I love the game of poker, with all of the challenges, opportunities, and fun that it presents. I also find poker wisdom carries over instructively to other areas. Today’s article relates poker concepts to economics and technology in order to question whether the worst predictions by famous economist Paul Krugman expose weaknesses in the fabric of our society.
Poker Profit Centres
My favourite forms of poker are the Limit games. I prefer Limit over No Limit because the game is quicker. No Limit games can be tiresome because players take a long time to act. The reason for these delays is in part that every decision seems very important since you might end up risking all of your chips by going ‘all-in’. The irony is that in the long run, you won’t win or lose much of anything based on how you deal with the decisions that feel the toughest.
A tough decision is by nature a close decision. If you feel one decision just might be 1% better than another decision, it’s very difficult to be certain. Is it really 1% better? Could it actually be 1% worse? Close decisions come up all the time in poker and real life, but it remains difficult for our human brains to significantly improve decision making here.
The reason computers are now so much better than humans at games like chess, go, and 1 on 1 Holdem poker, is because using deep math and memory, they’re able to refine what would appear to us to be an impossibly close 50/50 decision into clear 51/49.
The Real Test
In poker, players don’t lose much if they regularly raise in situations where folding would have technically been 1% better. Poor results stem from plays which are much worse than the ones your opponents will make when faced with a similar situation in reverse.
Imagine a poker hand where you’d technically need 35% equity to make a profitable call. Calling here with a hand that has only 2% equity is an extremely bad play. If you always call in that type of situation, and your opponent never does, then in the long run they’re essentially gaining a 33% equity spread. That’s a massive imbalance and a player who is regularly on the wrong end of such exchanges will lose a ton of money.
Yet simply being ‘wrong’ or ‘right’ doesn’t count for much at all (even though many players will waste a ton of time and energy thinking until they finally feel one way or the other). Results are governed by the magnitude of your best and worst plays.
Going a bit further, say a computer analysis shows that raising a particular poker hand will net a theoretical profit of $10 in the long run, while folding will net a loss of $10. The choice is crystal clear. You have one correct play (raise) and one wrong play (fold). Now assume the computer also shows that calling (instead of raising or folding) will net a loss of $1,000. Folding is still technically wrong, but calling is 100 times worse! In practical terms this translates to folding being essentially a fine play, and to calling being a disaster. That’s why the real challenge is just keeping an even keel and not doing anything dumb.
Asymmetries In Poker And Life
We face many tough decisions in life where multiple choices appear close to equivalent in terms of their expected outcomes. The good news is that these decisions don’t matter much.
Think about it. Why waste resources on so-called ‘tough decisions’ when after a reasonable period of time you still can’t show why one choice has more merit than the other?
We should be asking ourselves: How can we improve our ability to detect outsized opportunities or disasters? Unfortunately, you can’t conveniently better these skills in real time whenever you happen to be facing a decision. Improving our abilities here probably requires constantly seeking out and reflecting on useful principles and data in order to gradually refine our decision-making with the specific goal of unhampered compounding growth. Meanwhile, decisions at game speed in a poker game don’t present any real opportunity to compound. This is why in poker, as long as we’re focused, we can act very quickly with the full confidence that we’re playing our best. Real world decisions benefit much more from sweeping analyses and deeper thinking.
How Wrong Was Paul Krugman?
When making a prediction, you’ll generally end up being either wrong or right. But there’s a lot more to the story than a binary outcome. Small mistakes are often inconsequential. Being very wrong can be cataclysmic.
Paul Krugman’s take on the internet from 1998 is perhaps the worst prediction of all time:
Many people might be dismissive and think: “Big deal. He was wrong. People make mistakes,” without appreciating the magnitude of the errors, and what Krugman’s continued presence in the media says about society.
This is a Nobel Prize winner who is supposed to be one the world’s very top economists. He’s specifically the person that governments, large companies, and markets overall rely on for understanding on where the economy may be going. And he didn’t just say that the web was overblown. He completely discounted it!
It’s a massive mistake that surely hurt millions of people who took his highly credible, widely circulated, and radically incorrect statements to heart.
Here’s a 2020 graph showing clearly how internet companies have become the biggest companies in the world:
The shift to a web economy is still accelerating. Microsoft, Apple, Alphabet, Amazon, Meta have a combined market capitalization of $9.9 trillion as of this writing.
Crypto and web3 have also independently achieved a market cap of over $2.5 trillion! Meanwhile, for the past decade Paul Krugman has been repeatedly publishing belligerent comments against crypto in large publications such as the The New York Times and The Independent, massively compounding his errors.
Here are a few quotes (of many):
- “Bitcoin isn’t a convenient medium of exchange”
- “Law-abiding people don’t use crypto”
- “Bitcoin is evil…a cult”
- “Crypto plays almost no role in normal economic activity”
The Krugman Effect
I don’t mean to pick solely on Paul Krugman. Plenty of highly regarded people have gotten things horribly wrong throughout history. Ultimately, my point is that it’s high time mistakes of this nature, which can materially impact the pace of innovation, inflation, move the geopolitical needle, and potentially cost people their livelihoods, are taken more seriously.
It’s forgivable to be wrong. It should not be so forgivable to be extremely wrong over and over again on the most important concerns of our age.
The fact that someone who has been so wrong as Paul Krugman has a Nobel Prize in Economic Sciences also undermines the idea that this prize has value at all. Pulling at threads like these reveals how plausible it is that our trusted institutions may in fact be steering humanity in a completely wrong direction.
I have a new term for the feature of our society which allows someone to be repeatedly, dangerously, and very publicly wrong on critical topics, and yet somehow maintain their reputation and be lauded as a global expert: The Krugman Effect. Hopefully this effect will be lessened as we build new media platforms on web3 which better prioritize accountability.