A few weeks ago, I questioned the FBI's decision to shut down a handful of online poker websites. The FBI correctly interpreted the law -- but that law didn't make any sense. Why ban online gambling when its negative effects are demonstrably less harmful than other perfectly legal evils such as obesity, smoking, or medical bills?
More importantly, this debate is about which businesses should and shouldn't be regulated. I believe that things need regulation when they can cause widespread collateral damage on innocent bystanders. Most courts have taken that test a step further, judging the legality of a game based on whether it relies on skill or luck. Skill is good. It's capitalism. Luck is bad. It ruins people -- or so the thought goes. The current ban on online poker rests largely on this skill-vs.-luck premise.
A new paper by Thomas Miles and Steven Levitt (the latter of Freakonomics fame) challenges it. The two economists used data from the 32,000 players who participated in last year's World Series of Poker to show, convincingly, that successful poker players are indeed skillful folks.
Here's a simplified breakdown of how the study worked. Before the tournaments began, Miles and Levitt identified a list of players as "highly skilled," based on previous years' tournament winnings and rankings drawn from poker trade magazines. After the tournaments ended, they calculated how those highly skilled players fared. The result:
Our empirical findings suggest a substantial role for skill in poker over the time horizon examined. The 720 players identified a priori as being high-skilled generate an average ROI [return on investment] of 30.5 percent in the 2010 WSOP, reaping an average profit of over $1,200 per player per event. In contrast, all other players obtain an average ROI of -15.6 percent, implying a per event loss of over $400. The observed differences in ROIs are highly statistically significant and far larger in magnitude than those observed in financial markets where fees charged by the money managers viewed as being most talented can run as high as three percent of assets under management and thirty percent of annual returns.
As these findings show, gambling certainly isn't safe. Many players -- most -- lose money. But this is true of nearly every aspect of money and business. Most small businesses fail. And while luck isn't completely absent in poker, you'll also find a degree of luck in almost any successful business. Poker isn't vastly different from other parts of the economy, including, as the Miles and Levitt point out, investment management.
So why the ban? I think, and hope, it'll end before long -- and that's coming from someone who's never sat at a table. I suspect that poker elicits fear from politicians, and much of the general public, because nothing innovative comes out of it, even if skill is involved. There's no research and development. No patents. No pioneering. Nothing involved that most of us associate with good, American business. Just money changing hands.
But this, too, isn't unique to poker. Take Wall Street. Last week, Berkshire Hathaway (NYSE: BRK-B ) vice-chairman Charlie Munger opined that the financial industry should be downsized by at least 80%. Why? Most of it is just money sliding back and forth from the dumb to the smart.
Similarly, billionaire hedge fund manager Ken Griffin quipped that "bilateral derivatives should all come with a label that says 'We seek to profit from your ignorance.'" In what might be the understatement of the year, Citigroup (NYSE: C ) and Goldman Sachs (NYSE: GS ) have diverted more money from the dumb to the smart than Wynn Resorts (Nasdaq: WYNN ) could ever dream of.
That, to me, makes the banning of online poker odd: the inconsistency of it all. If we legalize one skill-based skimming arrangement, why not them all?
You tell me.
Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Follow him on Twitter @TMFHousel. Berkshire Hathaway is a Motley Fool Inside Value recommendation. Berkshire Hathaway is a Motley Fool Stock Advisor selection. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.