In poker, we often discuss the expected value (EV) of strategies, without considering the risk or variance involved. However, in the wider world of finance, there's a prevalent concept known as
"Risk-Adjusted Return". This idea, while fundamental in finance, seems almost entirely overlooked in poker.
The simplest version of a Risk-Adjusted Return can be calculated with the
Sharpe Ratio = (Expected Value) / (Standard Deviation)
The best investments are those that optimize your Risk-Adjusted Return.
Let's set aside emotional factors for reducing risk and focus solely on the financial rationale for maximizing this ratio.
Consider, for example, two distinct games:
- Game 1: A guaranteed win of $50.
- Game 2: A coin flip where a win means $1000, but a loss costs you $900.
Both games have an EV of $50, yet Game 1 achieves this EV without any associated risk.
Now imagine that it takes a month for this game to complete. It's important to note that in reality, investments take time to pay off. Choosing Game 2 would require allocating a significant part of your bankroll, which could otherwise be invested elsewhere. Opting for Game 1 frees up your bankroll for other investment opportunities. So the fundamental idea is that maximizing Risk-Adjusted return improves your ability to make compound returns.
Here is an example of how you might calculate Sharpe Ratios in Poker
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Now, the question:
Is this concept applicable in poker?
- If two poker strategies offer the same EV, but one has lower variance, should the lower variance strategy be the preferred choice?
- Should you opt for a slightly lower EV strategy if it offers a better Risk-Adjusted Return?
- If so, what strategies could you employ to lower your variance? Shortstacking for example?
And the really hard question:
Last edited by tombos21; 01-27-2024 at 07:21 PM.