Incentives in Backing Deals

September 2020

The player and backer each have unique incentives that guide their behavior. They are both trying to make money, but they can influence that outcome in different ways.

This essay will explore some of the perverse incentives that act on players and backers. It's helpful to keep these in mind so you can work around them and build a mutually beneficial partnership.

Looking above at Figure 1, the size of the whole circle represents the profit the player has won at the tables. The example on the left shows a player that's won $5k total, and on the right a player that's won $10k. Doubling the profit doubles the size of the circle.

The player will keep some percentage of these winnings (half in this example), and the backer gets the rest. Problems arise when either party tries to maximize the size of their share of the pie instead of increasing the size of the whole.

The player can profit at the expense of the backer by risk seeking. The backer can profit at the expense of the player by profit handicapping.

Risk Seeking:

If you are a player in low or zero makeup, your incentives are the same as the backer. You just want to play solid poker and try to get into profit. You care about losses because they move you materially further away from the goal of getting a profit chop.

But if you get into deep makeup - the kind that takes months to dig out of - things change.

Losses become less painful, because you are already so far from being in profit. You don't actually pay a price for any losses, so you become incentivized to play higher stakes, or a more volatile style.

Either you win big and get a profit chop, or lose more and get dropped from the deal, leaving the backer holding the bag. Because the backer pays for all losses, you are able to trade risk and volatility for personal profit.

It's important to note that you won't necessarily be aware of the forces that guide your behavior in this scenario. These incentives can act on us unconsciously. It's not always the case that a risk seeking player has planned out in advance to increase their variance to try and get back to even. It could be that it's too painful to face the reality of grinding $3/$5 for the next 5 months, so you convince yourself that you can win at $5/10 instead.

Profit Handicapping:

If backing deals never ended, your incentives as a backer would always be aligned with the player. Help them make as much money at the tables as possible, which results in your cut being maximized as well.

But backing deals do end. So if you were to act in pure self interest as a backer, you would seek to maximize the profit your player makes, but not past the point where they earn enough to become self sufficient.

You want them to do well - but not too well.

You could try a number of things to handicap the amount of profit they make to achieve this goal. You could encourage them to play stakes that are too low, or to play low volume. You could refrain from pointing out mental game leaks that are holding them back, or encourage reckless spending that leaves them more dependent on you.

Just like a player that seeks risk unconsciously, backers can be unconsciously biased towards maintaining the status quo.

If you backed a player that was a consistent winner at $3/$5 but wanted to take a shot at $5/$10, what would the risk/reward analysis look like? If he takes a shot and loses 10 buyins, that sets you back quite a bit. If he ends up winning instead - that's great in the short term. But if he becomes a regular in that game and increases his yearly income from $50k to $85k, he might no longer need you. That might look like a lose/lose scenario.

What to Aim for Instead:

Instead of thinking selfishly, you should always keep the needs of your partner in mind. Do what is best for the team, not for yourself.

As a backer, you should always approach a deal as temporary. Your goal is to help the player make as much money for themselves as possible. Which means trying to get their percentage of the profit cut to 100% by preparing them to go on their own.

As a player, you should try to win as much as possible while using the right amount of risk. You need to take losses seriously. It's not your money being lost, but it is your responsibility to put in the hours to win it back and that is something just as valuable. You must still take feedback from downswings. They may be a sign you need to move down even though your bankroll is not actually in danger. You should take as much care in winning back makeup as you do in building up profit chops.

If you have thoughts on this essay, please leave them here.