Poker, Property, Prices, and Public Goods

[Valuebettingtheriver]

A friend of mine recently posted this on his blog, and I thought I would share it...

Poker, Property, Prices, and Public Goods

The other night, while watching the World Series of Poker on ESPN, I noticed that players will pay --in cash, not chips--to see an opponent's hand after a fold. This phenomenon sheds some light on a couple of things: 1) the Coase Theorem, and 2) the public goods "problem" (which anyone with a brain--no, half a brain--knows, isn't even close to a problem, but is, instead, one of the free market's greatest accomplishments).

Before I continue, a little background on both concepts.

The Coase Theorem postulates that, in an environment with sufficiently low transactions costs, the initial allocation of property rights is irrelevant to where they end up. In other words, when bargaining is possible, resources will flow to their most highly valued uses. At the poker table, each player is given an absolute property right in his "hole cards."

Before I continue, a little background on "hole cards."

Hole cards are the cards that are dealt face down to a player in a poker game. In "Texas Holding Them," the "Cadillac" of poker games, and my favorite, each player is dealt two hole cards. In Omaha, each player gets four.

In any event, each poker player has a God-given, natural right to the knowledge of his hole cards. No one else may initiate force against him by sneaking a peek, and he has no obligation to reveal them to any of his opponents, because that would be anti-life.

Further, unlike markets, poker is zero-sum.

Before continuing, a little bit about the concept of "zero-sum."

When a process is "zero-sum," one participant's losses are offset exactly by some other participant's gains. At the poker table, when I take your money, you lose it, and at the end of the day the total amount of wins and losses between all the players will equal zero.

A zero-sum game means that all of the interests of the players are antagonistic. The better you do, the worse I do, and vice-versa. One can easily see how poker is a zero-sum game. Further, poker is a game of incomplete information. This means that, unlike chess (where all the moves are known by both players), poker players must act without knowing all the facts about the hand (most notably the identity of the opponents' hole cards).

One of the most valuable "goods" at the poker table is information. If one can discern what another player is holding, then he can play the hand perfectly. Even after a hand is over, when a player turns his cards over, his opponents can gain valuable information about how he plays certain hands (i.e., does he raise post-flop after making top pair?). The corollary here is that each player has an incentive to keep secret as much information about his play as possible. But like I said before, players often exchange information for cash. Why?

Because of the Coase Theorem. Here's an example. Player A folds a hand to player B. Because the hand did not go to a showdown, B does not have to show his cards. But A values the information more than some amount of cash in his pocket, and player B would rather have the cash than the secret. Since transactions costs are low enough, the exchange occurs, and the "property right" in the hole cards is transferred.

However, this transaction poses a problem. The public goods problem.

Before continuing, a little background on the public goods problem. A "public good" is anything that is difficult to produce the optimum amount of some good because of the good's positive externalities. Public goods are non-rivalrous and non-excludable, which means that one person's consumption does not preclude another's consumption, and that once the good is produced, one cannot prevent others from consuming it. Lighthouses, for instance, are public goods because even though a salty old sea-dog may pay to put the lighthouse up, every other ship--merchants, pirates, you name it--gets to use it to come into port. Public goods are generally underproduced because no one has the incentive to make them due to the free rider problem (if I have to explain THAT to you, then you really shouldn't be reading this, you fool).

Most poker games are not "heads-up." In other words, there are generally more than two people at the table. Further, when a player shows his cards to one person, he must show them to all players. Information at the poker table is, then, a public good (it is non-rivalrous and non-excludable). as such, why does any player pay the cost associated with uncovering the information? The question is even more puzzling since, given the structure of the game, the person who pays to see the cards not only incurs the monetary cost, but also "pays" the "price" of giving his opponents information that they can use later in the game.

The "pay to see 'em" phenomenon that I am the first to notice, uncover, and analyze in a rigorously academic fashion highlights another aspect of the market economy, to wit, the spontaneous generation of prices. Poker games have well-defined property rights (my chips and cards are mine; yours are yours) and low transactions costs. In other words, the settings are prime for exchange (and its corollaries, unparalleled progress, wealth, and freedom). And just like Hernando de Soto would predict, such exchanges do occur, and a priori make everyone--everyone--better off.

Like every other observable phenomenon, the exchange of information at the poker table is evidence that Adam Smith was right when he wrote of the human tendency to "truck, barter, and exchange information for cash at the poker table." Further, casino attempts to regulate "price gouging" for information have always led to shortages and queues for the information. This inevitably leads to poker information rationing and crazy schemes like only allowing the purchase of poker information on odd-numbered days, etc. Finally, the execrable Kelo case will unfortunately allow the government to seize poker information for private benefit, in contrast to the Fifth Amendment mandate that such seizures be used only "for public use."