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/Apr/2014

Diving into staking!!

By: SuperXjitsu @ 22:53 (EDT) / 256 / Comment ( 3 )

Well, how much you can I learn in one day!  From first read, to first investment...

I have been exploring staking...  giving my money to someone else (who can hoepfully do better than me!!) to diversify my risk with my bankroll.  Imagine an investing strategy can also work in Poker.

Diversification:  spreading the risk over multiple instruments to optimze the risk/reward trade-off. 

If you play your bankroll by yourself, you have two possible outcomes, you lose (or negative return) or you win (positive return). 

With a stake, you add another player to the mix, your profit is distributed between how you do, and how your "horse" does.  Now you have 4 possible outcomes instead of 2.  You both lose, you win and your horse loses, you lose and your horse wins, or you both win.  Sound a little like game theory?? well it is.  

I am ignoring "amplitude (how much you win or lose)" here for the sake of simplicity. I am not considering what the return may be, but this shouldn't matter.  In theory, with 2 players, only one of the four outcomes are negative, two are neutral (when not considering amplitude), and one is positive.  This means, only 25% of the time you are in a total loss, vs 50% by yourself.

Of course, amplitude does matter, and the "neutral" outcomes may actually be net negative or net positive.  But, from a risk perspective, this doesn't matter, because you have still reduced your downside risk.

Now add a third person to the mix.... there are 8 outcomes:

You lose, player one loses, player two loses  (0,0,0)

you lose, player one loses, player two wins    (0,0,1)

you lose, player one wins, player two loses    (0,1,0)

you win, player one loses, player two loses    (1,0,0)

you lose, player one wins, player two wins      (0,1,1)

you win, player one loses, player two wins      (1,1,0)

you win, player one wins, player two loses      (1,0,1)

you win, player one wins, player two wins       (1,1,1)

now 1 out of 8 are total loses, (4/8 are likely net losing when not considering amplitude)

As you add more players, you reduce the percentage of total loss situation, and reduce your overall risk.  (1/16 for 4, 1/32 for 5, 1/64  for 6, etc...) With many more potential outcomes, the risk smoothes out.  Just remember, you can't eliminate the risk because the total loss scenario is always a possibility.

Now you mathematicials/statisticians out there may determine each individuals probability of winning/losing (or risk factor).... and this can get very scientific very fast!  Nevermind adding other relevant risk factors that would not be player specific...  This could be a PhD thesis!!

Needless to say, the theory has been explored in the investing world, and various concepts of risk have been explored there.  I believe the concepts are relavant to staking, and I am letting them give me comfort!

Now, I am diving in, putting my faith in someone else for the first time playing poker.  Start small, and don't put out more than you can afford!!  Here's wishing me and my new partner best of luck!!

Have fun at the tables, I know I will!!

 

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