Opportunity Cost

Economics, Strategy

August 11, 2007

Here’s a concept from economics that should be near and dear to the heart of ever poker player – opportunity cost.

The concept is simple: one of the costs of doing anything is that you’re NOT doing something else instead. Let’s say a player with a $100/hour expectation is deciding between two choices: he can either play two hours of poker, or go to the theater and watch a movie. The theater charges $7.50 to watch the movie. But the cost of watching the movie is NOT $7.50. It’s $207.50 – that is the difference between the amount of money the player expects to have in his wallet if he plays (+$200) vs. if he watches the movie (-$7.50).

Issues of opportunity cost arise all the time in gambling and poker. For example, in limit poker when faced with a decision to call, raise, or fold, it’s often the case that calling and raising both have positive expectation. But usually one has a higher positive expectation than the other. Without the concept of opportunity cost, it might appear that ALL positive expectation decisions are good ones, ie. that calling and raising are both a good idea. But these options are mutually exclusive, so opportunity cost reasoning applies. In a situation like this, you will find that only one option has a positive expectation when opportunity cost is taken into account, and that one is the option you should take.

On a larger scale, game selection is also an issue of opportunity cost. You may be in game A and making money, but if there’s a game B available where you have a higher expectation, you’re in fact LOSING money be playing game A instead. This may seem counterintuitive, since you may well get positive results in game A and it will appear you made money. But in reality you’re worse off than you would have been if you had instead chosen game B. I’ll talk more about opportunity cost and game selection in a future article.

This leads to a key point about opportunity costs: they have exactly the same size effect on your wallet as “real” costs, but they’re much harder to see. In order to spot the opportunity costs of a decision, you need to know what the alternatives are, and have an accurate expectation for each of them. In the absence of this information, it’s easy to simply look for one positive expectation option, and then select it. if it’s not the best option, you can be incurring a large cost without ever realizing it.

Like this article? Subscribe to the CardSharp RSS Feed

Comments are closed.