Skill vs. Luck in Poker

Was Doc Holliday a highly skilled poker player or was he simply lucky enough play against uneducated drunks most of the time? Is poker gambling or is it a sport?

This issue has become important because online poker is now a $6 billion industry. Since a ruling in 1910, state and federal laws generally hold poker to be a game of  pure chance, so the Justice Department has recently cracked down on three internet companies that “help Americans conceal poker-related transactions” — a term that I think means “hide winnings from the I.R.S.” If winning at poker is pure chance, then it’s gambling. If it’s a matter of skill, however, then the game is a sport, and the laws against gambling don’t apply.

Steven Levitt,  the economist who wrote Freakonomics, has teamed up with Thomas Miles to write a paper called “The Role of Skill versus Luck in Poker: Evidence from the World Series of Poker.” The conclusions were that “high-skill” players were 12% more likely to win money than “low-skill” players, and 19% more likely to win tournaments. The authors also found that a high-skill players ended the tournaments with a 30.5% gain on average, while low-skill players lost an average of 15.6%. In a head-to-head competition, a high-skill player wins 55% of the time when playing against a low-skill player.

Um… That seems a little circular to me, since being “high-skill” is pretty much defined as winning poker games. So people who win money are likely to be people who win money. Can’t argue with that…Perhaps anticipating my incisive logic and brutal sarcasm, Levitt and Miles also looked at who won money in both the 2009 and 2010 World Series of Poker, and people who won before are more likely to win again.

If you win repeatedly, the chances are you’re doing something well because, as Ike Clanton remarks about Doc in the movie Tombstone, “What is that? Eleven hands in a row? Nobody is that lucky!” Right, Ike. And losing eleven times in a row isn’t bad luck, either. It’s the predictable outcome when  “low-skill” players, who are also drunks, play against somebody who can count.

Interestingly, Levitt and Miles applied the same algorithms to the work of mutual fund managers, to detect whether mutual-fund managers have genuine expertise or if they are just lucky. In contrast to the case of poker, they point out, those tests have tended to find “little evidence of skill in this domain.”

So John Henry Holliday may have disgraced himself by playing poker professionally, but at least the Hollidays were spared the humiliation of having a mutual fund manager in the family.





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