Topic: Economics
The Economics of Random Stuff: Poker The Economics of pokerby Jeff Peters
(conservative)
Monday, July 7, 2008
Have you ever wondered why you just can't leave poker with a net gain in the long run? Efficient markets theory can explain why.
Firstly, what is efficient markets theory?
I'll explain it in an example.
Suppose you have an idea to market that everyone else can easily learn to reproduce. Also, suppose that the market deems this idea profitable. This means that other firms will continue to enter this market until marginal cost exceeds marginal benefit - or when our costs exceed our revenues. Now, everyone finally learned to develop and sell this new idea to a degree that no one can make a profit.
The same thing happens in poker.
Everyone who wants and desires to play poker regularly goes into chat rooms. Most of these folks have strategies under their belt that are probably the same or similar to your strategy. Thus, in the long run everyone wins and loses the same amount. That means no profit and deems the model useless.
The Way to Win
If you find a model that works don't tell anyone else and don't write stupid books it (unless you want to make money off of a bunch of idiots who will make it useless as more people learn).
Some People will win more than you!
You are probably wondering why I believe this if people actually make it to the world series of poker. There is something called luck, however I don't wholly buy into that argument.
Some people will use the same models and strategies that you use but still win more often than you. That's because they have a better perception of how people function than most other folks. They also have other qualities that no one else can match, such as the ability to extract information about another person through "shit-talking" and other forms of taunting. There are other things that I just don't know because that's the point, stupid!
Rude Rebuttals:
Walt Thiessen: Chris, you're an idiot and you know nothing (the basic consensus of every rebuttal he has to my articles). Read the first comment below, which is drenched with words of an arrogant tone.
Response: Can't we all just be friends!
Interesting Rebuttals:
Efficient markets aren't necessarily zero sum.
Response: This depends on the market in question. If it is a perfectly competitive market, as I hoped to have properly described in the situation of poker, ultimately leads to zero profits. The reasoning behind this is simple: everyone is utilizing the same good, or in this case the same poker strategy, and thus no one can benefit because no one is different. It's the same thing as saying that competition will force prices of some good to be so low that it reaches marginal cost. Thus, no profit!
However, suppose that we have a relatively efficient market, such as a monopolistic market. A poker player can distinguish him or herself from the rest if he or she employs a different strategy, and make a profit if this strategy is deemed relatively superior. However, if everyone uses the same strategy then only luck will distinguish one player. Profits can also be pushed down if its a monopolistically competitive poker player market: everyone has probably equally superior but nuanced strategies.
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Posted By: Walt Thiessen
Date: 2008-07-08 02:14:13
If you really believe that poker is just luck, then you really don't understand poker. Yes, luck plays a role, but it's a much smaller role than you think. I have played poker online off-and-on over the past two years (mostly with play chips, although I've also played with real money and have a net winning record both ways), and I can assure you that the game is very definitely a game that requires more skill that luck. I've accumulated over 9 million play chips playing Texas Hold 'Em, after starting with just 2,000 that were given to me by the online poker site I use. Through careful cash management, I've also managed to win a net total of more than $65 playing penny-ante poker. In short, I regularly win more often than I lose. Your zero-sum theory suggests that's impossible in the long run, but it's not.
Does this mean that winning poker is easy? Not at all! It can be very difficult, because the skill level of many players is very high. However, the skill level of many other players is pretty low. That's why one of the most important factors in winning at poker is knowing who you're playing. It's not so easy to pick and choose online, but offline you can make out very well just by knowing who your opponents are.
Based on what you say, I know that you're a poker neophyte (relatively speaking), and if you and I were to sit down at a table and play poker together, I'd wipe you out 9 times out of 10, easily. Neophytes get cleaned out on a regular basis, because they think that poker is all about luck or intimidation and that it's really just a zero-sum game in the end.
One of the ways that I know you're a neophyte is that you claim that people play poker online in "chat rooms." This is patently false. They play poker online at websites (offshore) in java applet-driven "poker rooms" that offer both play for play chips and play for real money. While a certain amount of chatting can sometimes take place, for the most part they're pretty quiet. Any old chat room will not do. You have to have a specially designed room that can deal cards, handle betting, etc.
There are fewer opportunities for American players than there used to be (because Congress wiped out a lot of the access for American players, before which the sheer number of American players drove the market. Congress neutralized some of the American players' impact by including some anti-poker legislation at the 11th hour in a Port Security bill they passed a couple of years ago that had nothing to do with poker or online gaming...don't you just love the way legislation is passed in this country?), and thus it's more difficult these days for a U.S. player to play for real money. In fact, if you play poker in a venue that does exchange money and doesn't operate off-shore, you can bet your bottom dollar that it's going to get raided at some point by the Feds. But that's a tangent. Let me get back to the main issue.
Another way I know you're a neophyte is that your last paragraph vaguely talks about models and strategies. Yes, there is some truth to what you're saying, but the fact is that most winning is done by understanding the psychology of the people playing, the mathematics of card distribution, as well as some of the things you mentioned. It takes time to learn, and a lot of experimentation, but it can be done (as I have done). Learning this stuff is a skill, just like learning other stuff is a skill, and as the saying goes, "Texas Hold'em takes five minutes to learn and a lifetime to master."
Am I a world class player? Hardly! I'd love the chance to play against a Barry Greenstein or a Phil Helmuth, but I also know that I'd leave my money at home, because they're way ahead of me in their subtle knowledge of the art and science known as poker playing. Just as you'd lose to me 9 times out of 10, I'd be very hard-pressed to beat them 3 times out of 10.
Most of all, though, I think your article is really disjointed and poorly structured logically. You start out saying, "Have you ever wondered why you just can't leave poker with a net gain in the long run? Efficient markets theory can explain why." You go on to say, "Everyone who wants and desires to play poker regularly goes into chat rooms. Most of these folks have strategies under their belt that are probably the same or similar to your strategy. Thus, in the long run everyone wins and loses the same amount. That means no profit and deems the model useless." Then you conclude with, "There are other things that I just don't know because that's the point, stupid!"
Well, at least I can agree with your conclusion. The rest is ignorant bunk for the most part. There are lots of things about poker that you just don't know, but that's not the main point. The main point is that your poker analogy shows just how little you understand about efficient markets.
Efficient markets are not necessarily zero-sum games. They can also be positive sum, and they can be negative sum, depending primarily upon the legal situation surrounding them. If they were all zero-sum, no one would ever lose any money, and no one would ever win any money in the long run. You may think they're zero-sum, but I know that's not reality. So do most Americans. In fact, so do most people around the world. Why you don't know that is hard to decipher.
Posted By: Christopher Espinal
Date: 2008-07-08 07:23:33
Hey Walt,
I didn't think that one can be so fanatically opposed to the idea of luck. "The rest is ignorant bunk for the most part." I didn't think a man of wisdom like yourself can be so rude.
However, if you read my article you would have noted that luck is not at the center of my argument. Rather, the point is that some people have either better skills or better models to assess a poker situation. That ultimately distinguishes a player from everyone else. I think you should stop skimming my articles and reading them the whole way through.
The way I employ efficient markets in this concept in my view is pristine. Numerous players use similar models in poker to assess some situation. It turns out that luck is the last thing that will distinguish a loser from a winner. However, if you are the warren buffet of poker, you will have that marginal quality that will cause you to win more often than everyone else at the same table.
So yes, skill is important, but not as important if everyone else has the same skill.
If you actually understood what an efficient market is in a perfectly competitive situation - in the long it is a zero sum game. If everyone has the same skill it's almost like a perfectly competitive market where no profit can be made.
Sorry Walt that you try your least to understand things.
Posted By: Walt Thiessen
Date: 2008-07-10 02:44:51
You wrote: "So yes, skill is important, but not as important if everyone else has the same skill."
Name one situation where everyone has the same skill. I've never run into one. Even in a company where you work with colleagues in a single department who theoretically have the same skills, the skill levels vary.
You wrote: "If you actually understood what an efficient market is in a perfectly competitive situation - in the long it is a zero sum game."
You have not yet presented a single shred of evidence to support that insupportable theory. All you've done is engage in speculation...and faulty speculation at that. Your theory is just plain wrong.
I understand the theory, and I know for certain that it's wrong, because it bears almost no relationship to reality.
Posted By: Christopher Espinal
Date: 2008-07-10 07:17:12
There is no evidence because I try to use analogies of neoclassical economics to understand situations.
There are certainly games where everyone has almost the same skill - or where they are comparable. It's sort of like in the stock market where everyone seeks to purchase stocks using the same methodologies - and yes there's evidence support that theory. I guess that you don't play with friends who are equally as good as you like I do.
If you want evidence that supports the theory that efficient markets in perfectly competitive situations give zero profits then I would suggest you read Eugene Fama's work. He is the father of the "efficient markets hypothesis."
Just because you are good, doesn't mean that everyone else is just as good Walt. You probably win because no one else can match your expertise. However, in the long run, you may or maynot come across many people with the same skills.
Everyone says that economics isn't reality. Then I would suggest t those people that they should abandon science altogether. Science is simply a series of models used to simplify the environment with assumptions - none of which are realistic. However, the models themselves can still be used to predict information based on their usefulness. If you don't accept the model because it isn't realistic or a complete resemblence of reality (whatever that is) then science and empirical evidence are just clumps of crap.
The models I use to assess the poker situation are simply analogies and not based on studies. There may be some factor that I'm not considering that will cause this model to be incorrect.
If you would like to play sure, but one case doesn't disprove a theory. You should probably submit some data to pokernomics.com (run by Steven Levitt) who is trying to understand the poker environment using economic models. His evidence just may disprove my theory.
Posted By: Christopher Espinal
Date: 2008-07-10 07:21:42
"The models I use to assess the poker situation are simply analogies and not based on studies. There may be some factor that I'm not considering that will cause this model to be incorrect."
By that I mean to say the poker situation is being compared to empricial evidence where efficient markets actually cause profits to be zero.
The better variants of poker are so deep, complex, and subtle that there will always be people (or perhaps computers in the future) who can make money playing in it, and certainly not because of luck!
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