The Betfair Prof: "What does poker have in common with prediction markets - and tank driving?"

The Betfair Prof / Leighton Vaughan Williams / 16 February 2009 / Leave a Comment

How does poker have anything to do with prediction markets? The Betfair Prof, Leighton Vaughan Williams, tells all...

It was English lawyer and philosopher Francis Bacon who coined the phrase, 'Knowledge is Power', and information is the gateway to knowledge. Yet this is a fact seemingly lost on myriad poker players, wide awake to the cards in their hand but blind to their position on the board.

One way to look at this is to see the cards as representing the firepower on the battlefield and the player the tank driver. Indeed, poker does seem to possess the same sort of mystical attraction that draws so many to tank driving - the idea of going to war sitting down!

Now, as any tank driver can tell you, the best laid plans can easily go awry in the fog of battle. And this is where information is so important. The more you know about your enemy's strengths and weaknesses before you commit your own forces, the better suited you are to the combat at hand. On the battlefield the sight of the helicopter gunship overhead tells you something you may have preferred not to know about the strength of your adversary's hand, but it is information you need to know in order to deploy your best strategy going forward. At the poker table, the ammunition is less deadly, except to your pride and your pocketbook, but the same principle applies. The more you know about the ammunition of your opponents before you deploy your own firepower, the better placed you are to make the right decision. That comes down to position. If you are first to act, you will be able to glean next to nothing about your opponents' hands, especially playing online, before you have to make a decision. This is why it is so risky to commit your forces (i.e. your money) when 'out of position', i.e. acting early.

Prediction markets are much like this. Take the case of Francis Galton's ox. The crowd were invited to guess its weight and Galton charted the results. On average they got it almost exactly right, but what if Galton had only the opportunity to watch one of the throng make a guess? How much confidence would he have in that guess? Not a lot.

What about two guesses? Probably still not much, but maybe a little more. Move on to hundreds of guesses and the prediction market is beginning to take shape. Allow participants to wager more if they feel more confident in their guess and the market may forecast better than ever. In other words, the more information you have the more confidence you will have in your own estimate.

In this sense poker and prediction markets are very alike. The more you wish to commit to your decision, the more information you want to have. In poker, that normally means playing marginal hands 'in-position'. In real life it normally means putting more trust in the conclusions of well-populated, deep-funded prediction markets. In both cases, the stakes you are willing to commit should be linked to the information you have.

Naturally the same applies to tank driving. In that arena, of course, the stakes are considerably higher!

Professor Leighton Vaughan Williams is the Director of the Political Forecasting Unit and Betting Research Unit of Nottingham Business School, Nottingham Trent University