Understanding the Net Present Value in Poker

Posted September 24, 2009 by Andrew in Articles

Baked BeansIt may come as a surprise but many poker concepts can actually be learned by studying other disciplines. For example, there are so many parallelisms between poker concepts and business.

Various companies must make crucial decisions based on the net present value of money. In the simplest terms, this means that you would assign a discount rate that is based on a particular market factor in order to arrive at the net present value of money that you are going to spend or receive in the future.

For example, if there is a choice between spending $10,000 three years from today or $5000 up front for the same equipment, you are bound to compute for a net present value in order to see which choice makes the most sense on the basis of interest rates and opportunity costs. The thing that further complicates this is that every company will have to do the same calculation that is specific to it.

Let us say for instance that a company is facing a choice between leasing equipment that is very important to its business for five years or actually purchasing the same equipment with a cash payment of 100 per cent. The company can determine that if it buys the equipment right there, it will take three years for it to be able to break even when compared to leasing the equipment on the basis of the net present value. For the remaining two years, it will be able to keep all the money it would could have used paying for the lease. Based on the facts and the scenario given, it will seem that purchasing the equipment is the best choice. But the real answer would actually be “it depends.” For a company that is quite rich in cash and is considered as well established it will actually be an easy choice to buy. But for a cash poor company that is new to the business and may not even still be in operation in three years, it may probably not be a good idea to buy. They will be best served if they just lease the equipment because they have a more pressing need for the cash.

In poker, just like in business, the situation can be the same. Things may not always be as obvious as they appear to be. Let us cite a fictional daily tournament that has an initial 100 participants and with each one starting with $1000 in chips. By the time that 50 per cent of the people are eliminated the average stack of chips will have been $2000. When it is down to 25 people, the average stack will be $4000. But does this mean that the $1000 at the start of the tournament is equivalent to $4000 when it reaches 25? Not really. Tournaments are formed in such a way that the blinds and antes increase regularly. As the tournament progresses, luck becomes a bigger part of the game at the later levels. Additionally at the start of the tournament everyone has $1000. At the latter stages $4000 will be the average but there will be players who have a lot more than that. The advantage of a large stack becomes greater the further you’re into it.

I’ll go into more detail about the net present value in poker very soon…


About the Author

Andrew

Andrew Keyes is a poker enthusiast, a writer, researcher, speaker, and consultant. You can visit to get poker articles along with winning poker tips, tested poker strategies, the latest poker news, free poker tools, cool poker resources, and more! Visit today and you can download some of the best poker bots for automating your poker play!