Investing in poker and gambling on the stock market

He's just folded

There’s nothing like a research paper by Steven Levitt (of Freakonomics fame) to make you stop and think. This time he’s weighed in to the debate on whether poker is a game of chance or a game of skill.

As so often happens, even though this is a rather important legal question (given bans and restrictions on gambling in many countries) the debate has usually been anecdotal or moralising. But it is actually quite easy to test whether there is a substantial element of skill in poker: if it is merely a game of chance, then people who do well in one tournament will be no more likely to do well in another than anyone else. (After all, if you’ve won the lottery once it doesn’t make you more likely to win in the future than any other ticketholder.)

The results seem clear: in the 2010 World Series of Poker the “high-skilled” minority, identified by their past successes in other tournaments, made a return on investment of 30.5%. The rest made a loss of 15.6% on average.

Whether this remains enough to convince judges that poker is not gambling is another question. Recently the Swedish Supreme Court had to rule on whether Texas Hold’em poker was a game of chance or not in the context of a poker tournament. They ruled that it was not “predominantly” a game of chance, though it was not a pure game of skill (like bridge or chess) either.

This means that this form of poker is not banned by Swedish gambling law (dobblerilagen), which requires that the outcome of a game be wholly or predominantly decided by chance for it to be classified as gambling. However, poker tournaments do fall under the regulation of the lottery law (under Swedish law “lottery” doesn’t just mean a lottery, but describes any game for money), so they require a licence.

Away from the world of poker, Mr Levitt and his co-author Thomas Miles leave us with something more to ponder:

A tale of two lotteries

The economists say that similar tests of persistence in returns have also been used to detect whether mutual-fund managers have genuine expertise. In contrast to the case of poker, they point out, those tests have tended to find “little evidence of skill in this domain”.

That means that you can’t reliably choose a fund manager who will outperform the market, but you can choose a poker player who will outperform. Perhaps it’s time to start demanding fund managers and investment advisors get lottery licences?

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Photo credits: NYSE stock market trader by artemuestra on Flickr, republished under the CC BY-NC-SA 2.0 licence.
Lotto advert and newspaper billboard by jordi.martorell on Flickr, republished under the CC BY-NC-ND 2.0 licence.

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One Response to Investing in poker and gambling on the stock market

  1. Pingback: Weekend reading: Spin the wheel of satire

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