A very important concept that isn’t only relevant at the poker table is the risk reward ratio. Every insurance agent and every equity trader will heard of this concept before. But it’s not only important for certain jobs but also in everyday life. Unfortunately only a few people are aware of that and also only a few poker players calculate their pot odds seriously.

What are pot odds?
Pot odds are nothing else than a risk and reward ratio. Let’s assume you have to put in 100 to win 500. Then this ratio is 5:1. The possible win is five times the amount you have to risk – not a bad ratio. But if you have to risk 500 to win 100 this ratio is reversed and not really good.
Pot odds is the ratio of the amount you have to risk and the amount of the pot. If there are 500 in the pot on the flop and your opponent bets 100 you have to call 100 to proceed. After your opponent’s bet there are 600 in the pot (500 + 100) and you have to pay 100. The ratio is 600:100 or short 6:1.

Pot odds and decision making
As we know now how to calculate pot odds your focus should be to make correct decision based on these pot odds. Pot odds tell you how high your winning chances must be to play profitable. If you think your chances are 3:1 (25 in percent), the pot odds must be at least 3:1 otherwise you’ll lose in the long run.
To make things clear a short example to calculate your expected vaule: You have to call 100 to win 400 and your winning chances are 25 %: 0,25 x 400 + 0,75 x (-100) = + 25
So if your winning chances stay at 25 % and you get 4:1 pot odds you make a profit of 25.
If we now decrease your pot odds to 2:1 you’ll lose 50 on every move on average:
0,25 x 400 + 0,75 x (-200) = - 50
You see that a decrease in pot odds causes a positive expected value into a negative. That’s the whole secret behind pot odds. Pay attention to them and compare them to your winning chances to make your decisions.