ROI is (mostly) irrelevant in poker

[Greg (FossilMan)]

There was a remark in a very recent thread that got me onto this rant again. From eastbay in his thread titled "Grr. PP Multi-table Tourney Hand":

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This idea that "you can always just play again" is a little specious, I think. The idea is maximum ROI, so when going after your R, you have to worry about your I.

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EV matters. Variance matters. Bankroll matters. Return on investment is irrelevant. When you're playing poker, the large majority of your bankroll is NOT working. Most of it is sitting in your pocket, your lockbox, or your bank account, waiting there in case you lose tonight and need to go get it. Thus, who cares how much return you're getting on your current poker investment (that is, the game you're in right now)? Would you rather buy into a 1-3 stud game for $100, earn an expected $5 per hour for 5% ROI; or, would you rather buy into the 10-20 game for $500, earn an expected $20 over the same hour, and only have a 4% ROI?

If your bankroll can afford the variance, you generally want to play in the game that offers you the highest EV per hour. At least in my opinion.

Same thing for tourneys and tourney chips. If the play is one that offers +EV, then who cares about ROI? If a play is going to bust you out when you lose, that's poker. It doesn't become correct to fold just because you will survive longer in this event (without cashing), and thereby put off investing into another tourney right away.

Even if ROI is what matters, you need R to make this number positive, and folding when you've got the best of it does not lead to long-term R.

Later, Greg Raymer (FossilMan)

[CrisBrown]

Hiya Greg,

I agree. I've no idea what my ROI is, but I keep pretty good tabs on my expected hourly rate. I choose games and (try to) play to maximize my expected hourly rate, not my ROI.

To follow your example, I could probably make a higher ROI at $11 or $22 SNGs -- I'd probably win a bit more often vs. softer players -- but I have a higher expected hourly rate at $55 and $109 SNGs.

By contrast, I know some people who have trouble winning at higher stakes, but maximize their expected hourly rate (and reduce their variance) by playing two or three lower stakes touraments at a time. They estimate that their return will be more normalized by playing three $11 tourneys at once rather than one $33 tourney. And I suppose if they can follow three tables as well as they can follow one, they are probably right.

I know I wouldn't play as well trying to keep up with three tables at once, so I take the (somewhat) higher variance of playing in larger-stakes tournaments.

Still, I can see eastbay's point. I'm a lot more dangerous with a relatively short stack than I am from the rail. So I generally try to avoid dicey all-ins early, on the theory that patience will reward me with a more clearly +EV situation later.

Cris

[Guy McSucker]

This is a really good point that comes up quite often.

I think the key is that, in poker, money to invest is not scarce: you (should) have enough for several buyins, tournaments, whatever; but your time is very scarce: before the birth of online poker, you could only play one game at a time.

You therefore want to maximise return with respect to time, rather than cost.

I am sure economists must have a word to describe this concept. Time is the scarce resource, so it is the appropriate denominator for your fractions.

My wife is an economist. I asked her about this, and she agreed: she's sure they must have a word for it too!

Guy.

[CrisBrown]

Hi Guy,

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My wife is an economist. I asked her about this, and she agreed: she's sure they must have a word for it too!

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LOL....

(Making a note to forget all of her economist jokes....)

Cris

[drewjustdrew]

This is a case of Net Present Value method vs. Internal Rate of Return method (ROI) as a measurement of investments. Greg advocates the NPV which indicates which investment will yield the greatest return in the long run, regardless of total up front capital. This is also favored by most financial analysts. Internal Rate of Return would be used if you only had a certain amount to invest, and planned to invest the entire amount, so bankroll considerations are irrelevant.

[Redhotman]

This is completly true except, some people may believe that one should stay at a certain level until they are cappable of beating it, which is represented through ROI.

This can be shown through small stakes. I play six 3/6 games at a time and make about the same as a player playing 15/30 for a BB/HR.

Now if I sat at that table I'd get killed. So in the long run is profit all that matters, or is improving your game more important?

[Che]

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So in the long run is profit all that matters, or is improving your game more important?

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It depends.

If you play poker as a business, e.g. if it is your primary source of income, profits are (basically) all that matter.

If poker is just a hobby, improving your game might be more important although you would need to keep your maximum loss rate above whatever level you could afford to invest in a hobby. Poker is just one of many potentially high cost hobbies.

I guess you could also have a hobby/second income approach to poker which would have some sort of balance of priorities between monetary return (profits) and emotional return (improving your game).

So only you can decide what's important to you. (I'm being serious here and not trying to be condescending or trite. I hope I haven't come across that way.) [img]/images/graemlins/grin.gif[/img]

[eastbay]

[ QUOTE ]
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So in the long run is profit all that matters, or is improving your game more important?

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It depends.

If you play poker as a business, e.g. if it is your primary source of income, profits are (basically) all that matter.


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That seems like a strange business sense. It seems equivalent to saying: I have a widget factory that makes 10 widgets. Should I run it 24-7 or should I take it offline for a week so that I can increase the capacity to 15 widgets?

You seem to be saying that you have to run it all the time. I would say it depends how long you plan to be in the widget business, primarily.

[Che]

[ QUOTE ]
That seems like a strange business sense. It seems equivalent to saying: I have a widget factory that makes 10 widgets. Should I run it 24-7 or should I take it offline for a week so that I can increase the capacity to 15 widgets?


[/ QUOTE ]
In my quest for brevity, I was rather vague so I see how this could be confusing and/or strange. I'll be less brief this time...

The question I was answering was:

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So in the long run is profit all that matters, or is improving your game more important?

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What I was trying to say is:
1. If your goal is to make money (i.e. poker is a business for you), then it doesn't matter if you improve your game or not. What matters is how much profit you make relative to your investment (more on this below).
2. If your goal is something other than making money, that's OK. Just because "the object of the game is to make money" (The Theory of Poker, p.5) doesn't mean you have to make a profit for poker to have value in your life. Even if I consistently lost money for the rest of my life, I might still play $3 tourneys on Stars every once in a while since I enjoy the tourneys and I'm not going to miss $3. If I get rich someday, I might choose to donate money to the larger buyin events. How much you pay for your hobbies is relative to the size of your income/net worth (and based on the way they play, a lot of the players even at higher buyins have a hobby-level commitment to the game).

In summary, what's "important" is whatever is important to you - whatever you value.

Now back to point one, we now have to define "profit relative to investment." You invest two things when you play poker: money and time.

IMHO, if your goal is to maximize profits, you should choose the game(s) that give you the greatest expected profit per unit of time invested. How much money you actually invest (i.e. risk) depends on how much it is necessary to invest in order to achieve your maximum expected profit per unit of time invested. As long as the required investment is reasonable given your bankroll/variance profile, you should forget about what your investment in this game was or what the investment in the next game will be and focus on playing your best in the current game.

BTW, when I say "maximizing profits" I don't mean maximizing today's profits. I mean longterm profits. Continuing to earn the same amount per hour you currently make indefinitely is not profit-maximizing unless you have already reached the maximum possible per hour profit or the cost of improving your skills outweighs the NPV of the future increased profits that could be attained with improved play.

[eastbay]

[ QUOTE ]
There was a remark in a very recent thread that got me onto this rant again. From eastbay in his thread titled "Grr. PP Multi-table Tourney Hand":

[ QUOTE ]
This idea that "you can always just play again" is a little specious, I think. The idea is maximum ROI, so when going after your R, you have to worry about your I.

[/ QUOTE ]

EV matters. Variance matters. Bankroll matters. Return on investment is irrelevant. When you're playing poker, the large majority of your bankroll is NOT working. Most of it is sitting in your pocket, your lockbox, or your bank account, waiting there in case you lose tonight and need to go get it. Thus, who cares how much return you're getting on your current poker investment (that is, the game you're in right now)? Would you rather buy into a 1-3 stud game for $100, earn an expected $5 per hour for 5% ROI; or, would you rather buy into the 10-20 game for $500, earn an expected $20 over the same hour, and only have a 4% ROI?

If your bankroll can afford the variance, you generally want to play in the game that offers you the highest EV per hour. At least in my opinion.

Same thing for tourneys and tourney chips. If the play is one that offers +EV, then who cares about ROI? If a play is going to bust you out when you lose, that's poker. It doesn't become correct to fold just because you will survive longer in this event (without cashing), and thereby put off investing into another tourney right away.

Even if ROI is what matters, you need R to make this number positive, and folding when you've got the best of it does not lead to long-term R.

Later, Greg Raymer (FossilMan)

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Let me explain what I meant. My use of "ROI" was a little flip and imprecise.

I think a better way to think about it is to say that in a tournament, you cannot calculate EV independently of the chances of busting out. That is, you can't look at two hands, the board, and the pot, and say "this is x EV". Because either the decision is likely to cost you a buy-in, or it isn't. And if it is, that's an expense that hasn't been factored into the usual EV calculation.

So on a hand that is a potential bust, it is easy to get fooled into doing the usual EV calculation and thinking you're +, when in fact you're - because of the probability of having to "rebuy" (probably into a different tourney).