John Kay - Why poker can beat investment management hands down

Why poker can beat investment management hands down

If the measure of skill is how often good performance repeats itself, poker is a more skilful activity than investment management.

Derek Kelly, proprietor of the Gutshot Club in London’s Clerkenwell Road, recently had his day in Snaresbrook Crown Court. The Gutshot is a well appointed club established to accommodate the current craze for poker. The question before the jury was whether poker is a game of skill or of chance.

The objective of the 1968 Gaming Act was to establish criteria that would give the Gaming Board the authority needed to drive the Mafia out of Britain’s casinos without bothering thousands of highly reputable bridge and chess clubs across the country. But what was happening in Clerkenwell Road? Was Mr Kelly running a casino or a club?

The parliamentary draftsmen had not found their job easy. They decided the key distinction was between games of skill and games of chance. Chess is a game of skill, roulette of chance. But, as so often, the law tries to distinguish black and white in a world composed of shades of grey.

Chess seems an archetypal game of skill because the consequences of each move can be exhaustively analysed. But even in chess, with a limited and well defined number of legal moves, the range of combinations multiplies so quickly as to outstrip the capacity of the most powerful computer. Chess players learn to recognise positions, familiarise themselves with patterns of play, judge the mood of their opponents and assess the odds accordingly. As do players of every other game, including roulette.

And as do practitioners of business strategy. The most debated case is Honda’s attack on the US motorcycle market. One account tells of a carefully executed plan in which the company, having achieved economies of scale in its domestic market, used its low cost base and innovative distribution system to defeat the incumbent US producers. Another records the story of hapless Japanese who, failing to sell their big bikes against established competition, serendipitously received an inquiry for the small machines Honda executives used for their own personal transport. The company sold through sports retailers in the US because it failed to sell to bike dealers.

Even with the benefit of hindsight, neither the observer nor the participants themselves can distinguish good fortune from good judgment. Is Bill Gates the richest man in the world because he is smart or because he is lucky? Both, obviously. The draftsmen of the Gaming Act recognised that many games were a mixture of chance and skill and insisted these also be licensed. A licence is required even when the element of chance can be eliminated by the exercise of “superlative” skill. I am not sure what the legislators had in mind: I have met people in business and finance who think that chance can be eliminated by the exercise of – their – superlative skill, but no one of whom it is true.

All human activities are a mixture of chance and skill and the jury at Snaresbrook Crown Court was right to convict Mr Kelly. The evidence – which mostly consisted of an explanation of the rules of Texas Hold’em and the sophistication of its best practitioners – was largely beside the point.

Gary Kasparov and the person with a system for winning at roulette both tell us with confidence how the play will evolve. But good chess players win more often than average, while roulette players are all more or less equally lucky. The means by which we distinguish the contributions of skill and chance is the persistence of performance. That test indicates that Honda’s success demonstrates quite a lot of skill and Bill Gates’ success contains quite a lot of luck.

If the measure of skill is how often good performance repeats itself, poker is a more skilful activity than investment management. Few fund managers remain persistently ahead, so Clara Furse of the London Stock Exchange should perhaps view the conviction of Mr Kelly of the Gutshot Club with some concern. In life as in poker, the occasional coup does not necessarily demonstrate skill and superlative performance is not the ability to eliminate chance, but the capacity to deliver good outcomes over and over again. That is how we know Warren Buffett is a skilled investor and Johnny Chan a skilled poker player.

 

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