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Poker Is Not Gambling, Jury Still Out On Investing

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Because this is Dealbreaker: A Place For Finance And Sometimes Poker™, I figured some of you would be interested to know: poker is now legal!

Sort of. Basically a fellow named Lawrence Dicristina was running a poker room in Staten Island. He was arrested by the Feds and charged under the federal Illegal Gambling Business Act. He was convicted by a jury and asked a federal judge, Jack Weinstein, to throw out the jury verdict because he ran a poker room and poker isn't gambling. Today Judge Weinstein agreed: under federal law, poker isn't gambling. So Dicristina is free to go.

The opinion is here and it is 120 pages; the important don't-try-this-at-home headline is that this opinion "does not undermine the holding that poker is gambling as defined by New York law" and therefore probably illegal in New York. It's just not federally illegal, which I suspect means that Lawrence Dicristina may follow in Sergey Aleynikov's footsteps to state court. And this is just the opinion of one judge in one district, so consult your lawyer before you restart your online poker business/Ponzi scheme/other scheme that is not technically a Ponzi scheme: the online poker crackdown is unlikely to stop just because of this.

Nonetheless it's a nice win for the forces of poker. The decision basically turns on whether poker is mostly a game of chance (gambling, bad) or skill (not gambling, okay). For this the court looked at the testimony of two experts, defense expert Dr. Heeb, "a respected economist, statistician, and player in national poker tournaments," who argued that skill predominates, and prosecution expert Dr. DeRosa, an econometrician who "neither has any personal experience with poker, nor has he independently analyzed the game," and therefore felt comfortable saying that it's mostly a game of chance, which, okay, nice intellectual honesty prosecutors.* Given that - and, the fact that, y'know, poker is a game of skill - it's not surprising that the judge came out for the defense.

Even if you're not one of our readers who comes here for the gambling tips, you still may enjoy this opinion just for its recapitulation in miniature of the efficient markets hypothesis. Here is the defense expert's money chart:

That's based on the top ten and bottom ten poker players from ... umm ... some sample that Dr. Heeb found, not entirely clear, but anyway: top players made money, bottom players lost money, skill! Here is another chart:

That's the prosecution expert's rebuttal: he flipped coins for 1,000 players and plotted the winnings/losings of the top and bottom 10 players. As you may have heard elsewhere, the best coin flippers outperform the worst coin flippers in much the same way that the best poker players outperform the worst.

This is not a great rebuttal: I suspect Dr. Heeb did not cherry-pick the top and bottom ten performers from a list of 1,000 players (maybe he did), and "while Dr. Heeb showed that the same poker players would consistently come out on top in the play of a new set of multiple hands of poker, this consistency could not be demonstrated in a new set of coin tossers by the same tossers."** Nonetheless, I'm pretty sure Nassim Taleb has similar charts about the success of investment managers: no matter how skilled you (think you) are, your results will be swamped by a "spurious tail" of people who just got lucky on a lot of coin flips. And the evidence for that - that the successes and failures in the investment industry are explainable by chance rather than skill - seems a lot more robust than the prosecution's evidence in this case.

Actually it's a little weird that no efficient-markets experts testified here, to anchor the court's expectations of whether skill or luck predominates elsewhere in the world. Perhaps the standard for what is and is not gambling should be, if it requires and rewards skill more than managing a mutual fund does, then it can't be gambling. Or is that too generous?

U.S. v. Dicristina [EDNY]

* It's possible that I have many biases here. STILL.

** Also other cool stuff. He got a huge PokerStars database and showed that overall-winning players won more with particular hands - say K9 offsuit - than did overall-losing players, strongly suggestive evidence that their winning was not about getting dealt better hands but about playing better with the hands they were dealt.