his point so far as it pertains to poker. How important it is in business is another matter. If you're negotiating a multi-million dollar deal and the other side just offered you a price 30% lower than you expected, it might be to your benefit not to jump about and down and shriek with delight. Likewise, you don't want to pull a Sonny Corleone and embarass you boss when the other side makes an offer you find personally insulting. But unless you're a professional dealmaker, you're going to be dealing more with your co-workers, suppliers, and customers than directly locking horns with those you'd like to trick and sucker.

Although the article doesn't bring this up, there is a big difference between "bluffing" and "lying". Bluffing is a fundamental part of poker. If it wasn't for bluffing there would be no reason for the cards to be dealt face down, the dealer would share out the cards and push the chips to the player lucky enough to catch the best hand. Bluffing is not only kosher, it's expected. You know the other guy might be bluffing. You have to guess whether he is or not. That's part of the game, a big part.

In business, you would be naive to think that everything you're told is the gospel truth. People will obfuscate, hedge, dissemble, and fib. Sometimes they'll lie right to your face. But business people who regularly lie will often find it hard to find people to lie to, as word gets around and no one will deal with them anymore. Lie at the wrong time--like on your tax return, or in a contract, and you might be guilty of fraud, which might land you some time in the hoosegow. Even if you get away with your lie, you've probably pissed off the other party no end, and making enemies isn't profitable. God help you if you lie to your customers--there's an old maxim I'm no doubt misquoting, but it says something along the lines of "If a customer has a good experience with your business he'll tell a friend. If he has a BAD experience he'll tell TEN friends". Think about it--you go to a restaurant, and it's really good. You casually mention it at work the next day. You go to another restaurant, and it's like Chinese prison chow. That's a story you'll be stopping people in the hallway to tell.

So perhaps executives should be worrying about things other than developing their lying skills. But let's examine the article in question. The piece lists Hellmuth's poker takeaways, little tips he gives and then an example showing how each applies to the business world. Let me address them one by one.

Bluff when you can, not when you have to. Bluffing is a strategy, not a last resort. Think of Steve Case, who "bluffed" Time Warner's Gerald Levin into believing that 30 million dial-up subscribers were worth Time Warner's decades-old media empire--for a $99 billion pot.

This is utter bullshit.

To say that Steve Case "bluffed" Gerald Levin into making the worst business decision since Caveman Ook offered Caveman Oop a handful of moss in exchange for the hot glowing orangy thing Oop made by rubbing two sticks together is ludicrous. If Case believed that AOL's stock was overvalued and that he could maybe swing a deal using the stock to buy some "real" assets, i.e. Time Warner, that's a move that's been repeated over and over again in corporate mergers and takeovers.

But in this article the word "bluff" is a synonym for "lie", and if somehow Case lied to and/or tricked Levin into making a deal that would be catastrophic for Time Warner shareholders he should be burned at the same stake as Bernie Ebbers and Kenneth Lay. Because those Time Warner shareholders weren't bought out--they were given AOL/Time Warner stock in exchange for their current holdings, making them Case's new shareholders. And screwing them over by lying about the true value of your company would be corporate malfeasance at its most appalling. AOL/Time Warner shed about $50 billion in market value in the years following the merger, and I'm sure your typical Time Warner shareholder would like to see Levin drawn and quartered in Super-Slo-Mo. But I think both Case and Levin thought this deal would be the signature moment of each other's career. Staid old Time Warner would become a sexy Internet company, and AOL would have oodles and oodles of Time Warner content to offer their subscribers. That this dream turned out to be a total canard has, I think, less to do with bluffing and trickery than shortsightedness and plain old bad business.

Don't speak when you can nod. "Don't move when you can be still. And when you are the player with the action, never, ever raise your gaze across the felt. PeopleSoft CEO Craig Conway wisely let the courts deal with Oracle's $7.3 billion hostile bid for his company, while stealthily—if not quietly—going about his own business."

If someone can explain this to me I'd appreciate it. "Don't speak when you can nod" sounds more like advice for a Mafia don than a corporate bureaucrat. How many articles have been written the last 20 years advising executives that clear communication with superiors and underlings is vital if mistakes and misunderstandings are to be avoided? If I'm going to do business with someone, and I'm not exactly sure just what the hell he wants and/or intends, how is that to either of our benefit?

And if you take the example of two adversaries sitting across the table from one another, this still makes no sense. "Never, ever raise your gaze across the felt". Isn't Hellmuth's claim to fame his uncanny ability to read people? How do you do this if you don't look at the other guy? Has Phil developed Spidey-sense after playing for so long? I can imagine the scene—two groups of hotshot dealmakers sitting in a mahogany-paneled conference room, every person staring at his/her navel and bobbing their heads. This is the glamorous world of big business?

I won't even ask how someone can act "stealthily" and yet not "quietly".

Always be willing to fold a strong hand. "In his pursuit of PeopleSoft, Oracle CEO Larry Ellison stubbornly stuck to his initial all-cash, $5.1 billion bid, even after it became clear that getting the deal done would cost him almost 50% more than his bankers thought it was worth."

If Ellison's bid was twice what the deal was worth, wouldn't this make it a weak hand? Pot odds teaches us that you don't put money in the pot if you don't think the return is worth the risk. If you have a pair of fours and the flop comes A-K-Q, and there's only one player remaining and he tosses in a buck, well, maybe he doesn't have a better hand than you, but he probably does, and if he doesn't how much money are you gonna win anyway? Unless you have a great read on your opponent (and you probably don't, since you've been staring at the floor all night), you toss your weak pair in the muck.

And in business, if you have a strong hand (in other words, it appears you should make a good return on your investment), surrendering that position only makes sense if you decide the return ISN'T worth it. And that kind of decision is a lot more complex in the real world than it is sitting at a poker table when another player unexpectedly goes all-in on you.

Always be willing to call with a weak hand. "Hellmuth once called a $100,000.00 bet with nothing more than "King-high"—just as Amazon founder Jeff Bezos "called" Wall Street in 1999 for a $1.25 billion debt offering even as Amazon was bleeding tens of millions of dollars in cash (The bankers folded, and Bezos got his deal).

Amazon asking Wall Street to restructure its debt when it was losing money was perhaps an act of desperation, just as their bankers agreeing to do it was equally desperate. Amazon was losing money, but the bankers risked losing a bundle as well, with the humiliation of getting stiffed in the middle of the go-go Nineties. But, again, I can't see how the poker example fits here. What was Bezos going to do—let Amazon go bankrupt? What were the bankers going to do—let Amazon go bankrupt? Neither side had much incentive to "fold", and Amazon had none whatsoever. As you mother always told you, it never hurts to ask.

It also says Phil "once" called a $100K bet with K-high. I assume he won the hand. How many times has he—or any other poker player—called with a weak hand and berated themselves later for making such a stupid play? More times than anyone would like to admit. Wouldn't that be a valuable lesson for business people—don't throw bad money after good? Don't chase?

Patience is the highest virtue. "Consider Dell, which has made a business—and good money, too—of letting other computer companies bring innovative technologies to market, then pouncing with its own lower-cost direct-sales model. Case in point: Dell's Digital Jukebox, a knockoff of Apple's iPod for 30% less."

Here the writer didn't even bother making a poker reference. Perhaps her deadline loomed and she needed five points for some holistic reason. Patience is, of course, very important in poker. Especially in the grinding world of low-limit poker patience is an absolute must. You have to be willing to sit through hour after hour of rags until you get that one hand that's playable. But if patience is your ONLY virtue, you're not going to make much money. You have to be aggressive, you have to be subtle, you can't let your opponents pigeonhole you and predict your actions with a high degree of accuracy. In no-limit poker, which Hellmuth is best known for, patience is how you get blinded down to the felt.

I also don't understand how Dell's business model is an example of "patience". Their strength is taking off-the-shelf components and customizing computers for each customer and selling them at a competitive price. I doubt that Dell's Digital Jukebox is a huge piece of Dell's business, just as I don't know how well it's actually doing against the almost-as-hot-as-poker iPod.

The article also gives a listing of "Great Poker Primers", and of course Phil Hellmuth's "Play Poker Like the Pros" is the first one listed. We won't discuss the journalistic ethics of using a person as the main source for a story and then promoting that person's business in the same article because there's not much to discuss. David Sklansky's "Theory of Poker" is described as a "cult" classic, though I don't think grouping the majority of serious poker players as a "cult" is exactly fair. I really don't understand calling Jim McManus's "Positively Fifth Street" an "avant-garde management crib sheet". McManus's book is a lot of things—a report on Vegas mores, a personal biography, and a thrilling tale of a underdog battling the Titans of poker—but it ain't a management book. I think Jim himself would agree to that.

So the article was mostly horseshit. But are there lessons for business folks to learn from poker? Sure. As I said before, you shouldn't throw good money after bad. You have to learn how to cut your losses when a positive return is unlikely. You also have to learn, as good poker players do, that once you put money in the pot it isn't yours anymore. If you've thrown your money down a sinkhole and there's little or no hope of getting it back, cut your losses and walk. Putting another million into a project in the slim hope of getting back some of your initial $300,000.00 investment is a bad idea.

Fiscal discipline is another lesson business people and poker players alike should heed. When business is booming it's hard to resist every deal that comes along, no matter how lamebrained or wasteful it might be. Business are often like the Federal Government--if there's money lying around, they'll find a way to spend it. The smart business person knows that rainy days are always on the horizon, and maintaining the same standards in good times as well as bad can go a long way toward keeping you solvent when it hits the fan.

Likewise, poker players who get on a hot streak almost always think that NOW is the time to move up. If you're killing the $1-2 tables, its time to try $2-4. Or $4-8. Even if your bankroll is barely sufficient for your current game. That's risking a quick trip to the Poker Hospital when you luck cools and the fish start rivering you to death. Waiting for your bankroll to grow as big as your ego is tough to do, but the Poker Gods will undoubtedly reward your discipline.

If you watch the WPT one refrain you hear over and over again is that the players love the competition in poker. Competition junkies can find a ready fix at the table, where you only have to wait a few minutes for the next deal to return to the battle. Competition is at the heart of capitalism, where the struggle to offer better stuff at a better price than the other guy makes the world a better place for everyone (if you believe Adam Smith). If the worlds of poker and business share some simliarities, one is hardly a microcosm of the other. And if you think mastery of poker leads inexhorably to success in business (or vice-versa), well, I've got a nice piece of property in the Everglades you might find intriguing. Interested?

posted by Gene @ 4:30 PM   |