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Rational Bankroll Management - Part 1

Started by Bugs | 3394 Views Like 0 Show 25 Start New Thread

Category Donkr - Poker Forums - Cash Games | Tags bankroll, brm and management

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Bugs 5 years ago

1. Introduction
Reg: 02/10/2007
Posts: 5296 This is the first part of an article series about bankroll management (BRM)
in poker. Using some form of bankroll management is vital for poker
success. A serious poker player wants to maximize his profits in the long
run. To achieve this, he has to protect his bankroll from ruin, and this
principle of bankroll management is well known. What's the best way to go
about it is less well known.

In this article series we'll study rational bankroll management. We define

this as BRM based on the way we play, combined with rules derived from
statistics. We want to use BRM adapted to our situation (the games we
play, our win rate, our standard deviation, and our risk tolerance) instead
of simple rules of thumb like "50 buy-ins for no-limit". We'll use
mathematics to define a model for BRM that we can use to calculate the
best BRM scheme, given our situation.

Our goal is make good decisions about which games to play and how high
to play, given our bankroll, our skills, and our risk tolerance. Good BRM
decisions will maximize our profit over the long run, which is what we
strive for as serious poker players.

It's been said that "all the best gamblers go bust sometimes". Amateurs
with gamble in their blood are perhaps attracted to the "romantic" notion
of risking everything. But from a money making perspective, bankroll ruin
is completely irrational and unnecessary.

In this series we'll assume that we are rational gamblers who want to
make the most money in the long run. Our only concern is to maximize
profit and not to satisfy emotional urges. For us, variance and swings are
obstacles that we want protection against. Our protection is our
understanding of what variance is, mathematically speaking. Armed with
this knowledge we can design plans for moving up and moving down in
such a way that we both maximize our income and protect our bankroll.

1.1 Bankroll management in its simplest

form
Before we begin our discussion of rational bankroll management, let's talk
about how most players practice BRM today. The most commonly used
method is to choose some bankroll size that seems big enough to play our
chosen game and limit, and then we play and hope we don't bust.

BRM in its simplest form then means following certain rules that give you
an acceptably low risk of ruin, based on your subjective assessment. Many
rules of thumb exist for bankroll requirements, some better than others.
For example:

300 BB for fixed limit

50 BI for NLE
100 BI for PLO

And so on. All such rules have in common that they use some assumption
about what is "enough" to play, and that you are "safe" if you stick with
the scheme. This can work, especially when combined with rules for when
to move down. For example:

300 BB for fixed limit, but move down if the bankroll drops to 300 BB
for the limit below
50 BI for NLHE, but move down if the bankroll drops to 50 BI for the
limit below
100 BI for PLO, but move down if the bankroll drops to 100 BI for the
limit below
To make this type of simple, rule-based BRM scheme complete, we can
add a rule for when to move up:

300 BB for fixed limit

Move down if the bankroll drops to 300 BB for the limit below
Take a 100 BB shot at the next limit if you have 300 BB for the
current limit plus 100 BB for the next limit
50 BI for NLHE
Move down if the bankroll drops to 50 BI for the limit below
Take a 10 BI shot at the next limit if you have 50 BI for the
current limit plus 10 BI for the next limit
100 BI for PLO
Move down if the bankroll drops to 100 BI for the limit below
Take a 10 BI shot at the next limit if you have 100 BI for the
current limit plus 10 BI for the next limit

Most players who use BRM to guide their moving up and moving down
between limits use some variation of the rule-based scheme outlined
above. Not necessarily as strict, but it's based on some idea about what is
"enough" to play a certain limit. Then they add a lower threshold that tells
them when to move down, and an upper threshold that allows them to
start shotting at the next limit.

Here is an example of this kind of planning in practice:

Example 1.1: A rule-based BRM scheme for no-limit Hold'em

Bob begins his NLHE career at $25NL. He has decided to start with a 50 BI
($1250) bankroll, using the following BRM scheme:

Start with 50 BI ($1250) at $25NL

Move down to the limit below ($10NL) when the bankroll drops to 50
BI ($500) for $10NL.
Take a 10 BI shot at the next limit ($50NL) when the bankroll grows
to 50 BI ($1250) for $25NL plus 10 BI ($500) for $50NL
Keep climbing in limits using the same system (50/50+10)

Bob uses the more compact notation 50/50+10 to describe his system.
The first number, 50/50+10, is the number of buy-ins he wants in the
bankroll before he considers himself established at the limit he is currently
grinding. The second number, 50/50+10 is the threshold for moving down
to the limit below. The third number, 50/50+10 is the minimum capital he
needs, beyond his minimum 50 BI for the current limit, in order to take a
shot at the next limit.

If everything goes smoothly, he will quickly grind in $500 and take a

$50NL shot with this money. If the $50NL shot fails, he still has 50 BI
($1250) for $25NL, so he returns to this limit and tries again. If the $50NL
shot succeeds, he keeps playing $50NL until he has 50 BI ($2500) for that
limit, and then he considers himself to be established there. His next task
is to grind in 10 BI ($1000) more for $100NL, so that he can take a shot at
the next limit, rinse and repeat.

How will this bankroll management scheme work for Bob? When we try to
answer this question, we run into the fundamental problem of this type of
BRM planning:

1.2 Why simple, rule-based BRM schemes are

problematic to use
The biggest weakness of a simple, rule-based BRM scheme is that it does
not contain any information about the player's win rate or the variance he
expects to meet in the game.

Why is this a problem? Let's think about what will happen to various player
types, where we for now only consider their win rates. Let's first assume
that Bob is a steady low limit grinder who wins 10 bb/100. So he wins 1 BI
per 1000 hands on average.

The probability that this player will face a -50 BI downswing is negligible,
and even if that happens, he will be protected by his move-down rule. The
50/50+10 scheme will work well for this player, and he will quickly climb in
limits to begin with. Still, his win rate might drop significantly when he
reaches higher limits (for example, when he reaches $200NL, where he will
play in games with many professional grinders).

If his win rate drops, but is still positive, Bob will still be protected by his
BRM scheme. As long as he wins and has the discipline to move down
when necessary, he will never experience bankroll ruin. But 50 BI might
not be enough to properly deal with the swings he now experiences. He
will survive them as long as he moves down when he should, but he might
waste a lot of time bouncing up and down between limits.

For example, let's say that the swings at $200NL are so big that Bob has to
try 5 times before he establishes himself there. His move from $100NL to
$200NL might have gone quicker if he had used a stricter scheme, say
100/100+20. It will take more effort at $100NL to get ready for a shot, but
the chance of success has gone up. So the total effort to move up might
be less.

The same problem would have occurred already at $25NL if Bob had
started out as a small winner there, say 2 bb/100. A low win rate equals
big swings, and he might have to pay a visit or two to $10NL before
climbing up to $50NL for good. Having to make several attempts to move
up takes time and effort, and can be bad for morale. So a stricter BRM
scheme might be better overall.

But for both the 10 bb/100 winner and the 2 bb/100 winner, we can say
this:

As long as we have a positive win rate and a reasonable scheme for

moving between limits, we will not experience bankroll ruin. If we have the
discipline to stick with the plan and move down when we should, we will
eventually move up.

That's a good start. During this article series we'll see that we can do
better than the simple rule-based systems by applying a bit of
mathematics/statistics. Our goal is to design a bankroll management
scheme tailor-made for us, based on our win rate and variance in the
games we play. A unique BRM scheme for every player, not crude rules of
thumb that tries to apply to everyone.

But the biggest problem associated with trusting the simple rule-based
schemes is this:

Bankroll management does not protect losing players against ruin!

The simple schemes outlined previously circulate on poker forums and new
players quickly get an idea about how big a bankroll should be to be
"safe". But all these rules are based on two things:

We have a positive win rate

We have the discipline to stick with the scheme during adversity

In practice, new players will often run into problems on one or both of the
following areas:

They could be losing players, even when playing their best. Then no
bankroll will be big enough.
They win when playing their A-game, but they struggle hard with tilt.
The effect of tilt is to make them losing players overall.

This naturally causes some frustration if you believe bankroll management

to be a "magical" recipe for success. BRM is for winners, not losers. BRM
alone does not give you the right to survive, you need poker skills for that.

If you're a losing player, you don't need a system for BRM, you need a
budget (how much you allow yourself to lose). Splashing around for fun as
a losing recreational player is fine, if you can afford it and think the fun is
worth it. But we will not consider this player type in our discussion of
bankroll management.

2. Two components of bankroll

management: Win rate and
variance
To get to a rational system for bankroll management, we need some
building blocks, first and foremost an understanding of win rate (also
called "expected value", "EV" or "expectation") and variance.

Simply put:

Win rate
Our win rate in a game is what we expect to win (expressed as profit per
game, per 100 games, or some other convenient unit). We distinguish
between our true win rate (our hypothetical, fully converged win rate that
we would have if we played infinitely long) and our observed win rate (the
win rate we have now, given the amount we have played).
Win rate is a function of how well we play and how well the opposition
plays. It's the difference between our skills and their skills that determines
our win rate. Good poker players actively seek out opponent that play
worse than them, and then they play them. This is the skill of game
selection, and it's critical for your win rate.

Variance
Variance is a statistical property than tells us something about how far our
results will deviate from the expected results. For example, let's say our
true win rate in a poker game is 10 bb/100. Does this mean we'll have
10,000 x 10 bb/100 =1000 bb after playing 10,000 hands?

No, since poker is a game with a random component (the cards). In the
long run our observed results will converge towards the expected results,
but in the short run (say, some tens of thousands of hands, or some
weeks) it's very likely our observed results will deviate significantly from
our expected results.

Variance is partly a function of the random component in the game (the

randomness of the deck), partly a function of the specific rules of the game
(some poker games have more variance than others), and partly a
function of our playing style and our opponents' playing styles. If you play
tight and passive, you're variance will be lower, while loose-aggressive
play increases variance.

Since variance causes swings and emotional stress, it's generally a good
idea to take the low variance route if we have the choice between
alternatives that are otherwise equivalent. But this doesn't mean we
should try to reduce variance wherever we can. If increased variance is
accompanied by increased win rate, we should embrace the variance and
make sure we're properly bankrolled for it.

A good loose-aggressive player plays this way because it maximizes his

win rate. A consequence is that he experiences more variance than a
tighter player. More variance means bigger swings, so he probably needs a
bigger bankroll (but not necessarily, more about this an a bit). This is a
trade off he is willing to make in order to win as much as possible. And he
protects himself by using a bankroll management scheme suited for his
style.

A tight player has lower variance, which reduces his swings. Does this
guarantee he can get away with a smaller bankroll? Maybe, but not
necessarily, if his tight play keeps significantly reduces his win rate.

The mathematics behind the last statement will be discussed later, but for
now let's establish two important principles:

- Increased variance increases our bankroll requirements

- Decreased win rate increases our bankroll requirements

It follows that we want to maximize our win rate and minimize our
variance. If these two considerations pull in opposite directions (and they
usually do in poker) some compromise must be made. The obvious choice
for a serious player is to maximize win rate, accept the variance, and use a
BRM scheme that provides adequate protection against it.

There is a mathematical formula (the risk-of-ruin formula) that tells us how

win rate, variance and bankroll requirement are related to each other.
We'll get there eventually, but before we do, we'll build a better
understanding of win rate and variance by playing around with a couple of
"toy games".

We start by defining win rate in a strict way, suited for our purpose:

2.1 Definition of win rate/EV

Assume we're playing a game with n different outcomes. For example we
can flip a coin, which gives us two outcomes (heads or tails). Furthermore,
assume that each outcome is associated with some probability, expressed
as a number between 0 (never happens) and 1 (always happens). For
example, in a coin flip both heads and tails are associated with the
probability 1/2 (50%). Finally, assume that each outcome is associated
with some value. For example, we might wager $1 on a coinflip, win $1 on
heads and lose $1 on tails.

The general definition of expected value (EV) which for our purpose is the
same as win rate, can now be written as:
where the probabilities for the n outcomes are noted p, while the values
are noted x.

In other words, for each outcome we multiply the probability and the
value, then we sum over all outcomes. To illustrate the process, we'll
calculate the EV for a simple toy game:

EV for Dice Game 1

We wager $1 per throw in the following dice game:

Our wager is returned on 1, 2, 3 and 4

We lose our wager on 5
We win twice our wager on 6

This game has six outcomes (the die can land on 1, 2, 3, 4, 5, and 6). A fair
die has equal probability for all six outcomes, so the probability for each
outcome is 1/6. The value for the different outcomes are $0 for 1, 2, 3, 4, -
$1 for 5, and +$2 for 6. Note that the payout of +$2 is the net payout (we
get our $1 back, and then win $2 in net profit). We plug the numbers into
the EV formula and get:

EV (Dice Game 1)
=(1/6)(0) + (1/6)(0) + (1/6)(0) + (1/6)(0)
+ (1/6)(-1) + (1/6)(2)
=(1/6)(1)
=0.1667

We profit from this game, and we should play it. Our EV is 1/6 times our
wager, which becomes $1/6 =$0.1667 per throw.

One important property of EV is that it's additive:

In other words, if we throw several times, the total EV equals the sum of
the EVs for each throw. So if we play Dice Game 1 one hundred times, our
total EV is $16.67:

EV (Dice Game 1, 100 throws)

=100(Dice Game 1, 1 throw)
=100(0.1667)
=16.67

When we know the EV for the game, we can calculate the variance:

2.2 Definition of variance

Win rate/EV tells us what we can expect to win (or lose) on average when
playing a game. The variance tells us something about how far our result
can deviate from the expected result. For us poker players the most
interesting part of this is the size of the swings our bankroll will go
through.

Let win rate/EV be defined like previously for a game with n different
outcomes, each associated with a probability p and a value x. The
variance (V) of the game can then be written as:

In other words, for each outcome, take the difference between its value
and the EV. Then square the difference and multiply it with the outcome's
probability. Then sum over all outcomes. We can now calculate the
variance for Dice Game 1:

V (Dice Game 1)
=(1/6)(0 - 0.1677)^2 + (1/6)(0 - 0.1677)^2
+ (1/6)(0 - 0.1677)^2 + (1/6)(0 - 0.1677)^2
+ (1/6)(-1 - 0.1677)^2 + (1/6)(2 - 0.1677)^2
=0.8056
Like EV, variance is additive. The total variance for a series of throws is
found by summing the variance for each throw:

So the variance for 100 throws in Dice Game 1 is equal to 100 times the
variance for one single throw:

V (Dice Game 1, 100 throws)

=100(0.8056)
=80.56

The last mathematical definition we need is standard deviation (SD):

2.3 Definition of standard deviation

The standard deviation is simply the square root of variance:

Standard deviation and variance are two ways of measuring the same,
namely how wide the spread between observed results and expected
results can be. Statistical formulas typically use the standard deviation, so
we need this definition in our work.

The standard deviation for Dice Game 1 is then:

SD (Dice Game 1)
=sqrt(0.8056)
=0.8975

Where "sqrt" is the square root. Unlike EV and variance, the standard
deviation is not additive. This follows immediately from the definition:

So if we throw 100 times in Dice Game 1, the total standard deviation is

sqrt(100) =10 times the standard deviation for a single throw:

SD (Dice Game 1, 100 throws)

=sqrt(100)(0.8975)
=10(0.8975)
=8.975

We have now defined all the statistical concepts we'll use throughout this
article series when we discuss bankroll management for various games.
How we use EV and standard deviation to calculate bankroll requirements
will be discussed in detail in future articles. But before we do this, let's
study a variation of our dice game to illustrate the effect of variance. We
define a new dice game with the same win rate as Dice Game 1, but
different variance:

3. Illustrating the effect of

variance
We define a new game, Dice Game 2, where we lose our wager on 1, 2, 3,
4, and 5, and win 6 times the wager on 6. EV, variance and standard
deviation for the new game are easily calculated:

EV (Dice Game 2)
=(1/6)(-1) + (1/6)(-1) + (1/6)(-1) + (1/6)(-1)
+ (1/6)(-1) + (1/6)(6)
=(1/6)(1)
=0.1667
EV for Dice Game 2 is the same as for Dice game 1, namely +$0.1667. But
the variance and standard deviation are much higher:

V (Dice Game 2)
=(1/6)(-1 - 0.1677)^2 + (1/6)(-1 - 0.1677)^2
+ (1/6)(-1 - 0.1677)^2 + (1/6)(-1 - 0.1677)^2
+ (1/6)(-1 - 0.1677)^2 + (1/6)(6 - 0.1677)^2
=6.8056

SD (Dice Game 2)
=sqrt(6.8056)
=2.6087

Let's summarize and compare our two toy games:

Dice Game 1
We wager $1 per throw in the following dice game:

Our wager is returned on 1, 2, 3 and 4

We lose our wager on 5
We win twice our wager on 6
The expected value of the game is EV =0.1667
The variance of the game is V =0.8056
the standard deviation of the game is SD =0.8975

Dice Game 2
We wager $1 per throw in the following dice game:

We lose our wager on 1, 2, 3, 4, and 5

We win 6 times our wager on 6
The expected value of the game is EV =0.1667
The variance of the game is V =6.8056
the standard deviation of the game is SD =2.6087

The variance for Dice Game 2 is more than 8 times higher than for Dice
Game 1, with a corresponding difference in standard deviation. What are
the consequences when we play these two games?

The answer to this question pierces the core of rational bankroll

management. Most readers will intuitively realize that if we have the
option of choosing which game to play, we should choose Dice Game 1.
Dice Game 2 exposes our bankroll to bigger swings without any additional
reward. Bigger swings can cause problems for us, particularly if we're
playing with limited funding.

Le's say we only have $5 in our pocket to play for. In Dice Game 1 there is
only one outcome (rolling 5) that loses. 5 out of 6 times we'll either get our
wager back or win twice the amount. The risk of going broke before we
have built our roll big enough to survive the expected swings in the game
is fairly small.

But in Dice Game 2 we'll lose our wager 5 times out of 6. We expect to
make the same profit as in Dice Game 1 in the long run, but the most likely
outcome is that we wont reach the long run since we'll go broke early.
Another way of phrasing this is that both games are profitable, but it's
much less likely for us to realize the profit potential in the high-variance
game (when we start out with a small bankroll).

Of course, if we're loaded with cash the variance becomes irrelevant. We

still choose Dice Game 1, since there is no reason to choose the higher
variance game when the win rate is the same. But now our choice is more
dictated by principle than by a need to protect our bankroll (since we are
over-bankrolled for the game).

We end Part 1 with a graphical illustration of the effect of variance for our
two dice games. We use a online variance simulator to generate
graphs.

The simulator uses the units "per 100 hands" in the calculations, so we
plug in EV and standard deviation expressed as "per 100 throws". EV is
additive, so the EV for 100 throws is 100 x EV for one throw, namely 100 x
0.1667 =16.67 per 100 throws. This is the EV for both games.

The standard deviation grows as the square root of the number of throws
(see the previously defined formulas), so the standard deviation for 100
throws is sqrt(100) =10 times the standard deviation for one throw. We
get SD =10(0.8975) =8.975 for Dice Game 1 and 10(2.6087) =26.087 for
Dice Game 2.

Now we let 10 players (let "Num. of trials to run" =10) throw first 1000
times each (let "Num. of hands" =1000) and then 10,000 times each. We
do this for both games and plot the profit graphs for all 10 players:
[/quote]

[/quote]
3.1 Variance simulation for Dice Game 1[/quote]

The expected result after 1000 throws is 1000 x 0.1667 =+$166.70 . This
is the dotted straight line on the graph. We see that the results of our 10
players are distributed around the expected result, with actual results
ranging from about +$115 to +$200. The player with the largest deviation
is about $52 below expected profit.

Even if all players expect to make +$166.70 on 1000 throws, there is a

significant spread around the expected result. 6 players make more than
they should and 4 make less (this is of course a random distribution, and a
new simulation with the same input would distribute the players
differently).

If we increase the number of throws to 10,000, we get:

All 10 players have solid profit. The observed profits range from about
+$1550 to +$1950, where 10,000 x 0.1667 =+$1667 is the expected
result. We see that the spread around the expected result is less, relatively
speaking, than for the first simulation.

The player with the largest deviation is about $283 above expected profit,
while the largest deviation for the 1000 throws simulation was $52 below
expectation. But $283 relative to $1667 (283/1667 =17% deviation) is a
smaller relative deviation than $52 relative to $166.70 (52/166.7 =31%
deviation). This illustrates that the relative deviation from the expected
result decreases as the number of throws increases.

This is the effect of the long run. The more we play, the more similar our
observed results will be to the expected results. Mathematically, this
stems from the fact that our profit grows linearly with the number of
throws (EV is additive), while the standard deviation is non-additive and
grows more slowly, as the square root of the number of throws (see the
previously defined formulas).

Then we do the same simulations for Dice Game 2, with the same EV but
far higher variance and standard deviation.

3.2 Variance simulation for Dice Game 2

First the simulation for 1000 throws:

The spread of the 10 players after 1000 throws is significantly larger than
for Dice Game 1, from about $35 to $210. The largest deviation is then
about $132 below the expected profit of $166.70. We can see clearly from
the graph that it's much more randomness in the final results than what
we observed for the corresponding simulation for Dice Game 1.

Then we increase to 10,000 hands and get:

The spread is now from about +$1400 to +$2000, so the largest deviation
is about $333 above the expected result. The corresponding spread for
Dice Game 1 was from about $1550 to $1950, with the largest deviation
about $283 over the expected result. The effect of the larger variance in
 Dice Game 1 is still significant, even after 10,000 throws.

3.3 Conclusion from variance simulations for

dice games
The simulations we have done here with exactly known EVs and standard
deviations for two toy games have given us a taste of things to come in
future articles. We observe that games where we have the same win rate
can have very different profit curves, and it's the difference in variance
that causes this.

In future articles we'll look at win rate/EV and variance/standard deviation

for poker. These quantities are far more complicated to calculate in real
poker games than in our simple toy games, and in practice they can't be
solved for exactly. But we can estimate them from tracker software (such
as HoldemManager and PokerTracker) and the estimates can be used for
bankroll estimates.

Our next task is to learn how to use win rate and standard deviation for
poker games to estimate bankroll requirements. We'll use the risk-of-ruin
formula for this, and that will be the topic for Part 3. But before we do that,
we'll spend Part 2 investigating how our definitions of EV, variance and
standard deviation work in a simple poker toy game (the AKQ game).

4. Summary
We have started our discussion of principles for rational bankroll
management. In this article we have defined the problem of bankroll
management and gotten a basic understanding of win rate/EV and
variance/standard deviation from exactly solvable toy games.

In Part 2 we'll discuss how our definitions of win rate, variance and
standard deviation can be applied to poker games. We'll use a simple
poker toy game (the AKQ game over 1/2 street with fixed-limit betting) to
illustrate this.

Good luck!
Bugs

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