There are three core skills needed to be a good poker player: understanding of fundamentals, math and discipline. According to poker star, Daniel Negreanu, the fundamental ability to remain disciplined is all the more important because bad beat runs are inevitable. How players handle their internal ego and situation is what will make the difference between bleeding chips and coming back to win it all.
In a poker game, there are many sources of information other than the cards in hand. Although not often cited, one of those sources of information is the size of your chip stack. In a game of poker, as pots are won and lost, eventually some players may end up with more chips and some with fewer, as the game ebbs and flows.
‘Big Stack’ refers to a player that has the largest amount of chips at the table at any given time. More chips mean more capital. They are afforded the luxury of remaining patient for the right opportunities. ‘Short Stack’ players (those with fewer chips) on the other hand, are required to tighten up on hands as they play. Generally, they are forced to only play when they are dealt the highest probable winning hands. Both the Short Stack and the Big Stack know that the Big Stack player will be able to gamble more, play more loosely and bully Short Stack players.
Downward Death Spiral
The purpose of cost accounting is to appropriately research and analyze the profitability of various lines of business, products, services and other sources of revenue. Much like knowing the size of your chips, having a firm understanding on your sources of revenue and profit margin sensitivity allows companies to make decisions, if they are properly disciplined. Similar to in poker, companies can often find themselves in bad situations unexpectedly. How they react to each outcome, may make all the difference. The ability to resist the urge to make bad decisions because of circumstance, which could potentially lead to another crisis, is all the more important. Strong discipline is required and relying on the tools and information available is all the more critical.
The basic principals of accounting suggest that there are revenue line items and then direct costs to generate net margins on those revenue streams. Net margin is needed to cover indirect (often fixed) expenses (eg. salaries and other administrative expenses). Indirect expenses are dual edged swords though. Because they are by nature, difficult to attribute directly to revenue, their allocated value becomes cloudy. This may lead to some subjectivity, which in turn creates greater risk for a poor decision.
The Death Spiral is a term coined in Cost Accounting where products or services, which yield positive net margin, are repeatedly eliminated because they are deemed inefficient or sub-optimal. The inability to appropriately scale down central fixed expenses however, results in an overall lower dollar net margin to cover these expenses, compounding the problem of a shrinking bottom line. The repeated bad decisions of focusing on the wrong areas, in this case, individual service lines’ attributed net margins can lead to a greater crisis. Poor understanding of accounting fundamentals, can quickly lead from one bad decision to another.
“You can be so good at poker, but if you’re not disciplined at the table and off the table, you’ll never make it.” – Fedor Holz
In Poker, a player that is ‘playing on tilt’ is someone who plays sub-optimally and not in accordance with their usual strategy. It is not uncommon for this to occur in players who recently suffered from a bad beat (a hand which had great certainty of winning ends up losing against statistical odds). But the player on tilt is his or her own worst enemy. No company seeks to get into the Death Spiral just as no player expects to go on tilt. The problem is that companies often find themselves in these situations, thinking it is the start when, in reality, it was a result of previous decisions made long ago or from something out of their hands. A recession, a lost client, a major unexpected loss. All of these can potentially lead companies to react out of character or ‘on tilt’, which may manifest into the start of an unknowing Death Spiral.
The Death Spiral of cost accounting is just an illustration of how one bad decision can lead to another in business. Hiring the wrong candidate out of desperation or signing a bad contract, are common examples of a bad decisions. In the long run their impact is not felt immediately but eventually they may place the company into a situation where it must choose between two undesirable alternatives. Being ‘on tilt’, even after recognizing it was a mistake, can often lead them to make other poor decisions, such as entering into ill-advised litigation or making irresponsible expense cuts or investing in areas that make little sense.
Just as any player can lose on a bad beat, the difference between a good business person and a poor one is how they react to uncontrollable situations. And just as in poker, there are three core skills that remain constant in determining the long term outcome: understanding the fundamentals, math and discipline.