How To Know Whether Investing Is Pure Luck Or Skill, According To Research

How To Know Whether Investing Is Pure Luck Or Skill, According To Research


In the winter of 2008, Walter Watkins and Diane Dent were charged in a Pennsylvania court of running an illegal gambling operation. They were hosting poker games in the garage and were busted by an undercover cop.

Watkins and Dent conceded to everything the persecution has put forward. The games did take place, money did change hands, they did profit from the games in the form of tips. Instead, their defense lies in one critical point – is the game of poker a game of chance or skill?

The distinction is extremely important. If Texas Hold’em, the version of the poker game that took place, is a game of chance, then the defendants would indeed be guilty of a racketing crime.

If poker however, is a game of skill more than chance, the gambling element is non-existent. In that case, the players that evening cannot be more guilty than anyone who is engaged in a game of golf or tennis or chess. And the state would have no case against the Watkins and Dent.

Dominant Factor Test

The presiding judge invoked the Dominant Factor Test, a measure that is often used to determine whether an activity is gambling or otherwise.

In determining whether chance or skill is more predominant, the test itself relies on four criteria.

  1. Participants must have a distinct possibility of exercising skill and must have sufficient data to make an informed judgement.
  2. Participants must have the opportunity to exercise the skill, and the general class of participants must be able to exercise the skill.
  3. Skills or the competitors efforts must sufficiently govern the results
  4. The standard of skill must be known to the participants, and this standard must govern the results.

In that particular episode, the judge is satisfied that poker as a game has met the conditions required to be labeled as a game of skill. In delivering his judgement, he wrote that there are over 600 books on poker strategy and they all agree that poker is a game of skill.

In addition, he wrote that while the top poker players in the world can be clearly and meaningfully identified, the same cannot be said for other forms of gambling such as roulette. This is a clear sign that skill dominates.

Subsequently, in a study that analyzed more than 100 million hands of poker played on online gaming site Pokerstars, researchers discovered that 75% of the hands were determined without a showdown.

This goes to show that the actual cards (chance) only determined the results in a quarter of the games. How the player manipulates the cards he has been dealt with (skill) accounted for the majority of outcomes.

Golf and other Games

Let us apply the reasoning to other games to see if it stands.

Golf – books have been written on it and the top players in the world are obvious for all to see. Participants must exercise their skill to drive and putt the ball, and they must have sufficient knowledge about the course and conditions to make their play.

Other participants in the same game are also able to exercise this skill and how they play in return will be a factor in the final outcome of the game.

If a new golfer tees off with a professional, there is a very slim chance that he will emerge the winner simply by being lucky and hitting hole-in-ones all the way. However, the odds of that happening remains minuscule. Skill dominates, with luck playing a very tiny role.

The same can be said for tennis, for chess, for scrabble competitions and many other games.

Buying 4D

National Hobby – Queuing for 4D

The same though, cannot be said for our ‘National Hobby’ – buying 4D.

I have yet to see a book written about 4D strategies and despite its prevalence in the lives of many Singaporeans, there are no 4D coaches and 4D tournaments. There are no top 4D players in Singapore (at least not that I know of).

Punters pick a number out of ten thousand and hope to see it being drawn as a winner. Many pick numbers that are recently significant – the weight of a newborn, the number of a car involved in an accident, the time a bird flew past and took a dump on them. Good memory required perhaps, skill hardly.

Information is not required to make the selection decision. Contrary to what many perceive, whether a number is drawn ten times in the last year or has never been a winner in the past ten years does not affect its chances in the upcoming draw.

And no. Neither does the outlet in which you buy your tickets from matter. Tickets are blind. Each draw is a random independent trial.

And finally, how others play the game has no effect on your chances. Not at all.

Investing as a game

What about the game of investing then? Is it chance or is it luck? Have a ponder about it in the meantime and I will elaborate further in my next article.

Dive, snowboard and have moved house five times in the last ten years. Miraculously filled up every single page in my passport before it expired. Manage risk for a living.
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