Poker: A Game of Skill. So Why the Ban?

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.


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  • Report this Comment On May 12, 2011, at 7:49 PM, memoandstitch wrote:

    It's funny that you use evidence from offline poker to justify online poker. (I think the tournament used in the paper, WSOP, is an offline poker) If you want to show that online poker takes skills, you need a study that looks at, well, online poker. This seems like a great abuse of academic research.

  • Report this Comment On May 12, 2011, at 9:08 PM, Sirckus wrote:

    Poker is poker whether it is offline or online. Online is simply different form of access.

    What is the difference between betting live on horses at the track and playing OTB? Both of those are legal.

  • Report this Comment On May 12, 2011, at 10:18 PM, memoandstitch wrote:

    @Sirckus

    It's not just access. It's the whole implementation. Do you believe the online poker companies physically shuffle a deck of cards? As an aside, it's extremely hard to make a computer pull out a truly random number (ask any computer scientist).

    While I'm not asserting that online poker takes no skills, a better analogy is offline poker = physical football and online poker = xbox football (online games).

  • Report this Comment On May 12, 2011, at 10:33 PM, Törleß wrote:

    @memoandtitch

    While I agree, in principle, that studies should study like, or as close to like things as possible, you are oversimplifying with your football vs xbox analogy.

    It is certainly true that there are some different skill sets in online vs offline poker, the ability to read tells, remember people, analyze body language for offline and the ability to divide concentration to many different games at once, process past actions over large time horizons, and make quick decisions for online poker. What is also true is that both forms rely on many of the same skills sets:

    Odds calculation (event, pot, implied, implied pot and improvement)

    Bet pattern and timing analysis

    Other fundamentals, like position, style, levels of thinking, putting your opponent on a hand, bet sizing, etc... all happen on both the real and digital felt. I would venture to say that the two forms of poker are significantly more similar than they are dissimilar.

    I'm not sure where your shuffling comment fits in. Which do you think is more likely, that people with extraordinary computer skills are able to compromise rated SSL systems and keep playing undetected for a long enough time period to be profitable or that one of the 10s of thousands of dealers who work at any given casino can be flipped to work with confederates.

  • Report this Comment On May 13, 2011, at 9:18 AM, zerosum79 wrote:

    Here is a study of 103million hands played online.

    http://www.pokernewsdaily.com/study-reveals-poker-is-a-game-...

    "A total of 75.7% of the hands examined as part of the study did not go to showdown. In these hands, the victor’s skill of betting managed to win the pot for them, regardless of whether they held the best hand. In the remaining 24.3% of hands, the player who held the best five cards only won 50.3% of the time. In the other 49.7% of pots, the player with the best hand folded prior to showdown."

    Basically what this means is that the overwhelming majority of the time, the cards (random factor in the game) do not determine the winner. Poker is undoubtedly a game of skill with a luck component. However the luck component does not outweigh the skill component.

  • Report this Comment On May 13, 2011, at 9:45 AM, MonkeyFish912 wrote:

    Movies make it seem otherwise, but keeping a poker face and reading others' faces is actually very small part of the game.

    If this study were done on the exact same skilled people on an online tournament, I guarantee they would also be winners overall.

    If people could figure out which cards are coming next online since it's not "truly random," your online bank account and home PC would probably be hacked right now, since they also use randomization as security.

  • Report this Comment On May 13, 2011, at 10:05 AM, bottomfisherman wrote:

    Poker is not a game of skill your headline or some faulty research nonwithstanding. As a professional chess player I laugh when I hear this comment. A card is flipped and one counts on luck for the correct card to be be flipped and win. In chess everything is above the board, while I can queen a pawn I cannot just sit there and wait for a card to be flipped or diced to be rolled to get another queen to win the game is what can happen when needing a queen in poker a game of luck and chance.

    For example I was watching a Texas Hold em tournament. They list the current odds of the two players. One had an excellent hand and his odds of winning were 82 percent, his opponent had a poor hand and were 18 percent. There was only one card in the entire deck that could save him. So he puts all his money in and they flip the last card. Lo and behold it is the one he needed. He is either psycic or very lucky. No skill was required for him to win.

    Poker is a game of chance and luck and they were justified to ban it online unless it is being played for fun.

  • Report this Comment On May 13, 2011, at 10:38 AM, jrod87 wrote:

    As an advent poker player (at least once a week) and fulltilt member I have to say. how can you prove to me that the online site dosnt use BOTS???? you caint, mainly b/c it is a non US federaly regulated web site. where as in a casino you need a license that is subject to review by a third party. online you would have no way of knowing if you are in fact playing a real person, wheather the site uses them or another (smart hacker ) player dose. and also for me poker (to be considered skillfull) would involve the abillity to read "tells", you caint do that online.

  • Report this Comment On May 13, 2011, at 10:48 AM, ross97 wrote:

    First of all, about the randomness of the deal, a live deck shuffled is not even close to random. It clumps and is nearly impossible to make it so. If someone were so inclined they could make a study of it but to what purpose I do not know. The point is can a person predict how the imperfect randomness will effect the game and in most cases the answer is no. Online is also not random but it is far closer than the average hand shuffling in a live casino. More important I know of no one who can state how they can use this information of the shuffle being non-random and effect the game. As far as online and live being different that is true. But the skill factor in both can be measured the same way. The WSOP study is very relevant in both. To disagree would be like saying a math problem solved by MIT students is not the same as the same problem solved by a Harvard student. Both schools are obviously different but the skill shown in solving the problem is valid.

  • Report this Comment On May 13, 2011, at 10:58 AM, ross97 wrote:

    To the Chess player above, I will concede that you can see the skill of a chess player much quicker than a Poker player. This does not mean poker has no skill. Poker over the course of time is 100% skill. Part of that skill is understanding probability theory and playing within your bankroll accordingly. What most do not understand is the amount of time necessary for this skill to show. It won't always show over an eight hour session or even the 160 to 300 hours a professional might put in a month but give a highly skilled player 10,000 hours against lesser skilled players and that skill will show 100% There is no actual luck in poker, just fluctuations that mathematicians understand fully. A live player can play much fewer hands than an internet player and can therefore ensure his success over a shorter period of time. Also he can play for smaller stakes, needs a smaller bankroll than a live player would need to make the same living. That is why so many internet players will not be able to transition to live. The Casinos understand this but won't argue that poker is a game of skill because of a conflict of interest. We need a professional player to open his logs to a mathematician to prove this fact.

  • Report this Comment On May 13, 2011, at 1:20 PM, dprobert wrote:

    bottomfisherman,

    If poker is not a game of skill, then how can there be professional poker players? Skill definitely plays a part, and luck does as well, but as the article indicated, better players tend to do better over time. In any given hand, you may win against the best player in the world because you happened to be dealt a superior hand. But over the course of a hundred hands, or a thousand hands, the professional player will have won more of the money. Note, I am not even saying that the pro will win more hands--the pro will win more money though, which is the ultimate goal.

  • Report this Comment On May 13, 2011, at 1:23 PM, dprobert wrote:

    Morgan Housel writes:

    Why ban online gambling when its negative effects are demonstrably less harmful than other perfectly legal evils such as obesity, smoking, or medical bills?

    I reply:

    Because obesity and smoking are not considered moral hazards, while gambling is. When our country starts framing the debate about obesity as a moral issue (to some extent I think it has with regarding to smoking--secondhand smoking in particular) then more legislative action would be forthcoming.

  • Report this Comment On May 13, 2011, at 4:34 PM, miteycasey wrote:

    Poker is simply making a wager, with the given information, on certain percentage chance of an outcome. If the pot offers me 9:46 then I'm going to call with a flush draw with one card to come(assuming the opponent will not put any more money into the pot if the flush card hits). If the pot isn't offering me those odds I'll fold.

    Where is that gambling?

    It's just like saying "Apple is at $350 today. Will it go up or down over the period of time I'm looking to invest". If you don't know then it's best to fold and not get involved. If you think there is a good chance it will go to $400 then you should invest.

    It's said "the market can remain irrational longer than you can remain solvent" so variance plays in the market as well.

    Poker is a game of incomplete information, much like the stock market, so it does not compare to chess. As for chess could an amateur dumbly luck into making the correct move, of course. But what are the chances he does this over an entire game? None? That allows the player with better skill to win. Poker is the same way. The amateur is going to make the wrong play and lose his money at some point. It might take several hours, or even days, but he will go broke.

    Everyone has a style and think they can win. Nassim Taleb bets millions on things that aren't very likely to happen(black swan events). I don't see the government intervening telling him to stop.

  • Report this Comment On May 13, 2011, at 4:41 PM, EnigmaDude wrote:

    Although I agree with your thesis, I think you are missing the point. It is my opinion that the casinos (Wynn, LVS, etc.) are ultimately reponsible for the online poker ban because they see it as lost revenues - at least until they can figure out how to offer the service themselves.

    I am willing to wager (a small amount) that online poker will be legally available once the feds figure out how to regulate the flow of cash and the (US-based) casinos can get their take of the cut.

  • Report this Comment On May 15, 2011, at 6:35 AM, Waterhosed wrote:

    "They list the current odds of the two players. One had an excellent hand and his odds of winning were 82 percent, his opponent had a poor hand and were 18 percent. There was only one card in the entire deck that could save him. So he puts all his money in and they flip the last card. Lo and behold it is the one he needed. He is either psycic or very lucky. No skill was required for him to win."

    Err... so what you're saying is he got lucky vs a MORE SKILLED player who outplayed him?

    Also fyi, "one card in the entire deck" is not remotely 18 percent. Probably he needed one of a specific suit.

    You should probably stick with chess, but if you're still not convinced -- how about putting your money where your mouth is and playing a pro poker player for a couple thousand hands.

    For high enough stakes, I'll fly to your location and pay you $50/hr to play me. :)

  • Report this Comment On May 16, 2011, at 3:00 PM, Melaschasm wrote:

    '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.'

    In other words you will see a greater ROI by investing in professional poker players, than following the advice of professional money managers...

  • Report this Comment On May 26, 2012, at 6:25 PM, Pokerfor888 wrote:

    To the Mentally stimulating games gamer above, I will acknowledge that you can see the expertise of a chess gamer much faster than a Texas holdem gamer. This does not mean poker has no expertise. Texas holdem over the course of your energy and energy and effort is 100% expertise. Part of that expertise is understanding possibility concept and playing within your bank roll accordingly. What most do not comprehend is how long necessary for this expertise to demonstrate. It won't always display over an eight hour period or even the 160 to 300 time an established might put in a month but give an established gamer 10,000 time against smaller experienced gamers and that expertise will display 100% There is no actual fortune in poker, just variations that specialised mathematicians comprehend fully. A stay gamer can perform much less hands than an online gamer and can therefore ensure his success over a reduced time period. Also he can perform for smaller levels, needs a smaller bank roll than a stay gamer would need to make the same living. That is why so many online gamers will not be able to move to stay. The Casino houses comprehend this but won't dispute that poker is a game of expertise because of a issue of interest. We need an established gamer to open his wood logs to a math wizzard to confirm this fact.

    http://conteststowinmoney.blogspot.se/

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