Wednesday, February 20, 2013

The Myth Of The Poker Bubble

Are you trying to seduce me, J9-Suited?
How were you first seduced by poker? 

For me, after many a late night with ESPN reruns of World Series of Poker (WSOP) hole cam-hyped, Lon McEachern silver-tongued and Norman Chad ex-wife-cracking tales of derring-do lightly washing over me, I, somehow, stumbled my way to a 233rd finish for $200 bucks (or was it a 200th place finish for $233? Can't remember - it was back in 2006) past 20K+ runners in what is now called the Sunday Storm on PokerStars. It was an $11 tournament, of which I had satellited in using Frequent Player points or something; I didn't even pay my own buy-in. I had no idea what I was doing: If I ever saw my hand history from that terribly long California Sunday, it could serve as a stand-up routine, I'm sure. Although I'd luckboxed my way past 20,000 players, the trap had been set; four years later, poker swallowed me whole.

Welcome to the article that has hijacked my Wednesday. "Origins of the Poker Bubble," written by Austrian economist Peter C. Earle and featured today on the Mises Institute website (hat tip "Business Insider" executive editor Joseph Weisenthal's relentless Twitter timeline) is fascinating, well-sourced, serious, academic and, also, wrong.  It promotes a tantalizing hypothesis: What if the poker boom-bust period of 2003-2007 were due to the naturally occurring market forces of economic Austrian Business Cycle Theory?

The man who launched a million bankrolls
Perhaps "wrong" is too broad a word. As an intellectual exercise, Mr. Earle presents a narrowly valid, but incomplete, argument. As I point out in the Storify of our enlightened Twitter debate this morning, you cannot slough off the economics of the wildly misunderstood and maligned poker community on macroeconomic theory. If anything, the gale force winds of business innovation (satellite tournaments feeding to more expensive tournaments), presentation innovation (the use of hole cameras for entertainment and educational purposes), the Moneymaker Effect, mass marketing of poker professionals, and, of course, government regulation, are more responsible than anything to the boom-bust cycles of economic theory.

I won't go into great detail of the history of poker in the United States as it's already well-covered elsewhere. However, here are some Cliffs for people new to my poorly designed and sporadically updated blog:

- 1998: Rounders, starring Matt Damon and Edward Norton, debuts lightly but establishes itself as a cult classic and poker promotional vehicle. (poker popularity UP)

- 2002: Henry Orenstein's "hole cam," a camera that shows players' face-down "hole cards," is used in airings of ESPN's World Series of Poker, going on to become the industry standard to heightening the drama of professional poker on TV. (poker popularity UP)

- 2003: Parlaying a $39 satellite tournament into a trip to play in Las Vegas' WSOP, a Tennessee accountant with a ready-for-primetime name, Chris Moneymaker beats an established poker pro heads up to win the Main Event and $2.5 million. The resultant explosion in poker popularity is often referred to as "The Moneymaker Effect." (poker popularity UP)

- 2006: Ethically questionable congressmen tack on anti-poker business Unlawful Internet Gambling and Enforcement Act (UIGEA) to a popular, must-pass piece of port security legislation, effectively outlawing the operation of an online poker business in the United States. Publicly owned poker companies flee the U.S. market while several private companies, including soon-to-be industry leader PokerStars, still cater to American players, even ramping up their advertising vehicles to claim larger market share in a legal gray area of enforcement. (poker popularity DOWN)

- 2011: After years of relentless, worldwide marketing by online poker industry leaders/rivals PokerStars and Full Tilt Poker (poker popularity UP), the Department of Justice (DOJ) clamps down on the legal gray area by seizing the domain names and shutting off access to the world's most popular poker sites still serving the U.S. market. Despite PokerStars returning the bankrolls of its U.S. customers quickly, Full Tilt is exposed for the Ponzi scheme it is, with millions of player bankrolls (and my little ole $458) inaccessible. The poker economy, and poker's already mainstream-dubious image, takes a huge hit. poker popularity DOWN)

In an intellectual vacuum of macroeconomics, Earle's theory is an intriguing one: Did access to lower interest rates and cheap credit fuel the poker boom? Inside, or outside, of the vacuum, I say no. While the access to excess capital obviously gives people more liquidity to their discretionary income, the impetus to play, or not to play, is largely socially driven.

Although the mindsport has been around for ages, poker, and its popularity in America, ebbed and flowed in modern times due to, at the very least, the aforementioned abbreviated history. It was always a niche game until innovations like the hole cam made it more telegenic; everyday players like a Moneymaker can win a lottery-sized jackpot over several days in Vegas; and the marketing of poker professionals and their seductive, free-wheelingly exotic lifestyles were driven into our brains in via bulk advertising. The social stigma against poker, and gambling at large, are so ingrained in America for a variety of reasons I won't even indulge in this space, that any economic cycle of poker could hardly be explained away Austrian Business Cycle Theory (ABCT). As a person with an MBA and an avid appetite for understanding American macroeconomics in the wake (and, in my opinion, current continuation of) the Great Recession, I would posit that Mr. Earle's theory is, in and of itself, encased in its own bubble.

Yeah, this pretty much changed everything
Like economists, us poker players are obsessed with data. Sample size is king, especially due to the high variance swings of the game itself. If we're looking at the etymology of the phrase "Austrian Business Cycle Theory," evidence of a "cycle" would warrant a larger sample size than five or ten years. Not that you need a statistically relevant sample size (um, it's 1000, right? Sorry - Statistics was my worst class in grad school...although Economics was my best ;-) in this case to prove the theory, but the more years you have, the better your data. Shoot, even our economic recessions are separated by a decade or so. God forbid I do the research, but if Earle's assertion that ABCT truly were afoot in the popularity of poker due to the manipulation of interest rates of the Federal Reserve, wouldn't we have seen evidence of this earlier - or even later?

Check out this historical graph of the Federal Reserve Funds Rate by Charting the Economy:

 If poker's popularity were truly tied to macroeconomic forces such as The Fed and Austrian Business Cycle Theory, where was the Great Poker Boom of 1958? '72? Okay, sure: The Reagan Administration killed poker popularity with its high interest rates, and Clinton obviously made it sexy again with his low ones.

But check out this Pokerati historical graph of WSOP Main Event entries, a fairly reliable bellwether of mainstream poker popularity:

 Huh. Poker just kinda plods along, interest rates be damned, until just after 2003. Wonder what changed? Well, the interest rate was under 5% in 2004 - but the same could be said for the late '50s, early '60s, and most of the '90s. Oh, that's right: The Moneymaker Effect. Without taking into account the convergence of online poker; the hole cam; liquidity enough in PokerStars' player pool (and other sites) to conduct satellites to the WSOP Main Event; aggressive poker site advertising; lack of government interference; and a chubby, Tennessee accountant, who looks like every third guy in your home game, going on to defeat an established, likable, professional poker player in dramatic fashion for life-changing money then the explosion - and subsequent retention - of poker popularity doesn't make sense. Historically, and even presently, you cannot view poker economics, live or online, solely through the vacuum of...well, economics.

As readers of my sporadic blog know well, I am fond of saying how game theory and poker relate to all aspects of life. Mr. Earle's article is a reflection of that. I agree with his assertion that the access to cheap credit in a country going on a spending, home-building, stock-pumping bender must have made it easier to play a game where the way we keep score is via dollars and cents. The general allure - and overall societal stigma - of poker is related to the amounts of money involved.

Poker: a friendly, sociable game that anyone can play
Part of the reason I was so moved to correct Earle's narrow assumptions is that, because the tenets of poker are so greatly aligned to society and human nature, to limit its economic descents and ascents as mere functions of remote governmental institutions that have little to do with its everyday appeal, just adds to the misconstrued cultural narrative of poker in America. I have always felt that poker needs something like a player's union where, at the very least, it would not only have protections for its industry's professionals, but also to have a spokesperson whose job it was to correct the media narrative of this great, life-affirming game. While I may never see such a wish granted in my lifetime (generally, poker players are a fiercely libertarian bunch, hardened by years of society's misunderstanding and the nearly zero-sum nature of winning a single hand of poker), stranger things have happened - in my lifetime.

Although I am busy with other things in addition to pursuing professional poker, and may not be the best candidate for such a desperately needed job anyway, I am more than happy to jump to poker's defense when I can. Because when I fall in love, I fall hard. And poker has been quite the Mrs. Robinson.


  1. casinogamesfun I’m wondering how I might be notified whenever a new post has been made. I’ve subscribed to your RSS feed which must do the trick! Have a great day!

  2. Love the reference to Mrs Robinson and poker. Seduction, timeless and classic if we are mindful.

    I was a 'cougar' long before the word was coined. I abhor being labeled.

    Love this website. What an interesting young man you are.
    Love your mind.

    I must learn to play poker properly.

    Joan M Bunney
    Motivational Speaker
    Advocate/Activist for Social Change