Information asymmetry and informed consent in poker and financial markets
Feb 21, 2011

Information asymmetry and informed consent in poker and financial markets

There is a reasonably strong parallels between professional poker playing, financial investing and other aspects of society. As a poker player, I can talk about the poker side of the parallel which, given the relative simplicity of poker, may provide insight into more complicated matters.

In poker, much like many other fields, there is a distinct information asymmetry between regular winners and everybody else. To a regular winner, such as myself, it is abundantly clear who the "fishes" are - new players destined to lose. Online, one can sometimes determine this in a single hand, but certainly so after fifty or a hundred hands. Further, the regular winner knows with a high degree of certainty that the novices are going to lose their money. It takes a little while and every once in a while a losing player will get lucky, win big and withdraw before losing it all but this is rare; most of the time the obvious marks will lose all their money. And of course, the regular winning player knows precisely how to take the money of the poor player. In contrast, the losing player is generally ignorant of all this. They do not realize how obvious it is they are losing players or the near inevitability of their medium term losing.

The moral justification for playing poker rests on the mutual consent of all players. Everyone is aware of the basic rules and agrees to play despite them and hence one is not being exploitive in playing the game. The problem is that this enormous information asymmetry results in a consent that may not be truly informed. Given how this asymmetry entirely dominates the poker industry - indeed it is how regular winners can continue winning - it would appear knowing this is as critical to informed consent as knowing a flush beats a straight. If I know a player is very likely to lose while they think their odds are much higher, can it be said there is a moral basis for engaging in this transaction despite the voluntary consent?

The analogy between poker and financial investing is fairly close. In both cases there is voluntary consent to play in a game that can be modeled probabilistically. Terms such as "return on investment", "expectation values", "variance" and "risk" all transfer over bijectively. The most significant difference is that poker is negative sum (zero sum, minus rake) while the market has historically been positive sum with net increases for the majority of market participants. Indeed, transactions that are mutually profitable frequently occur in the market but not in poker.

The issue of information asymmetry in financial markets is far more complex than in poker, but it exists nonetheless. Namely, there is a relatively small number of market participants - various hedge funds, investment banks and the like - with significantly more access and control of information than your average investor saving for retirement. Joseph Stiglitz won the Nobel Prize in Economics for discussing many of these information asymmetries. The result is that an investment bank like Goldman Sachs has a series of advantages in the level of information they have access to and the ability to analyze that create a distinct advantage for them over other investors. The parallel is clear: given a similar informational asymmetry to the one from poker, can we say that informed consent is occurring and thus claim a moral basis for the financial system?

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