Is the Stock market a game of skill or chance ?

Investing and Trading

 

The stakes in online Poker just got a little higher. Online gambling is a major industry (mostly in the UK where it’s completely legal), and other European and Asian jurisdictions where things are semi-legal, and in America, its mostly an underground but huge industry. Despite it being illegal on paper in the US, in 2010, the industry wagered $20B – no chump change. Facebook just launched its online Bingo platform in the UK. Zynga (ZNGA), Caesars (CZR), and several publicly traded companies in the UK would simply love to see online Poker legalized and taxed in the US. Well, their dreams just got closer to reality. A New York Federal judge concluded this week that “skill” plays a more prominent role than “chance” when it comes to winning in Poker.

 

For those unfamiliar with the legal landscape, the question concerning gambling is a debate between games of “skill” and games of “chance”. If something is a game of skill, then in all likelihood, you could legally gamble playing it. If something is a game of “chance”, well, then you’re just “gambling”. Makes sense so far. Except that this definition is out of touch with reality. The fact is lotteries are probably the best example of games of chance, yet they are legal in pretty much the whole country. But let’s get back to Poker. The ruling by the federal judge, by itself, is nothing earth-shattering. I think we can all agree that intuitively, Poker feels like a game of skill rather than chance. If you put 2 professional poker sharks on a table with 8 ordinary Joes, and let them go at it for a 1000 rounds of poker (same rules applying to all), I’d be willing to bet that the 2 sharks collectively will win at least half of those rounds. So its 20% participants bagging 50% of the spoils. This kind of a result should be conclusive enough to prove that it’s more of a game of skill than chance. Nobody is denying the presence of a smaller element of chance, because none of the players can know what table cards are going to turn over. The skill part is analyzing the hundreds of combinations and possibilities of cards in the opponents hands after the table cards are turned over. And of course, there is the incalculable human element of emotion (or the lack thereof), the poker-face, the bluffs and many other characteristics that make Poker a game of skill.

 

The spectrum spanning the skill to chance range is wide. On the skill end, you have games like Chess, which are purely skill. Every possible move, can in theory, be calculated and analyzed. You could organize a chess tournament for money anywhere in America, and you’ll definitely win the case whether it’s a game of skill or chance. The proof is IBM’s Deep Blue – the supercomputer that beat grandmaster Gary Kasparov hands down. On the other end of the spectrum, you have lotteries and slot machines, which are clearly games of chance. Poker, Bridge or Golf fall in between – they are more games of skill rather than chance. Sports betting on the other hand, is more of a game of chance. Sure, you might be knowledgeable about how one team stacks up against another, but on any given day, even the best and the brightest can be humbled. Unsurprisingly, they are classified as a game of chance.

 

So the question is – where does the stock market fall ? And consequently, what should its legal status be ? If you know what you’re doing, it could be a game of skill. But on the other hand, if you don’t know what’s going on, you will get burnt. Is it like Poker (tilted towards skill) or is it more like sports-betting (tilted towards “chance”). And is it operating under the appropriate regulatory environment ? As it stands right now, its allowed to operate at the level of Chess. As a philosophical issue, I’ve always found this question fascinating – would love to hear opinions and comments.

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