Life Lessons from Poker is a seven-part series of articles about how the things we learn in our efforts to master poker can turn out to be indispensable life tools away from the felt. If you’re coming to the series for the first time, Part 1 can be found here.

Most of the articles in this series so far have dealt with the issue of variance, whether directly or indirectly. That’s no coincidence, as coping with variance is largely what poker is about, and a useful skill to have in life.

Poker is unusual among games – games played competitively by adults, anyway – in the degree of luck it involves. Of course, professional poker players like to stress that it is a game of skill, but what they really mean is that it is a game of some skill, as opposed to one entirely based on luck, and not that skill is the primary factor except in the very long term. With the exception of draw games, players have no control over the cards and no control over who wins the pot if it goes to showdown. The only thing within a player’s control is whether they’re willing to risk money on a given hand, and if so, how much.

That’s a very indirect way of interacting with the game’s mechanics, compared to most games, which have players deciding on which cards to play, or which pieces to put where. A lot of the time, life is like this as well; although we like to think of ourselves as the protagonists of our own life stories, the reality is that a lot of the time we only have indirect control over our circumstances. We may not be able to avoid risks or create opportunities out of nothing, but must instead capitalize on good fortune when it presents itself, and try to minimize the damage when things go badly.

When you can’t look past variance

In writing about useful cognitive behaviors we can learn from poker, I said that the biggest swings in poker and life are usually luck-based, and suggested ignoring those and focusing on improving the sorts of small-scale decisions which come up every day, or every poker session. That’s a good way to go about making decisions while at the table – or when similarly forced to act in the moment in life – but when it comes to planning for the long term, we can’t afford to ignore the possibility of exceptionally bad runs of luck.

In that same article, I said that it’s useful to think of bad luck as a sort of running cost that you’re anticipating and accounting for; that unexpected one-time costs aren’t as distressing when you acknowledge their inevitability and spread the cost out across the session or the year.

The only trouble with that way of thinking is that it treats money abstractly, as a score reflecting your performance in the game of life or poker, rather than as a crucial tool in those games. That would be the case if you had an infinite line of credit, but if that were the case you could equally make as much money as you like just executing a double-down strategy at blackjack.

Risk of ruin

Treating money abstractly is fine and good when the swings in question are small enough that they don’t restrict the options one has available for subsequent decisions. Imagine you’re at the card room to play a cash game, and within the first orbit you’re put on a very close decision for your entire stack. If you have another ten buy-ins in your pocket, you can do whatever you think is most profitable; if all the money you brought with you is on the table, on the other hand, then losing this pot doesn’t only lose the money, but also the opportunity to continue playing. You’ll have to go home and come back another day.

In economics and finance, this is what is known as “risk of ruin,” the chances that one’s losses will be so great as to impede the ability to make profitable decisions in future. It’s a bit like ICM for life, in that it means that one dollar is the same as the next dollar when you have many of them, but potential losses start to loom larger than potential gains as the risk of ruin grows.

Put another way, it’s rational to be more risk averse when you’re poor than when you’re rich, which is a subject I’ve discussed in the past, in relation to the question of whether it’s better to take $1 million guaranteed or flip a coin for $10 million. The trouble is that being risk averse means passing up profitable opportunities; you may have the brains to beat the game, but if risk aversion means you have to pass up chances that others can take, you might be better off not playing.

Bankroll management in poker

This is where the pragmatic skill of bankroll management comes in. Virtually every training site or poker book for beginners will stress how important this is. Without enough capital to endure the swings inherent in poker, eventually even the best player will experience a downswing deep enough to leave him or her penniless. And this does happen with shocking regularity, even to professionals who really should know better.

The trouble with most bankroll advice is that it’s a bit too simplistic. People want to know exactly how many buy-ins they need in their account to play this cash game or that tournament, and many sites and books are happy to oblige with formulae that will give you an answer. Bankroll requirements depend heavily on statistical win rate as well as variance, however, and many such systems fail to account for that. Others do, but there’s a problem there are well.

Knowing a player’s win rate for a game with any degree of accuracy implies that they’ve played a large sample at the game in question. If they’ve done so and haven’t gone broke, then either they’re running so far above expectation that their estimated win rate is distorted, or they’ve already got enough bankroll for those stakes. In other words, the paradox of these rigidly quantified approaches is that they can only give you an accurate answer when it’s no longer useful to have one.

Nominal vs. effective bankroll

Another problem is that most players aren’t aware of what their actual, effective bankroll is. Most online players would point to their account balance, while a live player might have a separate bank account, or a pile of cash and chips in a safe deposit box at the casino. Their actual bankroll might be much larger or smaller than this, however, depending on what they’ll do if they go broke or come close to going broke.

If you plan on reloading if your online account runs dry, your balance is not your bankroll: Your actual bankroll is the total amount you’re willing to deposit before you give up and quit, regardless of whether you’re putting it all online at once, or in $50 increments. Conversely, someone who’s just won a big tournament for $100,000 may call that their bankroll, but if a $25,000 downswing would be enough to cause them to cut their losses and leave the game, then that’s the real number.

In practice, then, bankroll management is more of a fluid thing, taking into account multiple factors such as: monthly expenses, other streams of income, availability of staking and loans from friends and family, liquidity of investments, etc. It also involves shifting between stake levels as appropriate: moving one level down pre-emptively may make more sense that risking an even larger downswing, while it can also be acceptable to “take shots” at higher buy-ins when a particularly lucrative opportunity presents itself, such as the WSOP Main Event or a cash game with an especially well-heeled and untalented player.

Bankroll management in life

Bankroll management in life is a bit more rigid, in that there isn’t some larger concern for which you’re partitioning off money. Your life is your life, so your life bankroll is all the money you have in the world, including lines of credit and any friends and family you can count on to help you out in a real pinch.

At the same time, assessing sources and degrees of variance is a bit trickier, because life doesn’t have well-defined rules and probabilities the way poker does. You can estimate the amount of money you’re going to spend per year on random expenses like home repairs and traffic tickets, but there’s far more variance in life than just that. The possibility of losing one’s job is a big one, and a hard one to predict in most cases. Any investments you have that are not guaranteed a certain return are another one. Even things like the price of gas can factor into your life variance, if your lifestyle is such that they’re a major running expense.

The question then, is what does poker actually have to teach us about life bankroll management? If poker has well-defined variance but a hard-to-determine bankroll, while life has a well-defined bankroll but hard-to-determine variance, aren’t they entirely separate problems? Yes and no. The formulae used to establish the correct bankroll for a given poker game won’t help you in life, but as I said, they’re not really that helpful in poker, either. There is, however, a large component of intuition involved in good bankroll management, and the instincts you need to develop to avoid going broke in poker will also serve you well in life.

The biggest downswing is the one you haven’t experienced

One thing that you learn after playing enough poker is that no matter how well acquainted you think you are with variance, there’s always a downswing waiting to happen which is worse than anything you’ve been through before.

This isn’t pessimism or a form of Murphy’s Law applied to poker, but a simple mathematical truth. If you flip a coin a certain number of times, the longest streak of heads or tails you expect to see is dependent on the number of flips. The bigger your sample size, the more improbable a run of good or bad luck you expect to encounter. Without hard evidence that you’ve actually been luckier or unluckier than expected, then, it’s safe to assume that as you keep increasing your sample size, you’ll keep running into streaks better or worse than anything you’ve seen before.

We’ve all seen a novice player with just a few hundred or thousand hands experience freaking out because their Aces got cracked; the first time it happens, it feels like the most improbable and unfair thing that could occur at a poker table. Play a bit more, however, and losing a buy-in to cracked Aces is just run-of-the-mill variance; perhaps it’s when you bubble three or four or five tournaments in a row in 80/20 spots that you start to feel persecuted. But of course, someone who’s played even more than you has been around that block several times over and their standards for “running bad” will be higher still.

Similarly, unless you’re already well past the midpoint of your life, chances are that the worst sequence of events you’ll have to cope with is somewhere in your future. Instinctively, though, humans tend to base their expectations for the future on things they’ve already experienced; how much we worry about things like robbery, fire, job loss, serious illness, and so forth depends heavily on whether those things have happened to us in the past.

Thus, when estimating how much of a cash cushion you need to endure some unknown future scenario, it’s natural to base that estimate on past experience. To be safe, though, it’s important to multiply this estimate by some factor to reflect the fact that you likely haven’t experienced the worst life has to offer, yet. The younger you are and the less real-world experience you have, the bigger that factor should be.

Be quick to move down, and slow to move up

Poker players often “cheat” a bit on bankroll management, moving up in stakes when they know they don’t quite have the money to do so safely, but promising themselves they’ll move back down quickly if things don’t go well. It’s a reasonable idea in theory, but in practice it’s easier to find the ambition to move up than it is to find the discipline to move down. Employing this strategy too liberally is a good way to end up on gorilla tilt and wiping out your bankroll entirely.

People have the same tendency in life, but for slightly different reasons. In poker, it’s largely about ego, as everyone wants to believe they can sit at whatever game they like and beat it. In life, there’s a psychological phenomenon called “hedonic adaptation” at the root of the problem. In plain English, it means that once you get used to having nice things, you cease to notice them until you lose them.

When they say that money can’t buy happiness, that’s not entirely true. Making lifestyle improvements does make us happy, but only temporarily. Pretty quickly, the new lifestyle becomes the new normal and no longer brings any particular pleasure. Remove some of those luxuries, however, and we feel the loss strongly, often more strongly than the happiness we experienced in making the upgrade. The longer we’ve taken the thing in question for granted, the more it hurts to lose.

In other words, lifestyle upgrades tend to have ongoing costs, but provide only temporary happiness. Moreover, if we later find that we can no longer afford them and have to scale back, the net effect on our lifelong happiness may prove to be zero or negative. Rationally, that should make us disinclined to “live better” until we’re really sure we can afford it, and quick to backtrack if that seems not to be the case.

Live beneath your means

Of course, we live in a time when there is no shortage of financial institutions encouraging us to life the life of our dreams today, because their business model revolves around convincing people to take on debt, and milking them for interest for as long as possible. That’s led to an epidemic of people living well beyond their means and ultimately paying a hefty price for doing so; once you’re on the debt treadmill, it’s very hard to get off of it, and one stumble can prove catastrophic.

“Live within your means” is good advice, especially when so many people are not doing so, but in my opinion it doesn’t go far enough. Taking into account the two points above – that your worst downswing is probably in the future, and that moving down feels worse than moving up feels good – it’s my philosophy that we should live well beneath our means.

Money may not be able to buy lasting happiness, but simply having it there, available if necessary, avoids a lot of potential unhappiness. Or, as I often put it, “the only good reason to have money is not to have to worry about money.” The best part of that is that, so long as the worst side of variance never happens, the money is still there and, if invested intelligently, should in fact be growing. Eventually, the time will come when you can make the improvements you’ve been dreaming of, but with close enough to zero chance that you’ll overstep and find yourself needing to scale down.

Alex Weldon (@benefactumgames) is a freelance writer, game designer and semipro poker player from Montreal, Quebec, Canada.