Why Online Poker Should Be Legal: A New Marketplace Podcast

(Photo: Images Money, www.taxcreditscalculator.co.uk)

In our latest Freakonomics Radio podcast, Steve Levitt visits with Marketplace‘s Kai Ryssdal to discuss his poker research and his personal poker history. The episode is called “Why Online Poker Should Be Legal.” You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript below.

In case you haven’t been following the long-running legal story, here’s the gist. Online poker was growing fast in the U.S. until Congress passed the Unlawful Internet Gambling Enforcement Act of 2006, which pretty much shut things down. The ruling was based in large part on the government’s reasoning that poker is predominantly a game of chance as opposed to a game of skill.  But is this classification correct?

Levitt — an avowed poker devotee — says the data show otherwise. In the podcast, he touches on two recent papers he has written, with Thomas J. Miles as a co-author on both and Andrew M. Rosenfield as a third author on one paper. The first paper, “The Role of Skill Versus Luck in Poker: Evidence from the World Series of Poker,” has been published in the Journal of Sports Economics. The second, “Is Texas Hold-’Em a Game of Chance? A Legal and Economic Analysis,” is forthcoming in the Georgetown Law Journal. An excerpt:

We develop four alternative tests to distinguish the impact of skill and luck, and we test these predictions against a unique data set of thousands of hands of Texas Hold ‘Em poker played for sizable stakes online before the passage of the UIGEA.  The results of each test indicate that skill is an important influence in determining outcomes in poker.

While academic research of this sort is often ignored by the courts, that hasn’t been the case here. In a recent Federal ruling, the venerable judge Jack B. Weinstein declared that poker is indeed a game of skill, citing the Levitt/Miles paper in his decision. For more, see poker writer James McManus‘s Times op-ed “No More Bluffing.”

During his conversation with Ryssdal, Levitt reveals how he came to think well of poker:

“My father introduced me to it early on.  When I was no more than five or six, he would go out and play poker with his friends and if he won, he would leave a $5 bill in the keyhole of my door.  And if he lost, he wouldn’t leave anything.  And so I very early on developed positive associations with gambling.” 

Audio Transcript

Kai RYSSDAL: Time now for a little Freakonomics Radio.  It’s that moment every couple of weeks where we talk to – this time – Steven Levitt.  He is the co-author (the other co-author) of the books and the blog of the same name.   It is, of course, “the hidden side of everything.”  Dubner, I guess, is out of town.  Levitt, how are ya?

Steven D. LEVITT: I’m doing great.

RYSSDAL: So listen: I have a little piece of paper in front of me that says we’re going to talk about poker today.  And I am shocked to find out there’s gambling going on at Freakonomics world headquarters.

LEVITT: Oh, well, poker is one of my all-time favorite things. All gambling.

RYSSDAL: Seriously?

LEVITT: Well, my father introduced me to it early on.  When I was no more than five or six, he would go out and play poker with his friends.  If he won, he would leave a $5 bill in the keyhole of my door.  If he lost, he wouldn’t leave anything.  So I very early on developed positive associations with gambling – that you only won and you never lost. 

RYSSDAL: I am a little shocked to discover that you are a poker player, because really it’s a game of luck, right?  I mean, you deal some cards and boom, you’re done.

LEVITT: If poker were a game of luck, I definitely would not be a fan.  You wouldn’t catch me anywhere near a craps table or a roulette table.  But poker is so obviously a game of skill.

RYSSDAL: That’s like a declarative statement – prove it, right?  I mean, how do you know?

LEVITT: You kind of know, if you’ve ever played poker, that some guys are good at it and some guys are bad at it. 

RYSSDAL: I have to say here that I’m a horrible poker player.  I’m just a really bad gambler. 

LEVITT: That’s good to know because I think you and I are going to have to sit down at a table next time we’re together.  But beyond just experience in poker, we’ve actually written a couple of papers.  One was a simple paper that looked at outcomes in the World Series of Poker.  Every summer, the best poker players in the world convene and the great thing about poker tournaments is if you pay your entry fee, you get to play.  You don’t have to qualify.  You don’t have to be any good and a lot of bad players play along with the good players.  So, not surprisingly to someone who plays poker, the good players did very well and earned positive returns and the bad players – the guys like me, who show up and think it would be fun to play with the good players – end up losing a lot of money.

RYSSDAL: Alight, so if that’s the simple paper you just described, what’s the complicated paper, in laymen’s terms?

LEVITT: So this is a special data set with 12 million hands of online poker.  What makes it special is that we actually get to see the hidden cards that the players have.  It was given to us by the online poker site.  So we can analyze the skill of the play in a way that others have never been able to.  And indeed we show in every single test that we can think of doing that skill really predominates over luck when it comes to no-limit hold ‘em poker. 

RYSSDAL: So what are we supposed to take away from this?  That it’s OK to do this if you know what you’re doing?  But it’s not if you’re not?

LEVITT: Well, it’s a crazy, politicized issue now, which is hard to understand.  Congress has made it more or less illegal to play games of luck over the internet for real money.  So there’s been a lot of litigation going on.  The biggest poker sites got shut down in what was called “Black Friday.” 

RYSSDAL: For those of you in the game.

LEVITT: Exactly.  So there’s an interesting decision handed down in a recent case by a legendary judge named Jack Weinstein, who has really turned over a lot of the existing legal thinking by judging that poker is a game of skill and looking at it in much the way an economist would look at it.  So we’ve been thrust into this new world, where no one really knows what’s going to happen next with online poker. 

RYSSDAL: What should happen next?  Should it just be legalized?  There are people who have problems with this stuff.  There are gambling addicts and all that.

LEVITT: Well, what’s funny is that government has taken a hard line against online gambling.   At the same time, there are state-run lotteries and there are state-approved casinos.  So it doesn’t seem really that the government is morally against gambling.  It seems more like the government is morally against gambling that doesn’t lead to direct revenues for the government.  So, it seems to me, if the government wants to be in the business of controlling and monopolizing gambling, then the government should do a better job of putting together some good internet poker sites so that the people who want to play poker can play. 

RYSSDAL: You know what I think?

LEVITT: What do you think?

RYSSDAL: I think you actually just did this research so you can play more poker.  That’s what I think. 

LEVITT: (Laughs)

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  1. frankenduf says:

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    • Dick says:

      So because of your irresponsible father, the government should restrict my liberty? I almost screwed up my back going too hard in the gym, should the government outlaw gyms as well?

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      • Mike B says:

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      • rwh03001 says:

        Mike B,

        I do understand where your comments are coming from, and I appreciate that you at least acknowledge that poker is a predominantly skill-based endeavor. However, poker is no more of a Ponzi scheme than investing in the stock market is. Just as the flow of money trends upwards towards the skilled players in poker, the flow of money trends towards the most skilled investors in the market. Everyone has access to the stock market, but there is no public outcry to put a stop to it. Why the double standard for poker?

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  2. Mike Hunter says:

    Why online poker should be legal:

    Because it’s no one elses business if you decide to waste your money on gambling instead of other types of consumption. I never understood some peoples’ need to control the personal lives of other citizens. I think gambling is a waste of money, so I don’t do it. Easy solution.

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    • James says:

      True, and there’s also the issue of jurisdiction. If I were foolish enough to gamble, and did it with a betting site located in Antigua, Britain, or other country where it is legal, then it is none of the US government’s business.

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      • Mike B says:

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    • T says:

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      • James says:

        Sure, if heroin, prostitutes, or whatever are legal where you are buying them. But of course you’d have to figure out how to get the effect of product to you over the web.

        Consider this: If I take a trip to Europe, and visit the casino at Monte Carlo, can’t I gamble all I want without the US government having anything to say about it? So what’s the difference between me moving my physical body there (burning jet fuel in the process) and sending my mental processes there over the internet?

        Likewise with prostitutes, and you don’t even have to leave the US. If you go to Nevada and visit one of the legal brothels, is what you do there any concern of the law enforcement agencies of your home state?

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      • Nick says:

        Off course, one could also make the argument that much of the negative societal consequences associated with drugs, prostitution, gambling, etc would not exist if they weren’t black market activities. Pimps, drug cartels, and leg-breaking bookies are all symptoms of prohibition, but the consumers would be out there regardless.

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      • Mike B says:

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      • James says:

        “When gambling in Europe or Nevada taxes are collected and government regulations are in force.”

        Presumably the same is true of internet gaming, IN THE LOCATION WHERE THEY ARE DOMICILED. What the US government is saying is that American citizens are not allowed to do business in other countries, following those countries’ laws.

        We could even take this issue a bit further: I do work (via telecommuting) for clients in Europe. Should the US government (or state/local government) regulate that work, even tell me that I can’t do it?

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  3. Eric M. Jones. says:

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    • JAM says:

      It is not about making everything legal. It is about government not getting involved in personal decisions that don’t affect anyone else.

      Right now we have a society where a lot of people think that their own personal preferences should be imposed upon everyone else. This leads to the ludicrous situation of having laws that prefer beer over marijuana and the state lottery over poker.

      Essentially these are the equivalent of having the government telling you the proper ways to get high and lose your money. And these are only a couple examples of many crazy government imposed constraints we have to adjust ourselves to every day.

      People need to wake up and stop passing so many laws. We need to have a very high bar when we constrain our freedoms by passing law.

      Just learn to live and let live.

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      • Mike B says:

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  4. Mike B says:

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    • James says:

      Where – and how – do you draw a line between “it’s addictive” and “hey, I just really love doing it”? For instance, I spend a goodly chunk of my disposable income & free time on horses (owning & riding them, not betting on horse races), and have friends who spend a lot more than I do. Are we addicted, or are we just having fun?

      I could say as much for disposable (and not so disposable) time spent on hiking, biking, skiing, and all the other things I do for fun. Am I addicted to these things because I’d rather be out doing them than sitting at the computer making more money?

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      • Mike B says:

        Intermittent positive feedback has been shown in both human and animal studies to be both addictive and to lead to highly destructive behavior. For example in one study monkeys were rewarded with a dopamine hit after pressing a button or some other task if the hit is delivered regularly they will eventually meter their use of the button. However if they are only given the hit occasionally and randomly they will continue to hit the button even at the expense of taking care of necessary biologic functions like eating. Yes, poker has a strong skill element, but depending on how the game is set up it can also have play mechanisms that have the same effect as a slot machine.

        Gambling is addictive / destructive because it exploits flaws in the human reward seeking mechanism. I’m not saying that people shouldn’t be allowed to gamble, but it needs to be regulated properly to minimize the risk of self destructive behaviors. Making people physically go out and go to a casino is one such mechanism. Online games are also much more susceptible to collusion between players and scamming by the casino.

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      • rwh03001 says:

        Mike B,

        You are absolutely correct. Addiction is a problem, whether it comes in the form of drug use, sex, or gambling. That said, gambling addiction is BAD for the online poker business. Unlike slot machines and table games, where the beneficiary of a person’s gambling addiction is the casino, someone who frequently loses a lot of money very quickly at the poker tables is doing very little to benefit the poker room’s bottom line. In fact, the poker room would prefer that everybody be of equal skill so as to slowly take all the money from all the players (in the form of rake) as the players pass it back and forth between one another.

        Poker rooms have a vested interest in identifying problem gamblers and restricting their play in order to prevent them from losing too much too quickly. Additionally, you would be amazed at how much cheating and scamming is uncovered due to highly advanced detection metrics used by the major online poker rooms. Now that the best poker sites are no longer permitted to service US customers, many of these customers are forced to play at smaller poker sites with less advanced cheating/scamming detection programs and little or no problem gambler identification systems.

        If you look at Pokerstars, the industry leader in online poker, they have very advanced problem gambling detection where the gaming of someone whose gambling habits set off a system red flag, is greatly restricted. Links to support sites, such as Gamblers Anonymous is also readily available on all major poker websites and poker clients. Also, due to the advanced datamining functionality of the major sites (combined with the complete information/record of all cards and hands dealt to all players), scams and cheating are identified and snuffed out very quickly as well. Furthermore, this cheating detection, problem & underage gambling prevention will be enhanced with the endorsement/tax regulations of the US government.

        The regulation of internet poker can truly revive a great form of entertainment and relaxing hobby in a country that was founded on the principles of freedom and liberty. With the right precautionary measures, poker can be legal and regulated, and some day the word “problem” won’t be the most common precursor to “gambler”.

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      • James says:

        “Intermittent positive feedback…”

        I certainly get intermittent positive feedback from riding the horse, and from doing all those other activities that I enjoy doing. Heck, I even get intermittent positive feedback from work, in the form of money deposited to my bank account. (As well as the less tangible feelings of achievement from accomplishing some difficult task.) Why is poker considered an addiction, but my activities not?

        Then too, I’ve played poker on occasion (maybe once every few years), and have won a few pots and even occasionally came out ahead for the night, thus experiencing those intermittent rewards. Why am I not an addict?

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  5. someguy says:

    The host doesn’t seem too bright. He thinks that poker is a game of luck, that he himself is a bad poker player and that there are degenerates who lose all their money. Seems like contradictory statements to me. What makes a mathematically unsavvy talk show host qualified to disagree with a freakonomics figurehead?

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    • Joe says:

      There seems to be flawed logic here. Why do you have to be bad a gambling to be addicted? Cant addicted gamblers lose money slowly as well as quickly? If a website is scamming, arent people free to stop playing that site and go to a different site and if they are all scamming arent they free to stop playing online and go to a non-virtual casino/tournament? If online poker affects anything its that it is more convinient than going to a local tournament or taking a trip to a state to play in a casino with legalized gambling. This could have effects on their business and tourism in general, but then that’s free markets working. A benefit of online poker, is if they allow private poker rooms so that friends who are geographically seperated can still enjoying a poker night together. The only real arguement is what if someone loses all their money gambling and now becomes reliant on social programs that our taxes pay for. Without putting to much thought into this and researching a lot of alternatives, I’d say that finanical advisors need to be assigned to people seeking these social programs to help them with their budgets. Once that step is completed it can be determined where these families need help and funds allocated approriately. If it comes up during the budget review that all their money is spent on gambling (drugs, prostitutes, shopping, or other areas of consumption) they should be assigned a counsler as appropriate. However, anyone with the means to pursue gambling and can do it within their budget should be able to do so, regardless of whether or not it is a game of chance.

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  6. Matt says:

    Government has taken a hard line against online gambling, and yet at the same time, there are state-run lotteries, and there are state-approved casinos. It doesn’t seem that the government is morally against gambling, it seems more like the government is morally against gambling that doesn’t lead to direct revenues for the government. So if the government wants to be in the business of controlling and monopolizing gambling, then the government should do a better job of putting some good Internet poker sites, so that the people who want to play poker can play.

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  7. casino-pa-natet says:

    Once the blinds become significantly larger in the later periods,stealing blinds is extremely efficient in building a stack.This is why so often players in late position raise the pot normally with marginal hands to accumulate the blinds.

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