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Is poker a game of chance or a game of skill?

During 1910 a Louisiana court judge, in a frequently cited judgment, ruled that poker was a game of chance, and NOT a game of skill. It was an important ruling in 1910, and it is even more important now. If it is not upset, then on-line poker, a six-billion-dollar-per-year industry, may be history in the United States because on-line games of chance are illegal in the United States.

Steve Levitt, author of "Freakonomics", and Thomas Miles, his Chicago University colleague, used data on those who took part in the 2010 World Series of Poker to determine if poker is a game of chance or a game of skill.

The World Series of Poker is an annual contest held in Las Vegas. In 2010 it attracted over 32,000 players willing to pay entry fees ranging from $500 for casino employees to $10,000 for the Big Boy's games. During 2010, more than $185 million in prize money was given out.

Because the tournament is open to anyone who pays the entry fee, its participants have varying levels of experience and differing records of success or failure. Levitt and Miles divided the participants into two groups.

The first group included the top players of previous tournaments and accounted for 12% of the participants.

The second group included everyone else.

If poker were truly a game of luck, then the winnings of former top players should not have differed significantly from those made by the rest.

But the opposite proved to be true. Those who did well before, also did well in 2010 i.e., their return on invested capital was 30.5%. Everyone else lost 15.6%. That strongly suggests that poker is a game of skill, and NOT luck.

SUMMARY

During the World Series of Poker in 2010

Professional Poker Players earned 30.5% on invested capital

Amateur Poker Players lost 15.6%

Conclusion: Poker is a game of skill in which amateurs seldom succeed.

The next question is:

Is the stock market game a game of chance or a game of skill?

Steve Levitt and Thomas Miles reported 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, there is very little evidence of skill in this domain.

Conclusion: The stock market game is a game of chance and not of skill.

Obviously, these conclusions have some disturbing implications. That is, on-line poker is a game of skill that should be encouraged, but on-line stock trading is a game of chance that should be illegal.

The BIG questions are: Is there a flaw in their conclusion?

And, can you spot the flaw?

Hint: The stock market game is a game of skill in which amateurs seldom succeed.

Source: The Economist ● May 21, 2011 ● Poker-faced