Explain it to me like I am 5: I ain’t got no time for this
I ain’t got no time for this. Explain it to me like I am 5
Most finance textbooks define Equity as the difference between the value of an ‘asset’, minus the value of all ‘liabilities’. For example, say John borrows $80,000 from the bank to buy a house worth $100,000. This means that John will pay the remaining $20,000 out of his own pocket. Although his new house (asset) is valued at $100,000, he needs to subtract the $80,000 he owes to the bank (liability). The rest of the money ($20,000) is his Equity and it represents the true monetary value of the house to him. The best way to visualize this would be with a “pie” chart like the following:
In poker we have something similar, although instead of a “pie” we have the pot. More specifically:
Equity is the portion of the pot that a player deserves, based on the strength of their hand
Let’s take a look at a simple example to solidify our understanding.
After a few raises and re-raises, Alice holding AA goes all-in against Bob’s KK. They both started with about $500 in their stack, so the pot is now $1,000.
What is Alice’s Equity?
To answer this, we would need to know how often Alice is expected to win the pot. A quick equilab calculation shows that Alice is expected to win about 82% of the time. This means that she (mathematically) deserves 82% of the pot or $820.
What is Bob’s Equity?
Following the same line of reasoning, Bob is expected to win 18% of the time, so his equity should be $180. Not surprisingly, the two equities add up to the size of the pot, namely:
The takeaway here is:
A pie always equals the sum of its slices!