Freakonomics Author Steve Levitt on Internet Poker

Steve Levitt, author of the well known pop-economics book Freakonomics, has a recent post explaining his opposition to the crackdown on Internet gambling. The whole post is worth reading, but here is a shortened summary of his arguments:

1) Prohibitions that focus on punishing suppliers are largely ineffective. Prohibition of internet poker is no exception.

2) Relative to the consumer surplus generated by online poker, the externalities caused are small. Government interventions should focus on cases where the opposite is true

3) From a moral perspective, it is inconsistent for the government to condone and profit from gambling on the one hand, while criminalizing private providers of Internet poker on the other.

4) Even under the government’s own laws, it would seem that there is little question that online poker should be legal.

Levitt notes that he also recently completed a paper intending to explore the skill v.s. luck argument as it relates to poker. Levitt gathered data from a sample (n=57) of poker tournaments and compared the average ROI for players that had been considered “skilled” based on data from previous years with data from the rest of the field (i.e., unknown players). Levitt found that on average the “skilled” players earned an ROI of positive 30 percent, while the unskilled earned an ROI of negative thirty percent.

(ROI represents the average return on an “investment.” In this case ROI is referring to the average amount of money a poker player wins as a percent of his/her investment, investment equaling the total sum spent in tournament entry fees. So if a player enters 10 tournaments at $100 each, and wins a total of $1500, his/her ROI would equal 50 percent, as the player wagered or “invested” $1000 to earn the $1500.)

This is important as it counters the idea that poker should be defined as a game of chance, thus potentially falling under the purview of the Unlawful Internet Gambling Enforcement Act. My colleague Michelle Minton has written more about the outcomes of the skill vs. luck argument here.

In other gambling news, the American Gaming Association, the biggest gambling lobby in the United States, recently released a white paper addressing the feasibility of poker regulation in the United States. From the summary:

Numerous Western nations — including the United Kingdom, France, Italy, and some provinces in Canada — have created structures for tight regulation of the online gambling industry. This course provides consumer protections for individuals while also generating jobs, economic opportunity and government revenue. Beginning with careful confirmation of the identity of every online gambler, which is the foundation for effective regulation, these nations employ technologies that effectively ensure:

• That the games are played fairly, according to their rules, and pay off as promised;
• That underage gamblers are excluded from play;
• That people who struggle to control their gambling have access to
tools to limit their deposits, bets, and overall play, or even exclude
themselves from gambling websites entirely;
• That online gambling operators do not accept bets from
jurisdictions that prohibit online gambling; and
• That gambling websites are not used for money laundering and
other illegal purposes.

It is worth noting that though there wasn’t much federal legislation regulating internet poker, the system worked almost flawlessly, with competition providing pressure for operators to follow the noted policies above.