Phil Hellmuth's nickname, "Poker Brat," is well-earned. How did a man known for rants and tirades become one of the world's greatest poker players? In part by getting very good at managing risk, which often means managing his emotions. In her new book An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk (Portfolio, an imprint of Penguin Publishing Group, Penguin Random House LLC, 2019), economist Allison Schrager examines how Hellmuth controls his emotions to make better decisions in high-stakes situations. The following is an edited excerpt.

To be successful at poker, or in any risky situation, you must not get too emotional or aggressive when losing. You might develop rules for yourself to avoid this behavior; for example, promise yourself that you'll walk away from a bet when you're down $100. 

You can also hone the skills you need so that when it really matters you stay calm and wait for the right hand. Phil Hellmuth, notorious for his meltdowns, has managed to become a poker champion. Here are the strategies he uses to keep his emotions in check to make the best decisions possible to increase the odds of a winning hand.

 inline image

1. Never have too much of your own money at stake.

Hellmuth has a firm rule that whenever he goes into a tournament, his own personal stake never exceeds $10,000. He learned the hard way in his twenties, when he would begin with good intentions of limiting his bankroll (his budget for gambling) but then lose and end up betting more than he planned on, thinking he could win his way back.

Despite these bad habits, Hellmuth had gotten rich by the time he was in his thirties. He started to notice other players his age hit a wall--they had the skills to win but were overconfident and lost overall. Hellmuth resolved that once his net worth fell to $1 million, he'd limit the amount he could possibly lose. From then on, he went into large tournaments "staked" (when outside investors put up money for you to play and then get a share of your winnings).

Most of us do not know anyone who will subsidize our bets. But there is a lesson to learn from Hellmuth. He gives up some of his potential winnings to avoid having too much on the line that he can lose. We can all do this by tempering the risks we take, otherwise known as hedging. It might be balancing a stock portfolio with bonds or not taking a bigger salary instead of stock options at work. The principle is the same: when you have less at stake to lose, you stay more rational.

2. Eliminate extreme downside risk.

At a crucial part of the game, Hellmuth and the other player often take a break, remove their microphones, and step outside. There, they agree to split the prize money and still offer the winner some extra upside, just as he and Annie Duke did at the 2004 Tournament of Champions.

Having a guaranteed payday (win or lose), in addition to being staked to begin with, helps Hellmuth stay focused; he doesn't panic or play too aggressively, because he is not facing a big loss.

In everyday life we can follow Hellmuth's example by buying insurance. Hellmuth is essentially buying insurance on losing when he makes a side deal, because he'll get a payment if he loses and a bigger payment if he wins. We can buy insurance in case our house burns down, we are robbed, or we get in a car accident. And just like Hellmuth's strategy, it offers peace of mind because there is a smaller cost to loss.

3. Remind yourself, 'This is just one hand out of many.'

Hellmuth practices what behavioralists call broad framing: He never feels pressured to play a hand or fold, even if he's down, because he reminds himself it's just one hand out of many. He doesn't just weigh the odds of the single hand he is playing; he considers how it factors into the entire game or tournament.

Think of broad framing as playing the long game. For example, you shouldn't look at your stock portfolio too often. If you are investing for the long term, a bad day on the markets, or even a few bad months, is only a blip. It is not the time to sell your stocks. Framing an individual risky decision as part of a larger gamble will help you think clearly and avoid overreacting to temporary loss.

4. Avoid overconfidence to maintain focus.

Hellmuth is clearly proud of his success. But when it comes to poker, he embraces every opportunity to remain humble. Anything can happen in a game, no matter how skilled you are. When you are up, you can still lose it all.

I spoke to him after a series of big wins. He beat top players in big tournaments and received lots of praise, but one well-known poker player tweeted that Hellmuth was overrated. Rather than defend himself, Hellmuth asked the rival player to list forty players better than him, explaining, "Having this voice doubting me and not giving me any credit--sometimes I use energy from doubters; [it] motivates me."

Excerpted from An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk by Allison Schrager in agreement with Portfolio, an imprint of Penguin Publishing Group, a division of Penguin Random House LLC. Copyright Allison Schrager, 2019.