Friday, May 09, 2014

The poker ecology

Every few years I happen to stumble upon and reread the excellent paper written by Lawrence Harris entitled "The Winners and Losers of the Zero-Sum Game : The Origins of Trading Profits, Price Efficiency and Market Liquidity".

Trading is a zero-sum game when measured relative to underlying fundamental values. No trader can profit without another trader losing. People trade because they obtain external benefits from trading. These benefits include expected returns from holding securities, risk reduction from holding correlated assets and gambling entertainment. 

Three groups of stylized characteristic traders are examined. Winning traders trade for profit. Utilitarian traders trade because their external benefits of trading are greater than their losses. Futile traders expect to profit but for a variety of reasons their expectation are not realized. 

Winning traders make prices efficient and provide most liquidity. Utilitarian and futile traders effectively underwrite the winning traders' efforts. 

In the paper he mentions the similarity between trading and poker. He lists the many types of traders and how, even among the winning styles, one group will profit from another but will lose to other specific styles.

So informed traders will profit from market-makers but lose to bluffers, while parasitic traders will profit from upstairs traders but lose to informed traders. Note that informed traders, market-makers, bluffers, parasitic traders, and upstairs traders are all classified as winners i.e. if skilled, these traders will profit from trading in the long run.

It would be interesting to see a similar analysis for the different poker playing styles.


angerisagift said...

how is the orient? made out with any trannies yet? dont lie. LOL

Memphis MOJO said...

Are living expenses cheap in Macau? Are there steam tunnels?

Mr Subliminal said...

Let's not jump ahead of ourselves. I'm working at the Panda Express on Sahara & Decatur.

angerisagift said...

i think that is as close to china as u r going to get.

bug said...

I haven't yet read the article yet, but I immediately have a question about the zero sum aspect. Trading isn't actually zero sum, right? Every day, millions of people add money to the stock market in the form of their IRAs, 401Ks, etc., right?

Similarly, cash game poker is also clearly not zero sum; rake is removed from the table on almost every hand dealt, right?

I'm curious how this affects the findings of the paper.

Mr Subliminal said...

@bug : Your question is addressed in the article.

grrouchie said...

That panda is pretty close to where I live. I'll be hitting it up all the time now hoping to tip you enough to scrap together a buy-in :)

Pete P. Peters said...

Congratulations on your job at Panda Express. I've been following your blog for some time now, and it's readily apparent that you are a smart guy and, presumably, have aspirations exceeding your current position in the fast-food industry. I hope you realize that a start is just that. It's simply the beginning of your journey. I wish you well and sincerely hope you reach your destination (where ever, or whatever, that may ultimately be) with god's speed.

All the best, PPP