"Dynamic Hedging" in Poker (For Finance Guys who Play Poker)

[That guy]

Dynamic Hedging is a portfolio strategy designed to enjoy upside potential while maintaining downside protection. In its most simple form, you basically increase your exposure when the market is rising and decrease your exposure as the market falls. ie, you 'expose yourself to more risk' as the value of your portfolio increases and decrease your risk exposure as the value of your portfolio falls. this combination yields an 'asymmetric' payoff profile --- similar to long a call option.

I was curious if anyone has explored this concept in depth for poker. Clearly, moving up or down in limits is one form of dynamic hedging.

The key drawback to it working in the stock market is that is only works when markets move by small amounts. Large moves (ie, market gapping up or down) do not allow you to keep your risk consistent with its desired level given your portfolio value. This is not such a problem in poker.

Thoughts?

[Mark1808]

I suppose another way to do this would be to play more hands when you are winning and and playing less when you are losing. I don't like the concept in stocks or poker because I don't believe past trials effect future results. A winning stock market strategy or poker strategy should be employed regardless of immediate past results. However, Doyle Brunson does feel there is something to rushes and states he continues to play any hand as long as he has won the previous hand. This may have more to do with game theory than his belief he is more likely to hold the winning hand.

[jason1990]

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I don't like the concept in stocks or poker because I don't believe past trials effect future results. A winning stock market strategy or poker strategy should be employed regardless of immediate past results.

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Just to correct what might be erroneous thinking (or erroneous interpretation on the part of readers not familiar with the subject): the simplest financial model in which one can develop the theory of hedging is the most primitive of Black-Scholes models in which the underlying stocks are represented by geometric Brownian motions (GBM). GBMs are Markov processes. Heuristically speaking, in a Markov process, the past and future are independent. So the theory of hedging does not require the assumption that the future depends on the past.

[Derek in NYC]

... I know something about it, and my S.O. is a finance type. I dont know what a dynamic hedge is, but I do know that hedging generally is a tool employed to eliminate some of the volatility in a position, such as going long a bond but buying puts on the equity. This way, if you make money on your long position, great. But if something weird comes along to whack the bond, at least you'll make up some of this on your short. (High yield bonds move in parity with the underlying equity, generally.)

Good poker is really not about lowering volatility, however. To the contrary, whether at limit or no-limit poker, a tight aggressive player should be pursuing strategies that yield highly volatile results. Only weak-tight play reduces volatility.

Thus, a no-limit player should happily call all-in with his entire chipstack if he holds AA, despite the fact that he could get them cracked. The 4:1 minimum edge that AA enjoys over any RH, is simply too big to pass up. In fact, a no-limit player should be willing to do this even if the pot is 10-handed, and his AA will only hold up 35% of the time. A lower volatility, but lower return strategy, would be to only play AA all in after seeing a flop to make sure that it isn't a monotone board, double paired, etc.

Tight aggressive limit player also seek out the most volatile strategies. Thus, holding A /images/graemlins/heart.gifT /images/graemlins/heart.gif on the button after a number of limpers, we raise for value because we want to build a pot. Or we raise multiway nut draws for value on the flop, even though we're a 2:1 dog to make the hand by the river. These are high volatility strategies. The safer course would be to wait until you hit your draw to raise.

Anyhow, you get the point. I dont think good poker is about "hedging" at all. I think it's all about pushing small edges hard, which results in positive EV, but at the cost of higher volatility. If you're looking for a finance analogy, you might actually consider this a "leverage" play.