Beware What You Call Gambling

A lot of the literature about performance management likes to assume that the world is a perfectly ordered place, that the right actions will result in increased performance, and that bad performance indicates there’s a problem.

But the real world is a place where sheer randomness has big effects, and is especially prevalent hanything to do with the actions of fickle human beings. Some recent news provides an instructive insight about the role of randomness in various fields of human performance:

The US government has recently cracked down on online poker sites, on the grounds that they provide US residents with the ability to gamble illegally.

But is poker “gambling” or is it a pastime or sport where participants pay an entry fee, and the winners get prizes? After all, there are big winners in some chess competitions – is that gambling?

Part of the definition of gambling is how much skill is involved. A new study, “The Role of Skills Versus Luck in Poker: Evidence From the World Series of Poker” by “Freakonomics” author Steve Levitt and Chicago University colleague Thomas Miles shows a high correlation between expected winnings and “skill”, as measured by previous records in competitions: skilled players made a return on investment of over 30%, and skilled players win almost 55% of matches against the less skilled.

Is that enough to treat poker as a game of skill rather than gambling? The authors point out that studies of the (perfectly legal, non-“gambling”) activities of mutual fund managers show no evidence of such consistent returns, and that in baseball, playoff-bound teams win, on average, 55.7% of their games against teams that failed to make the playoffs the previous year…

The summary of the report:

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.

And another quote:

“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”