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“Your scientists were so preoccupied with whether or not they could that they didn’t stop to think if they should.”
Ian Malcolm
“You can buy it. You can’t afford it.”
I said that to my partner years ago, mid-argument, over a car I thought they shouldn’t get.
Their case was simple: I can afford it. And strictly speaking, they could. The money was there. So was a big monthly payment.
I use the same argument against myself now.
Each day I run a batch of experiments, things I don’t yet know will work. I count the ones I finish.
My floor is the minimum number of experiments I hold myself to on the worst day.
Do more than that on a good day and the extra counts toward tomorrow, so a good week puts me days ahead of schedule. Those days in hand are my habit bank.
When the bank has days to spare, a voice says raise the floor: you can clearly afford more. Think how much faster you can move.
The bank proves I can hold my current floor.
It says little about whether I can hold a higher number tomorrow.
Poker players face the same question.
Your bankroll grows until it’s big enough for the next level of stakes. The pros test first.
The rule they repeat: prove you can consistently beat the stakes you’re at before you move up.
Move up merely because the bankroll allows it and you bleed it back down.
The bankroll gets you into the bigger game. Beating the players there is a separate question.
Chris Ferguson was already a World Series of Poker Main Event champion when he started a new bankroll from nothing.
Starting from free online tournaments in 2006, the game theorist set out to run zero dollars up to ten thousand. He got there in September of 2007. His two rules:
- Never sit down with more than 5 percent of the bankroll on the table.
- Leave the game once more than 10 percent of it is sitting in front of you.
Ferguson held a world title and still obeyed his own two rules at each table.
An edge is a real advantage, the skill that wins money over the long run. Serious players break “consistently beating” into four tests you can run on a habit too: how big your edge is (margin), how much you’ve measured (sample), what the game takes off the top (rake) and how wildly results swing (variance). The four tests together are what I call the Edge Check.
1) Margin.
The big blind is the forced bet that sets a table’s stakes. Players measure winning in big blinds won per 100 hands. Win $100 over 100 hands at a table with a $10 big blind and you’ve won 10 big blinds per 100.
A long-term winner usually wins 1 to 3 big blinds per 100 hands. The best players at small stakes win 5 to 10 big blinds per 100 hands.
Beating a level means winning with enough room that a bad stretch is survivable.
Long-Term Capital Management had two Nobel laureates at the partner table and a genuine edge.
The partners borrowed about $25 for each dollar of their own, which left almost no room for a bad stretch. One bad four-month stretch in 1998 erased 4.6 billion dollars. 14 banks put up 3.6 billion more to take it over.
In a habit, the margin is the cushion between your ordinary day and your floor.
If your floor is 20 push-ups and you average 21, you hold a 5 percent cushion, one rough week from breakeven.
If you average 30, you hold a 50 percent cushion. Raise the floor to 25 and you still clear it on an ordinary day.
2) Sample.
One good poker session is noise. A poker player wants 50,000 hands before a win rate means anything and closer to 200,000 before they trust it.
The casino knows its rate exactly. It deals millions of hands.
A first-night blackjack winner walks out sure they’re good at the game on a sample of one night.
In a habit, one heroic Saturday counts for about as much as a single poker hand. Raise your floor, the minimum you hold on your worst day, only after weeks of ordinary days beat it, with the bad days counted.
3) Rake.
The house takes a cut of each pot. Online that cut runs about 5 percent and stops at a fixed dollar amount. Live it runs closer to 10 percent.
A typical winner wins 1 to 3 big blinds per 100 hands. At the smallest online stakes, the house’s cut adds up to 8 to 10 big blinds per 100 hands.
A player can beat each opponent at the table and still lose money.
Pros count their win rate after rake.
Barber and Odean tracked 66,465 brokerage households through the 1990s and found the same cut at work: the most active traders earned 11.4 percent a year while the market returned 17.9. The stock picks were roughly average. The trading costs did the damage.
In a habit, the rake is the overhead you pay before a rep counts.
The drive, the setup, the cleanup, the recovery.
An hour of weight training at the gym costs you 40 more minutes driving there and back. That drive is 40 of the 100 minutes the habit costs you. Raise your floor from one gym session a day to two and you pay the drive twice. A habit you can run from your living room adds almost nothing on top of the work itself.
Count what a habit gives you after overhead.
4) Variance.
A real winner is a player whose skill wins money over the long run. The skill might earn 2 big blinds per 100 hands while ordinary luck swings results by about 100 big blinds. Play 100,000 hands and that much luck still leaves a genuine winner behind about one time in four.
50,000 hands is when a rate starts to mean something. More hands shrink the luck.
Some luck survives at any number of hands.
In 1999, Berkshire Hathaway’s book value grew 0.5 percent while the S&P 500 returned 21 percent. Barron’s ran a December cover story titled “What’s Wrong, Warren?”. Buffett called it the worst absolute performance of his tenure.
The dot-com crash arrived the next year and Buffett’s caution turned out to be right.
A Baird study of 155 funds that beat their benchmark over a full decade found 97 percent spent at least one three-year stretch behind it.
In a habit, variance is bad days arriving in clusters. A bad month comes even while the habit is genuinely working, so a raised floor, a higher daily minimum, has to survive one. Before raising, ask whether you’d hold the new floor through a stretch where each rep runs over budget.
Margin, sample, rake, variance. Pass all four and you’re ready for the next level.
Even then, passing the Edge Check is still not permission to raise the floor.
The Edge Check answers one question: Can I move up?
A higher floor, a bigger daily minimum, drains the habit bank faster and costs more willpower each day. We rarely ask where that willpower should go. Spend it at the bottleneck: the one constraint holding you back right now.
A morning run and a daily marketing block can both pass the Edge Check. Raising the run is still the wrong raise.
Each unit of willpower the run burns was needed on marketing, the habit where you’re actually stuck.
The Edge Check answers Can I? The bottleneck answers Should I?
♠️
What can you “afford” to do that you shouldn’t do?
