Poker is Skill, Not Luck

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University of Chicago economics professor Steven Levitt, famous for the best-selling Freakonomics series, has published a working paper alongside fellow University of Chicago professor Thomas Miles entitled "The Role of Skill Versus Luck in Poker: Evidence From the World Series of Poker." In it, they attempt to answer the central question surrounding the legality of the online poker industry: is it a game of skill or luck?

The hugely popular industry of online poker has been controversial for some time now. Despite efforts to curb the industry, most notably the 2006 Unlawful Internet Gambling Enforcement Act, still upwards of 10 million Americans play poker online for money. Just last month, three popular online poker sites -- Full Tilt Poker, PokerStars and Absolute Poker -- were shutdown by the FBI, and the federal government announced plans to recover $3 billion from them, according to the Los Angeles Times.

The central question surrounding the legality of the industry, on which Americans consumers spend $6 billion annually, has been whether poker is a game or skill or luck. Despite this, the paper says, "[s]tate courts that have ruled on whether poker is a game of skill-versus-luck generally have done so in the absence of any statistical evidence[.]"

To answer the question, Levitt and Miles looked at information made available by the 2010 World Series of Poker. The annual event, held in Las Vegas, includes 57 tournaments, 32,000 participants and $185 million prize money, including the "Main Event," in which the grand winner earns almost $9 million.

The duo found significant evidence that poker requires skill. Players assumed to be skilled earned 30 percent on their investment, compared to all other players, who lost 15 percent. In dollar terms, and even excluding the highly-skilled "Main Event," high skill players earned an average of $350 per tournament, while other players lost $400 on average.

To put that in perspective, Levitt and Miles compare the return on a poker investment with that common from the financial markets. "The observed differences in ROIs [return on investments] are highly statistically significant and far larger in magnitude than those observed in financial markets," the paper says, "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 human speak, that means the money of skilled players is better invested in a poker tournament than Wall Street, despite conventional wisdom that would indicate the opposite. In fact, the paper finds, "the high skilled player wins 54.9 percent of the match ups." That compares more closely to what is witnessed in Major League Baseball than anything on Wall Street:

"Since the year 2007, [baseball] teams that made the playoffs the previous season win 55.7 percent of their games in Major League Baseball against teams that failed to make the playoffs in the previous year. Thus, in some crude sense, the predictability of outcomes for pairs of players in a poker tournament is similar to that between teams in Major League Baseball. To the extent that baseball would unquestionably be judged a game of skill, the same conclusion might reasonably be applied to poker in light of the data."