Hold ‘Em or Fold ‘Em?

Hold ‘Em or Fold ‘Em?

by Ryan P. O'Connor

An estimated 60 million Americans play poker. Poker is fundamentally a game of skill, not chance. Of course, luck is certainly involved—especially on any given hand—but over time, over the course of many games, skills matter most. Poker and patents have so much in common that useful comparisons can be made between the two “games.”

Texas Hold ‘Em serves as a particularly apt model of the game of patents. There are some basic strategies that apply. One is to practice value maximization at all times during the game. Always think in terms of expected value (payout) in poker, similar to net-present value (NPV) in business. Just as NPV needs to be adjusted for risk and opportunity costs, think about what you need to put at stake versus what you can possibly win—and the likelihood of actually winning. Expected value is basically the pot size multiplied by your odds. If the pot is $100 and you have a 10% chance of hitting your straight, you might not want to match a $50 bet since it far exceeds your expected value of $10. A lot of players fall victim to the sunk-cost fallacy, saying something like “I’ve already invested so much, I can’t fold now.” They just can’t stand the thought of throwing so much money into the pot, only to give away any chance of possibly winning. However, knowing when to fold your cards is one of the most important abilities in poker.

In business, you need to know when to “fold” your patent filings, i.e., let them go abandoned. You cannot take back any of your bets, but you can save money going forward if you’re unlikely to win the pot. On the other hand, you need to bet (venture) chips to win (enhance revenue). Going “all in,” or betting all your chips, is like directing all corporate assets towards one major patent portfolio. It is risky but can also pay off very well.

At every single point in a game of poker, you should carry out some type of decision-tree analysis involving (1) your cards, (2) the community cards (shared by all players), (3) the size of your chip stack, (4) the pot size, (5) the odds governing the hand, and (6) the strategies of the other players still in the hand. Patenting your technologies is no different:

  1. Your cards are your patents and your competitive advantages in the market.

  2. The community cards represent the overall industry your company is playing in — i.e., the rules that preside over all competing companies in your space.

  3. Your chip stack of course epitomizes your available investment capital for business opportunities enabled by your patents.

  4. The pot size is the size of the market for your patented product or process. Note that it is often easier to win small pots than big pots, because big pots attract more players willing to invest (fight for IP). In big pots, there are more ways to lose, and the temptation to go after that large pot (market) can mean you go broke.

  5. The odds for the hand are important, and it’s good to have a sense for the mathematics and how your chances evolve throughout the hand. In poker, a feel for the odds comes with practice. Likewise with patents: companies that are successful (or not) in a particular industry acquire knowledge over time that helps them assess probabilities of success for new, but related, inventions.

  6. Finally, the strategies of other players cannot be overlooked. In fact, one definition of a “game” is a set of activities in which the strategy of player A must depend on the actions of all other players. Think of any sport—obviously players react and change strategies mid-course, to avoid a tackle or to break free for a goal. A single, fixed strategy will usually not work. You need to get to know your competition and what motivates them to make decisions. How will they react to something you might do? A great example is the poker bluff. When you bluff, you place a bet with a poor hand and hope nobody calls you. If everyone else folds, you win the pot regardless of the quality of your hand. (Every hand’s a winner. And every hand’s a loser!) The frequency of bluffing in poker has to depend on the strategies of other players: some will call bluffs more than others, just to “keep you honest” or maybe just to keep you guessing. Good poker players modify their strategy dynamically in response to what everyone else tends to do. Even better poker players alter their strategy in anticipation of what other players will probably do. Competitive analysis of patents is virtually identical. Companies bluff by announcing new technologies and filing patent applications, with the hope that smaller players exit (fold). Watch for “tells” of others (and yourself!). Don’t give away what you are holding or how much you might bet. Similarly, be careful not to divulge critical IP which can happen in many ways—and sometimes neither side even knows it happened until later.

There are many other analogies: optimal betting and raising (investment theory with capital constraints), folding, risk tolerance, distribution of chips at the table, betting position, cheating, and so on. Space is running out, so I’ll conclude with a final word: the best player does not always win. Here is the luck component. Sometimes, in poker and in patents, despite the best efforts of all involved — and the high degree of their skill/knowledge — simple bad luck leads to failure. Nevertheless, we believe that poker and patents are both about 80% skill and 20% luck.