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The Efficient Frontier of Poker

euphoricism recently made a post entitled The biggest money-making secret in poker. https://www.flopturnriver.com/poker-strategy/biggest-money-making-secret-in-poker-19084

I’m not going to rehash it here (read it if you haven’t already – it’s good stuff), but it did get me thinking about poker’s similarities to investing and modern portfolio theory (bear with me).

In my daytime life as an investment advisor, one of the things I try to educate my clients about is how various assets behave in diversified investment portfolios. This is called portfolio theory. The central concept of portfolio theory is that of the ‘efficient frontier’. This involves identifying the portfolio composition(s) that provide one with the maximum return for a given degree of risk (or alternatively, the least amount of risk for a given return).

On the investing spectrum, the least risky investments are also those that have the least potential in terms of return on investment (a savings account with zero risk of loss but that only gives a tiny interest rate would be a good example), whereas the most risky investments (commodities, precious metals, etc.) have the most potential to produce the biggest returns, but also have the most potential to produce significant losses. Very simply: lowest risk = lowest return/loss; highest risk = highest return/loss (potentially – see below).

Now, in designing an investment portfolio, what you need to do is balance risk vs. return in order to come up with an investment plan that is appropriate to one’s tolerance for risk while providing a long-term rate of return that will meet your investment objectives. Where it starts to get complicated is that some investments provide the same level of risk, but vastly different rates of return, so what you want to do is avoid underperforming investments and choose the ones with the best performance potential, by strategically allocating your assets. This is where the ‘efficient frontier’ comes in.

Along the entire spectrum of investment options, there is a point where you are optimizing returns for any given level of risk, and if you plot it out on a graph of risk against returns, what you end up with is a parabolic curve. This is the efficient frontier (see below).

So…wtf does this have to do with poker?

Well, if you think about it, it has everything to do with poker. In the investment world, for the most part all you really have to go on in evaluating whether an investment is worth putting your money into is its historical performance under a variety of market conditions (I’ll leave speculative investments like stock IPOs out of this). In the poker world, all you really have to go on is the past performance of how a given hand typically performs in playing conditions, based on your own experience and that of other players, as well as simulations run over thousands and thousands of hands such as those used in PokerStove (experience which, ultimately, informs your decision to fold 72o preflop but to raise and reraise AA).

Where am I going with this?

Well, to me, if +EV play is anything it is striving to achieve The Efficient Frontier of Poker – finding the optimal balance of risk vs. potential return by strategically allocating your bets on the right cards in the right conditions in order to maximize your long-term returns.

How can you achieve this?

Euphoricism talks about playing more hands as being the biggest money making secret in poker. This couldn’t be more true. In the investing world, the adage goes that “it’s time in the market, not timing the market, that counts.”

But beyond playing more hands, playing them with the most efficient, +EV strategy possible is where your ultimate success will lie. You can play all the hands you want, but if your strategy is to play any two because “any two can win”, you’ll quickly go broke.

So study your ass off. Learn the difference between +EV and –EV play. Optimize. Then you, too, will start to approach The Efficient Frontier of Poker.

Just for fun:

We all experience variance – it comes with the territory – and we’ve all experienced The Newbie Circle of Death to some degree. See any similarities with the following?

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