LAS VEGAS ( TheStreet) -- Las Vegas and Wall Street have a lot in common. That isn't always such a bad thing. A casino is like a stock exchange. Cash-backed securities and stocks are similar to monetized gambling chips. Each buy-in at a poker table is akin to a securities purchase. Stock-market fluctuations are like hot and cold streaks. Risk management and a careful re-investment of wins or earnings are vital. "Gambling lies at the heart of economic ideas and institutions, no matter how uncomfortable many people in the financial industry are with that idea," Aaron Brown writes in "The Poker Face of Wall Street," which argues that the card game can be used as a tool for learning how to evaluate and embrace financial risk. "Not surprisingly, the game most like the financial markets -- poker -- is hugely popular with financial professionals." While many who describe financial markets as "gambling" do so in a pejorative way, understanding the winning ways of both cards and stocks -- how to manage risk and maximize reasonable returns -- can be beneficial. Goldman Sachs ( GS), the most profitable investment bank, makes most of its money by speculating where the securities markets are headed. The New York-based bank's FICC unit, which stands for fixed income, currency and commodities, takes bets from clients and charges a fee, and also places wagers with its own money. A key metric is value-at-risk, the sum a bank thinks it could lose from trading in a single day. Goldman's was $208 million last quarter, more than its main rivals, which include Morgan Stanley ( MS) and JPMorgan ( JPM).
"At a basic level, what poker players do isn't entirely different from what Wall Street analysts do," says poker pro Phil Gordon, whose live tournament winnings totaled $1.7 million through last year. "I don't approach poker as gambling. I don't think I've ever 'gambled' a day in my life. How I approach the game is as strategic investing." As a younger man, Gordon, who holds a degree in computer science, was once prepared to leave a job at Lockheed Martin's ( LMT) artificial intelligence research center for life as a professional poker player. Three colleagues talked him out of it, pitching him on a different sort of gamble: being the first employee, as a software architect, for a start-up they would soon launch. The bet paid off. Three years later, in 1997, Cisco Systems ( CSCO) acquired that company, Palo Alto, Calif.-based NetSys Technologies, for $95 million in stock and cash. Gordon then resumed his postponed career as a poker player. Building on several final table appearances at the World Series of Poker, Gordon also has been a commentator for Bravo network's "Celebrity Poker Showdown" and offered analysis for ESPN. He has written three popular books on poker, released an instructional DVD and even acted (as himself) in the poker-centric movie "The Grand." During the now-waning poker boom of the past few years, Gordon was frequently hired to be a corporate speaker, telling employees at such companies as IBM ( IBM), Charles Schwab ( SCHW) and Google ( GOOG) about his experiences and how poker skills can translate to business endeavors.
Along with risk management, Gordon speaks of setting reasonable expectations. "If I put $100 in the pot, I'm expecting $ 110 back or $120 back," he says. "I am certainly going to lose my fair share of hands, but I know if I keep putting my money in with positive expectations over the course of the long term, I'm going to come out a winner. If you poll any number of the top poker players and ask them what the most important thing to long-term success is, a lot of them are going to say 'bankroll management.' What we saw with the financial-system collapse are these guys who placed bets that were way too large for their bankroll, and they paid the ultimate price with their firms." Professional poker player Fredrik Paulsson also delved into the topic of risk in a blog post. "Many poker players are active investors of their capital," he wrote. "A lot of us are simply not satisfied with letting large chunks of cash sit in low-interest bank accounts when there are better options available. And, frankly, I think poker players are well-equipped to understand and deal with the stock market, having already learned lessons that other people venturing into that territory have yet to come across. We may be used to daily laying 10% of our bankroll on the line and we may be used to seeing a 20% increase in capital in a short period of time. At the stock market, such an increase usually takes more than a year for even a very skilled investor. We may be impatient and, therefore, we risk taking some of our gambling gene to the investment arena."
Uniting the worlds of finance and card playing is a mathematical formula known as risk of ruin. It's used by investors and gamblers to crunch how their success and "edge" relates to their ability to walk away a winner. "It will tell you the biggest bets that you should be willing to make," Gordon says. "If you consistently bet larger than your bankroll, there is an extremely significant chance of going broke. The big problem I found while following the financial crisis was that people overestimated their expectations and, thus, made steps that were much bigger than they could actually afford to make." There may be similarities, but Gordon, despite his success, is quick to recommend a career in business as preferable to one hunched over green felt. "We know that only about 5% of people who play poker on a more-than-casual basis will end up winning long term," he says. "I think you've got a better chance on Wall Street just throwing darts at a dart board." -- Reported by Joe Mont in Boston.