Online poker in the eye of a legal storm

Steven Levitt, of “Freakonomics” fame, plays poker. His wife loves to play more than he does, as he has written on his blog. It should be hardly surprising then that Mr. Levitt would take his analytical eye to the card game and revisit the age-old question of whether poker is a game of skill. The question is the subject of a new paper he wrote with Thomas Miles, one of his University of Chicago colleagues who was a former student. Their research could not be more timely. The future of online poker is hazy after federal authorities last month shut down popular Internet poker sites and charged their founders with bank fraud and money laundering. The question of whether poker is a game of skill or luck goes to the heart of the debate over the legality of online poker. Games of chance are considered gambling under federal law. Analyzing results from the 2010 World Series of Poker, the researchers looked at poker the way an investor would study a stock portfolio. They found that highly skilled players earned an average return on investment of more than 30 percent, compared with a 15.6 percent loss for all other players. They concluded that the large gap supported the idea that poker is a game of skill. Mr. Levitt wrote on his Freakonomics blog earlier this month that “this finding has serious implications on the legality of online poker, as that debate is heavily dependent on whether the game is based on skill or luck.” Other studies have come to the same conclusion, and yet state courts have consistently ruled that poker is gambling, said Chuck Humphrey, a Colorado lawyer who specializes in online gambling. “It boils down to what the courts say,” Mr. Humphrey said. Mr. Levitt became interested in studying poker after the passage of a federal anti-gambling law in 2006 that tried to shut down the online poker industry, Mr. Miles said. Mr. Levitt could not be reached for an interview. The 2006 law did not directly outlaw online poker sites but made it a federal crime to knowingly accept most forms of payment for Internet gambling. That move blocked access to U.S. banks, and thus, the ability to accept wagers from U.S. gamblers. Popular online poker sites took operations offshore and continued to operate. Mr. Levitt has written that he found the logic underlying the 2006 law deeply flawed. Under the law, games of skill are exempted. Mr. Levitt had a casual conversation about the gambling statute with Mr. Miles, a law professor who has a Ph.D. in economics. When the World Series of Poker made its 2010 data available, “it appeared to us to be an ideal opportunity to test for the importance of skill in poker,” Mr. Miles said. The annual event, held in Las Vegas, had 57 events last year that drew more than 32,000 participants. The researchers separated players they rated as highly skilled based on lists of rankings found in poker magazines and other sources. The pair found that the 720 players rated as highly skilled earned an average of $1,200 per tournament, while other players lost more than $400 on average.