I’d like to give an example of how poker players make money… For those that don’t know the rules of No Limit Texas Hold’em, they can be found here.
Suppose you have pocket 5’s (55) and you and your opponent both have $3,000 on the table. Your opponent has raised $200 preflop. 55 is not that great of a hand and you know that you probably have a worse hand than your opponent. However, you also know that if you flop a set (three of a kind) that you will most likely win all of your opponent’s money.
Now here comes the math part. The chances of getting a set on the flop is about 1 in 8. So for you to invest your $200 into the pot, there needs to be the potential of making at least $1,600 to make this investment worthwhile. Your opponent has $2,800 and you know that he will put it all into the pot after the flop. You have an 1 in 8 chance of winning and your payout is 14 to 1.
Now let’s look at it from an investment stand point. You are investing $200 to get $2,800 with 1 to 8 odds. Let’s totally take the poker aspect out of this scenario. I pull out a new deck of cards and take out two of the 5’s. Then I say “I will give you 14 to 1 odds that I will not flip over a 5 on my next three cards.” Would you take this bet? If you took this bet 100 times, you would probably come out way ahead. In my opinion, this would be a good investment.
Why isn’t this gambling to me, why do I call it investing? It’s because the mathematically probability is saying that I will make money.
To further simplfiy it, let’s just flip a coin and play heads or tails. Every time heads comes up, you pay me $1.25. Every time tails comes up, I pay you $1.00. Who do you think would come out ahead on this after 100 flips.
This is how pro poker players consistently make money. They are making plays with positive expected value. The plays they make have consistently a better probability to pay them off. If you play this way over thousands of hands, you will make money.