This post is about one of the ultimate expressions of capitalism.

A theoretical exploration of poker.

Of course, I'm not speaking literally. However, poker is an extreme expression of lassiez-fair economics. My spelling might be off, of course, but the concept remains true.

When you play poker, you wager monies. Pretty simple concept there.

Naturally, it gets more complicated if you want to do this for a living. A little like the stock market, though I'm sure that's a common analogy.

With each wager, you attempt to maximize the amount of *expectation* you have when risking your monies.

Expectation is an important concept. Excpectation is the amount of money you expect to make given the *average* of all possibilities for the outcome of a hand. The important part is to disregard individual results, because poker is a game of wild variations in "luck".

I call luck "variance" because it means much the same thing, but doesn't have any sentimental attachment.

Sentimental attachments, whether it is to a particular hand or class of hands in poker, is a dangerous position.

The equation works like this:

Expectation = edge * volume.

Your "edge" is essentially the skill you have in excess of your opponents (If it helps, think of it in terms of the mistakes they make but you avoid. Every time an opponent makes a mistake, there is a potential for profit. Conversely, when you make mistakes, you SHOULD lose money, though unskilled opponents will frequently not capitalize on your mistakes.) The more you play, the bigger your edge will get (if you try to improve, which most people don't or can't). It's a positive feedback equation, because the more you play, the larger your edge gets (again, if you try to improve). The more you play, the bigger your edge gets, and the more you are betting (the volume section of our equation) and the more your edge affects your profits.

Any questions?