The Betfair Prof: "Why does the poker market differ from the prediction market?"

The Betfair Prof / Leighton Vaughan Williams / 14 May 2009 / 2 Comments

Or does it? The Betfair Prof, Leighton Vaughan Williams, explains it all...

Poker professional 'Action' Dan Harrington relates a tale of the day a tournament-playing friend of his made a first foray into a no-limit hold' em cash game. The friend bought in for 100 big blinds and soon picked up the Ace-King in early position. He raised and got three callers, including the two blinds. The flop came King - 10 - 9, and the first-timer was feeling confident staring down at his top pair, top kicker. Then the small blind bet and the big blind raised. He pushed all-in and got three callers. "How am I doing?" he excitedly asked Dan. "You might be third best ", replied the professional. In fact, he was fourth best, beaten by a set of 9s, a set of 10s and a straight that held up.

As Harrington explains, "His hand (top pair, top kicker), which is an excellent hand in most tournament situations, is a relatively weak hand in a deep-stack cash game when all the money goes in."

Having said that, we have to accept this particular cash-game novice was at least a little unfortunate.

Take now a different example, of another novice being dealt a pair of sparkling Aces in the big blind. He raises, and is called by a couple of early limpers who have position on him. The flop comes down 10 spades - 8 clubs - 6 diamonds. He makes a robust bet with the overpair and is called again by both opponents. The Queen of Clubs comes down on the turn and he bets again, and is called again. The river reveals the 2 of spades, he bets and is called all-in. How good are the sparkling Aces likely to be here? Well, our novice may be up against a player excited by a pair of Queens, or perhaps by a sophisticated bluff, but then again he may be up against two pair or better, and it's (just) possible that he's sophisticated enough to be able to judge the difference. In all probability, though, he's beat. Yet many players clutching the Aces would call instantly in this situation, and most of the time they'd lose at least a good part of their stack. As did our novice, to a Queen-high straight!

The problem is that the player holding the big pair knew he was once ahead, and it's part of the human condition that we generally fail to fully, or at least sufficient quickly, adjust to revised circumstances, especially when those circumstances mean we should revise downward.

What was the information our novice failed to adjust to properly? First, he failed to adjust to the fact that an overpair is a big hand before the flop, while an overpair in a game which has reached the river after a sequence of raised pots is at best a mediocre hand. He also failed on this occasion to fully adjust to the behaviour of the other participants in the market.

James Surowiecki, in his book, 'The Wisdom of Crowds', identifies 'independence', which he defines as a situation where "people's opinions are not determined by the opinions of those around them," as an important condition for group accuracy, and therefore for the accuracy of a prediction market.

So why does the poker market differ from the prediction market? Or does it? Any thoughts?

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