Skills of Mututal Fund Managers?

Gambling

Poker-faced

A new study argues that poker is a game of skill, not chance.

May 19th 2011 | from the print edition of tehe Economist

IS POKER "a gambling game, pure and simple", as a judge in Louisiana called it in a much-cited 1910 judgment? Or is it a game in which skill plays an important role? The answer may help determine whether online poker games should be covered by a law that prohibits Americans from gambling over the web.

So far, judges have tended to agree with the 1910 precedent. Future rulings will determine the prospects of a $6 billion industry. Yet there has been very little research into this subject, in part because of the paucity of data.

A new study by an economist, Steve Levitt, author of "Freakonomics", and Thomas Miles, his Chicago University colleague, uses data on those who took part in the 2010 World Series of Poker, an annual contest in Las Vegas. Last year it attracted over 32,000 players and gave out more than $185m in prize money. Because the tournament is open to anyone who pays the entry fee, its participants have varying levels of experience and differing records of success or failure.

Messrs Levitt and Miles divided participants into two groups. The first included those who, based on lists of the top players in 2009 and the results of previous tournaments, could be thought of as "high-skilled"; the second was everyone else. If poker were truly a game of luck, then the winnings of the 12% of entrants marked as specially gifted ought not to have differed significantly from those made by the rest.

But the opposite proved to be true. Those who had done well before did well in 2010, too. Whereas ordinary players made a loss of 15.6%, the skilled made a return on investment of 30.5%, suggesting that poker is after all a game of skill. The economists say that similar tests of persistence in returns have also been used to detect whether mutual-fund managers have genuine expertise. In contrast to the case of poker, they point out, those tests have tended to find "little evidence of skill in this domain".