Step 5. Probability

Texas Hold’em and investing both present you with uncertainty and limited information about each situation that you analyse. In Texas Hold’em you don’t know what cards will come next or what exact cards your opponents hold. In investing you don’t know how a security will perform after you have purchased it or the condition of its internal business capabilities before you invest. In futures trading you don’t know the intentions (if any) of the market participant that has taken the other side of your trade.

Fortunately for Texas Hold’em players and investors there is a rational method for dealing with the problem of uncertainty – using probability theory.

Probability theory, which has become the bedrock of decision-making for Texas Hold’em players and investors alike, has a fascinating background. It came to exist because of a problem that frustrated gamblers in the middle of the 17th century in France. Chevalier de Mere, a keen gambler, posed the so-called “problem of points” question to Blaise Pascal, one of the greatest mathematicians of all time. The question was as follows:

Two people, A and B, agree to play a series of fair games until one person has won six games. They each have wagered the same amount of money, the intention being that the winner will be awarded the entire pot. But suppose, for whatever reason, the series is prematurely terminated, at which point A has won five games and B three. How should the stakes be divided?

Pascal shared this problem with another great mathematician – Pierre Fermat – and their letters about the problem formed the basis for modern probability theory.