Steven Levitt (of Freakonomics fame) on Skill vs Luck in poker

[Shank]

Published May 2011. I particularly enjoyed the little dig aimed at asset management as a skill domain.

Abstract:

In determining the legality of online poker – a multibillion dollar industry – courts have relied heavily on the issue of whether or not poker is a game of skill. Using newly available data, we analyze that question by examining the performance in the 2010 World Series of Poker of a group of poker players identified as being highly skilled prior to the start of the events. Those players identified a priori as being highly skilled achieved an average return on investment of over 30 percent, compared to a -15 percent for all other players. This large gap in returns is strong evidence in support of the idea that poker is a game of skill.

Conclusion:

This paper attempts to shed light on the extent to which pre-existing metrics of poker skill are useful in predicting tournament outcomes. Our results suggest that players who are a priori identified as “high skill” do indeed substantially outperform other competitors. This predictability in returns is evidence for a substantial role of skill in poker.

It is not immediately obvious how one measures the importance of skill versus luck in poker relative to other activities. One approach that problem is to estimate the probability that a randomly drawn high skill poker player will outperform a randomly drawn low-skilled poker player over the course of a tournament. An important limitation of our data in this regard is that we do not observe the complete order of finish, but rather, only the order of finish for those who make the money. Because of this limitation, we can make pairwise comparisons between two players in a tournament only when at least one makes the money. Subject to that constraint, an exhaustive pairwise comparison of high skilled and low skilled players entered in each tournament in the WSOP finds that the high skilled player wins 54.9 percent of the match ups. For purposes of comparison, we calculated the regular season win rates for professional sports teams that made the playoffs in the previous season – making the playoffs last year is akin to being a highly skilled player entering the WSOP. Since the year 2007, 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.

Asset management is another domain where skill is generally believed to be important, as evidenced by consumers paying billions of dollars annually in fees to money managers. Academic analysis, however, has generally found little evidence for skill in this domain as demonstrated by low rates of persistence in mutual fund returns (Carhart 1997, Bollen and Busse 2004) and evidence of inferior or superior performance only in the extreme tails of the mutual fund distribution (Fama and French 2010).

Link to full PDF

[Dying Actors]

this guy still owes me a t-shirt, book, and an indepth analysis of my game for the 100,000 hh's i sent him.

[V0dkanockers]

Love the asset mgmt. dig. LOL

[BullGator]

Especially with the fact Asset Management has been fighting any regulation what so ever. At least I know a deck has 52 cards.

[SGspecial]

Anyone who's ever played 4-card Barry knows poker is a skill game in the long run.

[efficacy]

This is awesome! Any way to get him to testify for us in front of the house financial servives committee? Seems like getting a well known guy with credentials and a persuasive argument could go a long way.

[repulse]

From a creative mind like Levitt's, I might have hoped for a more clever and unique approach to skill vs. luck than simply measuring that better players outperform weaker players, but this is still a pretty comprehensive methodology and certainly helpful, I'd think.

[chytry]

Originally Posted by repulse

From a creative mind like Levitt's, I might have hoped for a more clever and unique approach to skill vs. luck than simply measuring that better players outperform weaker players

This.

[Uglyowl]

http://www.freakonomics.com/2011/05/...ker-crackdown/

More today in a series it appears

[Koss]

Originally Posted by efficacy

This is awesome! Any way to get him to testify for us in front of the house financial servives committee? Seems like getting a well known guy with credentials and a persuasive argument could go a long way.

Agreed. I think arguments of luck vs. skill, that online poker has the potential to create jobs/tax revenue in the U.S., and that it's a matter of personal freedom, are key to winning over the centrists in both the democratic and republican parties. I'm afraid religioius right types like Bachus are pretty static on this issue and any pro poker legislation will have to be passed in spite of them, not with them.

[Koss]

Originally Posted by Uglyowl

http://www.freakonomics.com/2011/05/...ker-crackdown/

More today in a series it appears

As nice as it is to have him arguing for our cause, it's pretty hypoctrical of him to say "because I don't care if my daughter plays poker I think it should be legal, but not prostitution or coke." Great, you have an opinion, as does all of congress. The article basically says that governments should pass laws based on opinions, and that his opinion on gambling is right.

[newschool2]

Originally Posted by Koss

As nice as it is to have him arguing for our cause, it's pretty hypoctrical of him to say "because I don't care if my daughter plays poker I think it should be legal, but not prostitution or coke." Great, you have an opinion, as does all of congress. The article basically says that governments should pass laws based on opinions, and that his opinion on gambling is right.

I think hes doing it right, hes using rhetoric, not logic, which sadly, is the only thing that works to change public opinion.

[Do it Right]

This is cool. I wonder if Brandon Adams gave him nudge in the right direction. Either way its great to have a reasonably recognizable voice pointing out how absurd the notion that poker is luck is. He also should have excluded rake in this calculations which would further drive the point home. The rake makes it massively more challenging to show a profit at poker in the long run and that should not be such a significant factor when considering the skill/luck of the game itself since rake is an externality that is not necessary nor inherent in the game itself.

From what I understand of the skill game legislation it would be incredible if we could have poker classified as a skill based game. That legislation already seems to trump most of all poker specific legislation we've seen drafted.

[La Brujita]

i played poker with him in vegas i think in 2007. he seemed like a good guy and a huge poker fan.

[efficacy]

http://www.huffingtonpost.com/2011/0..._n_859388.html