When to hold ‘em and when to fold ‘em: What poker can teach us about exit planning26 Jun 2023 - Simon Palmer - Vet Practice Sales
For those of you who are unfamiliar with poker, I will recap how the game works:
To begin, a player needs to put in money to get dealt their cards. The player then needs to choose to invest further for every additional round of cards that are drawn. With each round of cards that are dealt, the probability of success will change, and a good poker player will be continually re-assessing their odds of winning. When the odds are in their favour, a good poker player will continue to bet – and when they aren’t, they will quit (or “fold”).
Poker is unlike almost any other game, in that being successful in poker is not just a measure of how you play the cards that you are dealt…being successful is also a measure of the cards that you choose NOT to play. This is highlighted in the statistic that a professional poker player will only choose to play a mere 15-25% of the starting cards that they are dealt, while an amateur will choose to play over 50%. A professional player is successful because of their proficiency at navigating the sunk-cost fallacy and quitting hands that they have a lower chance of winning.
The sunk-cost fallacy is a strong cognitive bias that exists in most people, in which there will be a strong urge to continue to invest resources (such as time, money or effort) into an activity that is unlikely to yield a positive return, simply because they have already invested so much in it.
In poker, and in business, the sunk-cost fallacy makes a person’s rational analysis of the likely future returns difficult to assess, because they are blinded by their past investment. When this happens, it is impossible to know when it is the right time to move on.
A poor poker player will fall victim to the sunk-cost fallacy if they continue to invest in a hand that they have a low chance of winning. Their emotional attachment to the chips they have already put in makes them want to continue to work (and bet) on a hand with a remote probability of success.
Business owners often fall victim to the sunk-cost fallacy because they have so much invested in their businesses (in time, effort, money, identity) that they hold on to their businesses and careers far beyond when all the evidence around them says that it is in decline, time to sell and/or retire.
So…how do you avoid falling victim to the sunk cost fallacy? It is not that complicated:
1. Being able to read the signs.
In business, and in poker, you need to be keeping a close eye on “the cards you are dealt”, so that you can notice when the odds of success change.
In business, this means keeping an eye on KPIs like revenue, expenses, profit, competition, new client flow, etc.
2. Being able to recognise your emotions.
In business, and in poker, it's important to make important decisions rationally and unemotionally. If you are deciding to stay, is it because you have read the signs and rationally assessed the positive prospects of the future? Or is there an irrational/ emotional anchor keeping you from moving forward?
3. Make decisions based upon the probability of success rather than emotional attachment.
Once you’ve read the signs and kept your emotions in check, all you need to do is make rational decisions based on the probability of success.
In business ownership, and in poker, winning is not about each transaction, it’s all about the long game and winning the long game is not just about playing well…it’s about knowing when to stop. Knowing “when to hold ‘em and when to fold ‘em”, so that you are ahead after the total amount of time and hands played.