I recently had the privilege of writing a guest piece for pokerfuse regarding the recently-published Department of Justice document related to the federal case against former online poker payment processors Campos and Elie.
Check it out here: DOJ’s Response to Campos and Elie: Summary and Analysis.
I do hope to be back to semi-regular writing here soon once I can start finding time for it again. I have some ideas in the pipeline that I may be able to get to in the near future. Thanks for all of your support so far.
Showing posts with label Black Friday. Show all posts
Showing posts with label Black Friday. Show all posts
Tuesday, November 8, 2011
Saturday, June 18, 2011
Update/correction to risky site model: Casualty losses and tax effects
This is not the kind of stuff that I want to be spending my time writing about, but I discovered a serious enough practical change to one of my old analyses that I felt it was important to inform you all of it.
In my model for bankroll management and game selection in risky sites, I made the following assumption, which I thought was a reasonable guess as to the tax implications of losing access to poker funds:
It turns out that this is indeed not exactly true. In fact, being able to deduct this money against poker winnings is probably not possible in many cases.
The default classification for such a loss would be as a casualty loss. Even though a player may have been "gambling" on the chance that the site would return his funds, this must be considered a casualty loss rather than a gambling loss, which brings about some serious restrictions in many cases. The effects on the affected player's bottom line are significant.
Tax effects of stolen funds for those who file as professionals
Professional poker players can take such a casualty loss related to his poker business without any limitations. So, if you file as a pro, you can ignore all of this.
...but for amateur players...
Amateur players most likely have to take the loss of poker site funds as a casualty loss, which is a deduction that is strictly limited. A casualty loss can only be deducted to the extent that it exceeds 10% of adjusted gross income (AGI) — and, remember, while an amateur player still ends up getting to use his net (positive) gambling winnings for his bottom-line taxes, the AGI is a figure which is calculated after all winning sessions are added, but before losing sessions are deducted.
Example
Bob, a formerly-winning recreational small-stakes player, decides to deposit $500 on a current risky U.S.-facing poker site. Though he knows he will not make much money, he enjoys playing and wants to keep his poker skills in practice. He averages $3/hr in risky site funds by playing on the site, and after playing for several months, he has run his balance up from $500 to $1,500. The site then has its funds seized, declares bankruptcy, or otherwise absconds with the money. Bob was never able to cash out successfully.
The results:
Implications for the model
I modified the old model by making the losses due to unretrievable funds occur after taxes, rather than before.
To keep the charts simple, I considered only the 50NL case this time. See the old article for the other assumptions.
We see that, as one might expect, the effects of this tax correction do not change much based on the per-day probability of site closure (i.e. the average lifetime of the site). If the site is likely to die at some point, the hit of this tax situation will be about the same whenever it happens, at least when cashouts are liquid enough along the way.
Much more important is the liquidity of the site, which will dictate the probability of funds being lost forever when the site disappears. After all, these funds being lost is what causes this fun little tax situation to occur.
Once the probability of losing funds becomes reasonably high, the utility gained by playing drops off quite a bit. Remember, playing and winning will go on to cost money if the site ends up not paying. Even in the extreme case where there is no probability of the site ever allowing a cashout, the "money" won on that site would still be considered gambling winnings for a player who knowingly put money onto the site for the purposes of practicing his game. What a mess.
Overall, I would think that any reasonable estimate of the safety of current risky sites is going to involve more than enough risk to really cut into the expected utility of playing. So, if nothing else, this provides another strong incentive to choose even lower stakes than one otherwise might. The less funds that are at risk, and the less likely a player is to win money and go on to get it stolen from him, the less the effects of these negative tax implications will be.
Other bad news
Americans who don't file as professionals and who currently have funds stuck on Full Tilt Poker (or, more likely, the other, less-reputable sites) will also suffer negative tax effects if those funds end up not being returned to the players. Unless their online bankrolls were more than 10% of their total income for the year (plus the phantom session-by-session income in the AGI), recreational players will get no deductions at all if their money is absconded with.
Strangely, in the event that the funds aren't returned, winning recreational players would have been much better off somehow losing their entire bankrolls prior to April 15.
In particular, if Full Tilt Poker goes on to end up not returning U.S. funds, then of the alleged $150 million in American funds that are stuck there, I would guess that at least $50 million of them will be completely non-deductible, even though much of that sum represents taxable poker winnings.
Possible exceptions
It's possible that, at least in the case of money put on post-Black Friday sites knowing that there would be a chance of not being able to get money out, there might be a way to argue that the losses should be gambling losses rather than casualty losses.
The key factor here is the notion of constructive receipt, which is the rule which causes poker income to be taxable when it is earned rather than when it is cashed out. The underlying principle is that, as soon as a taxpayer is able to undergo actions to have the money in their hand, that income is immediately taxable.
In the case of a poker site that disappears with player funds, one might argue that the player did not actually have the ability to ever receive the money and thus that constructive receipt does not apply. If this approach were deemed to be valid, there would be no taxable income.
It is likely important that the funds weren't accessible at the time they were won, rather than just at some later date when the site closed or when a cashout was attempted. For a hypothetical site which has never processed withdrawals, this would be true. For U.S.-facing sites which are currently not processing U.S. withdrawals, perhaps this is true, though the mere possibility of you being able to successfully withdraw in the time after the money was won might be enough to invalidate this. For pre-Black Friday sites, it's definitely less true, as though it certainly had been difficult to withdraw funds prior to Black Friday, people were able to do it with some degree of regularity. It's hard to guess where this line would be drawn.
Also, it is difficult to find a way to reconcile this sort of accounting rule with the necessary session-by-session accounting, which implicitly assumes constructive receipt.
I find the tax effect described in this article to be quite absurd, even in the context of the other IRS rules that produce various unfair tax situations for poker players. Despite this, there might not be any reasonable way around it. Filing one's taxes as if these losses were gambling losses instead of casualty losses may not be considered appropriate by the IRS, which has a history of interpreting rules for anything related to "gambling" as harshly as they are able to. Fighting to clarify the nature of these losses may be costly.
Thanks to taxdood, Russ Fox, and PokerXanadu for helping me understand this tax situation.
In my model for bankroll management and game selection in risky sites, I made the following assumption, which I thought was a reasonable guess as to the tax implications of losing access to poker funds:
...For simplicity, we'll assume that any money lost due to site-specific risks [sites closing down or withdrawals being seized] is treated the same as a poker loss and directly deductible against poker winnings, though I believe this is not exactly true.
It turns out that this is indeed not exactly true. In fact, being able to deduct this money against poker winnings is probably not possible in many cases.
The default classification for such a loss would be as a casualty loss. Even though a player may have been "gambling" on the chance that the site would return his funds, this must be considered a casualty loss rather than a gambling loss, which brings about some serious restrictions in many cases. The effects on the affected player's bottom line are significant.
Tax effects of stolen funds for those who file as professionals
Professional poker players can take such a casualty loss related to his poker business without any limitations. So, if you file as a pro, you can ignore all of this.
The original approach is still accurate for anyone filing as a professional on their taxes.
...but for amateur players...
Amateur players most likely have to take the loss of poker site funds as a casualty loss, which is a deduction that is strictly limited. A casualty loss can only be deducted to the extent that it exceeds 10% of adjusted gross income (AGI) — and, remember, while an amateur player still ends up getting to use his net (positive) gambling winnings for his bottom-line taxes, the AGI is a figure which is calculated after all winning sessions are added, but before losing sessions are deducted.
Amateur players can only take a casualty loss if it exceeds 10% of their AGI, an amount which will always be artificially inflated above actual income due to session-by-session accounting that amateurs must use.
In almost all practical cases, this will mean that losses due to the risks of the current online poker environment will not be deductible at all unless you file as a professional.
Example
Bob, a formerly-winning recreational small-stakes player, decides to deposit $500 on a current risky U.S.-facing poker site. Though he knows he will not make much money, he enjoys playing and wants to keep his poker skills in practice. He averages $3/hr in risky site funds by playing on the site, and after playing for several months, he has run his balance up from $500 to $1,500. The site then has its funds seized, declares bankruptcy, or otherwise absconds with the money. Bob was never able to cash out successfully.
The results:
- If Bob's AGI for the year is above $15,000, he cannot deduct any of the $1,500 that he lost. This is almost certainly the case, even if Bob does not suffer from undue AGI inflation from his poker sessions.
- However, Bob still earned $1,000 in gambling winnings from his play on the site, even though he never got his money.
- Notice that, given that the site ended up disappearing, Bob would have been better off if he lost money on the site. Winning has increased his taxable income, despite not providing any actual money or deductions to Bob.
Implications for the model
I modified the old model by making the losses due to unretrievable funds occur after taxes, rather than before.
To keep the charts simple, I considered only the 50NL case this time. See the old article for the other assumptions.
We see that, as one might expect, the effects of this tax correction do not change much based on the per-day probability of site closure (i.e. the average lifetime of the site). If the site is likely to die at some point, the hit of this tax situation will be about the same whenever it happens, at least when cashouts are liquid enough along the way.
Much more important is the liquidity of the site, which will dictate the probability of funds being lost forever when the site disappears. After all, these funds being lost is what causes this fun little tax situation to occur.
Once the probability of losing funds becomes reasonably high, the utility gained by playing drops off quite a bit. Remember, playing and winning will go on to cost money if the site ends up not paying. Even in the extreme case where there is no probability of the site ever allowing a cashout, the "money" won on that site would still be considered gambling winnings for a player who knowingly put money onto the site for the purposes of practicing his game. What a mess.
Overall, I would think that any reasonable estimate of the safety of current risky sites is going to involve more than enough risk to really cut into the expected utility of playing. So, if nothing else, this provides another strong incentive to choose even lower stakes than one otherwise might. The less funds that are at risk, and the less likely a player is to win money and go on to get it stolen from him, the less the effects of these negative tax implications will be.
Other bad news
Americans who don't file as professionals and who currently have funds stuck on Full Tilt Poker (or, more likely, the other, less-reputable sites) will also suffer negative tax effects if those funds end up not being returned to the players. Unless their online bankrolls were more than 10% of their total income for the year (plus the phantom session-by-session income in the AGI), recreational players will get no deductions at all if their money is absconded with.
Strangely, in the event that the funds aren't returned, winning recreational players would have been much better off somehow losing their entire bankrolls prior to April 15.
In particular, if Full Tilt Poker goes on to end up not returning U.S. funds, then of the alleged $150 million in American funds that are stuck there, I would guess that at least $50 million of them will be completely non-deductible, even though much of that sum represents taxable poker winnings.
Possible exceptions
It's possible that, at least in the case of money put on post-Black Friday sites knowing that there would be a chance of not being able to get money out, there might be a way to argue that the losses should be gambling losses rather than casualty losses.
The key factor here is the notion of constructive receipt, which is the rule which causes poker income to be taxable when it is earned rather than when it is cashed out. The underlying principle is that, as soon as a taxpayer is able to undergo actions to have the money in their hand, that income is immediately taxable.
In the case of a poker site that disappears with player funds, one might argue that the player did not actually have the ability to ever receive the money and thus that constructive receipt does not apply. If this approach were deemed to be valid, there would be no taxable income.
It is likely important that the funds weren't accessible at the time they were won, rather than just at some later date when the site closed or when a cashout was attempted. For a hypothetical site which has never processed withdrawals, this would be true. For U.S.-facing sites which are currently not processing U.S. withdrawals, perhaps this is true, though the mere possibility of you being able to successfully withdraw in the time after the money was won might be enough to invalidate this. For pre-Black Friday sites, it's definitely less true, as though it certainly had been difficult to withdraw funds prior to Black Friday, people were able to do it with some degree of regularity. It's hard to guess where this line would be drawn.
Also, it is difficult to find a way to reconcile this sort of accounting rule with the necessary session-by-session accounting, which implicitly assumes constructive receipt.
I find the tax effect described in this article to be quite absurd, even in the context of the other IRS rules that produce various unfair tax situations for poker players. Despite this, there might not be any reasonable way around it. Filing one's taxes as if these losses were gambling losses instead of casualty losses may not be considered appropriate by the IRS, which has a history of interpreting rules for anything related to "gambling" as harshly as they are able to. Fighting to clarify the nature of these losses may be costly.
Thanks to taxdood, Russ Fox, and PokerXanadu for helping me understand this tax situation.
Saturday, May 7, 2011
To play or not to play: Optimal game selection with risky operators
There are few certainties in the post-Black Friday online poker world. One fact that we are all still sure of is that nothing has changed with respect to the fact that playing online poker is legal on the federal level in the U.S. If an American player finds a poker site willing to take his business, and if he can manage to get his money to and from that site, he is not violating any federal law by doing so.
So while the remaining U.S.-facing online poker sites are unlikely to be anywhere near as large, reputable, or financially liquid as what players are used to, as long as the risk of losing one's funds is small enough, there may still be some (severely-reduced) profit opportunities for American poker players, or, at the very least, a means of continuing to stay competitive at poker by practicing one's skills at one's leisure.
The remaining U.S. sites should be expected to be different than PokerStars and Full Tilt Poker in at least a few incredibly important ways:
Putting it all together, how big are these costs? How bad do these risks have to be before it's not worth even trying to continue to play online? We can quantify this with a model which can estimate the effects of these risks on expected utility through Monte Carlo simulation.
Model inputs
We start by making assumptions about various aspects of the risks and costs of playing on these sites. Some of these are deterministic, and others will be uncertain. Once we have settled upon reasonable estimates of these values for all of these parameters, we can vary the most critical parameters to find break-even thresholds for expected utility, which can guide player decisions.
Parameter choices
We'll again work with our typical poker player: $80k net worth, $40k non-poker income, $10k year-to-date poker winnings, and isoelsatic utility with ρ=0.8, paying both federal and NJ income taxes.For simplicity, we'll assume that any money lost due to site-specific risks is treated the same as a poker loss and directly deductible against poker winnings, though I believe this is not exactly true.
I'm not entirely familiar with costs of deposit and withdrawal at all of the remaining U.S.-facing poker sites, but for Carbon Poker, it looks like roughly $17 in costs to make a deposit, and about $5 per withdrawal for a medium-volume player.
We'll look at two possible levels of stakes for our player: multitabling $0.25/$0.50 NL at an hourly winrate of $10 with a standard deviation of about $70, or multitabling $0.50/$1.00 NL with an hourly winrate of $15 and a standard deviation of about $140. His $0.50/$1 winrate is higher in dollars, but lower relative to the stakes, which introduces not only the usual higher relative risk to his results, but also a need to keep a higher balance with the site. Keep in mind that he will have a much tougher time achieving these winrates on a remaining U.S.-facing website, since the player pools will be significantly tougher and it may not always be possible to play as many tables as he would normally be accustomed to. In the post-Black Friday market, I would expect winrates to be significantly lower than the good old days, and most players should probably drop down at least a level or two.
We assume that, for $0.25/$0.50 NL, he will redeposit when his balance falls below $800, and he will redeposit up to $1,200. He will withdraw down to $1,200 when his balance hits $2,000. For $0.50/$1 NL, we will double each of these deposit/withdrawal thresholds. Once we settle upon the other parameters, we can play with this to see which withdrawal strategy is optimal.
As a default, based on no science at all and simply my gut assessment of the risks of the current poker market, we'll assume that the per-day probability of site closure is 0.002 (i.e. the site lasts, on average, 500 days), that there is a 50% probability of players getting paid if the site closes, and a 75% probability of getting paid on any given cashout prior to closure.
We'll have him start playing in early May, so there's about N=240 days left in the year.
Algorithm
To calculate the expected utility of playing with these risks, these winrate parameters, and this utility function, we will simulate the system through the following steps:
Some results
For the parameters we chose, we can look at how the results change as we perturb the most uncertain parameters, those related to site-specific risks.
First, if we disregard the assumption of getting paid 50% of the time if the site closes, and instead vary that, we can see what the effects of additional liquidity are and find the break-even liquidity level. Since this liquidity and the probability of successful cashouts are linked, it is desirable to adjust both at the same time, so as we vary the liquidity level, we will assume that the risk of losing a cashout is always half the risk of losing a bankroll in the event of closure.
The rightmost point is when the site is fully secure, which is what decision-makers have been roughly used to in the pre-Black Friday environment. In this case, the player prefers to play his more pure-EV-profitable stake of 100NL. As the site gets less and less secure, the need to keep a higher bankroll at the site for 100NL will create more and more risk, and 50NL becomes better when the site liquidity falls below about 38%. For less than 5% liquidity, the increase in the player's utility by playing either stake is negative, so the player should refrain from playing at all, unless the entertainment value or the value of being able to practice and work on his game is worth the cost.
If we return the liquidity probability to its original default rate of 50%, we can instead look at how expected utility varies with the per-day probability of site closure.
When changing the average lifetime of the poker site, we see that the effect is less linear. Again, the rightmost point corresponds to perfect safety, a site that has no risk of closing. As the probability of closing is increased (and we assume a 50% chance of not being able to get money back after closure), the expected utility drops off significantly. 50NL overtakes 100NL around a per-day closure probability of 0.004 (i.e. a mean lifetime of 250 days). Not playing at all becomes the best choice at a per-day closure probability of around 0.01 (i.e. a mean lifetime of 100 days).
If we return to the original, fixed best estimates of these parameters (50% liquidity, average site lifetime of 500 days), we can tweak the deposit and withdrawal strategies to see which one works best. We'll stick with just 50NL here, since it seems to be the better choice. We need to keep the lower deposit threshold at $800 in order for the player to have enough bankroll to be able to play a bunch of tables of 50NL during his sessions, but we can vary the other three account balance strategy parameters.
We see that we can actually do better than the deposit and withdrawal strategy that we initially chose. It turns out to be better to wait to withdraw until at a higher balance, but still to deposit up to just $1,200. I suppose that this asymmetry comes about due to our utility function; we have a higher relative risk tolerance when we have earned more money on the year. We see that the "tightest" deposit and withdrawal thresholds do not do well here. This is all due to the interplay between the site-specific risks and the costs of moving money, and this behavior will probably change when any of these are modified.
Conclusions
If we compare the middle parts of each of the graphs to the rightmost points (which correspond to perfect safety), we can really see how much our utility suffers under these new risks. Players will need to have significant edges over their competition to overcome this.
In these results, the "shape" of the results is no surprise. We're not seeing anything we wouldn't have been able to guess without doing the math, but quantifying it provides a useful framework for guiding our play decisions under the uncertainty of the site-specific risks.
For our example player here, we see that, under the default assumptions with 50% liquidity and an average site lifetime of 500 days, playing 100NL will be a better risk-adjusted value than 50NL, though it's close enough that the player should move down if he feels the liquidity risk is greater, or that the sites have a significantly shorter expected lifetime. To dissuade him from playing entirely, there would have to be either a very low probability of getting paid back if the site closed, or withdrawals while the site is still operating would have to be less than 50% likely to go through. So, for this winning player, it looks like playing on a remaining U.S.-facing website should be better than quitting entirely as long as he has at least some faith in the current market. Many less skilled players with thinner winrates will be forced out of the market entirely from these additional risks.
This model is well-suited to being dynamically updated as the year goes on. The time horizon and year-to-date winnings will change constantly, which will shape bankroll decisions. Also, it should be useful to update the site-specific risks with better estimates as time goes on and as more information develops in the wake of Black Friday, or as the market positioning of the remaining U.S.-facing sites change.
While it's easy to see results by varying the site-specific parameters in this model when the player-specific variables (utility, income, winrate, etc.) are fixed, it's hard to draw broader conclusions over a more general player base. This is the sort of model that is best applied on a case-by-case basis, with each user's particular play variables fixed and known. If enough people are interested in using the spreadsheet I wrote for this, I might consider cleaning it up and hosting it somewhere.
So while the remaining U.S.-facing online poker sites are unlikely to be anywhere near as large, reputable, or financially liquid as what players are used to, as long as the risk of losing one's funds is small enough, there may still be some (severely-reduced) profit opportunities for American poker players, or, at the very least, a means of continuing to stay competitive at poker by practicing one's skills at one's leisure.
The remaining U.S. sites should be expected to be different than PokerStars and Full Tilt Poker in at least a few incredibly important ways:
- Since the subset of former American players which chooses to move to these sites will be highly skewed towards serious, professional players, all players should expect their winrates to drop significantly.
- Deposits and withdrawals will be more costly and more unstable, and players should account for some nonzero probability of never receiving a cashout.
- In the event of either voluntary or government-induced site closure, due to liquidity issues and the fact that these sites are less reputable, there is some probability that U.S. players would never get their account balances returned to them.
Putting it all together, how big are these costs? How bad do these risks have to be before it's not worth even trying to continue to play online? We can quantify this with a model which can estimate the effects of these risks on expected utility through Monte Carlo simulation.
Model inputs
We start by making assumptions about various aspects of the risks and costs of playing on these sites. Some of these are deterministic, and others will be uncertain. Once we have settled upon reasonable estimates of these values for all of these parameters, we can vary the most critical parameters to find break-even thresholds for expected utility, which can guide player decisions.
- Fees associated with deposits and withdrawals — Deposits and withdrawals at smaller sites are costly, in both inconvenience and fees, so managing account balances carefully will be important to avoid incurring too many of these expenses. Our model will consider fixed fees for depositing or withdrawing, which we can expand to include intangible costs that reflect the inconveniences of these money transfers.
- Deposit/withdrawal strategies — The simplest way to describe a rule that guides when to cash out or deposit is a set of four numbers. When the player's account balance is below some critical level (such as when it is too low to play his chosen stakes and number of tables), he should redeposit to bring his account balance up to some higher threshold level. Similarly, since he doesn't want to keep an unnecessary amount of money in a risky account, when his account balance hits some upper critical level, he should withdraw to bring his account balance down to some lower threshold level (which might be close to, if not exactly the same as, the threshold level for deposits).
- Winrate, standard deviation, and play volume — The model will approximate poker results by increments of the appropriate normal distribution. To match the rest of the model, rather than looking at winrate and standard deviation per hand, we can look at these on a per-day basis by factoring in the amount of hands the player plans to play each day. The number of days remaining in the year will be one of the inputs.
- Per-day probability of site closure — In our model, at the end of each day, we will assume that there is a fixed probability that the site will close forever. Each day will be independent of the last.
- Probability of getting paid if the site closes — When the site closes, there is a chance that all player balances will be lost.
- Probability of getting paid on each cashout — For each cashout prior to closure, there is a chance that the player will never see his money (or never be able to cash out in the first place). We can assume that this probability is less than that of the probability of getting paid when the site closes.
- Tax and utility functions
Parameter choices
We'll again work with our typical poker player: $80k net worth, $40k non-poker income, $10k year-to-date poker winnings, and isoelsatic utility with ρ=0.8, paying both federal and NJ income taxes.
UPDATE 06/18/2011: The above assumption may only be valid for those who file their taxes as professional poker players. Amateur poker players likely cannot deduct these losses at all in most cases, and this has serious implications for the model. See Update/correction to risky site model: Casualty losses and tax effects.
I'm not entirely familiar with costs of deposit and withdrawal at all of the remaining U.S.-facing poker sites, but for Carbon Poker, it looks like roughly $17 in costs to make a deposit, and about $5 per withdrawal for a medium-volume player.
We'll look at two possible levels of stakes for our player: multitabling $0.25/$0.50 NL at an hourly winrate of $10 with a standard deviation of about $70, or multitabling $0.50/$1.00 NL with an hourly winrate of $15 and a standard deviation of about $140. His $0.50/$1 winrate is higher in dollars, but lower relative to the stakes, which introduces not only the usual higher relative risk to his results, but also a need to keep a higher balance with the site. Keep in mind that he will have a much tougher time achieving these winrates on a remaining U.S.-facing website, since the player pools will be significantly tougher and it may not always be possible to play as many tables as he would normally be accustomed to. In the post-Black Friday market, I would expect winrates to be significantly lower than the good old days, and most players should probably drop down at least a level or two.
We assume that, for $0.25/$0.50 NL, he will redeposit when his balance falls below $800, and he will redeposit up to $1,200. He will withdraw down to $1,200 when his balance hits $2,000. For $0.50/$1 NL, we will double each of these deposit/withdrawal thresholds. Once we settle upon the other parameters, we can play with this to see which withdrawal strategy is optimal.
As a default, based on no science at all and simply my gut assessment of the risks of the current poker market, we'll assume that the per-day probability of site closure is 0.002 (i.e. the site lasts, on average, 500 days), that there is a 50% probability of players getting paid if the site closes, and a 75% probability of getting paid on any given cashout prior to closure.
We'll have him start playing in early May, so there's about N=240 days left in the year.
Algorithm
To calculate the expected utility of playing with these risks, these winrate parameters, and this utility function, we will simulate the system through the following steps:
- Initialize the player's starting bankroll by him making his first deposit, tracking the costs of doing so in a running net total starting from his year-to-date winnings. This running net will NOT include his day-to-day poker results; money on the site is not counted as a gain or loss until it is successfully withdrawn.
- At the start of each day, the player plays his daily poker session, and we adjust his site balance by a normal random variable with appropriate mean and variance. Since he can't lose more than he has on the site, we truncate this normal distribution on both tails by preventing the magnitude of the swing from exceeding his existing balance.
- After his session, if his bankroll is below his deposit threshold, he deposits according to his strategy. We track both the deposit itself and the costs of doing so in the running net.
- Then, if his bankroll is above his withdrawal threshold, he withdraws according to his strategy. He ends up receiving the cashout according to the chosen probability, which will be added to the running net, less the costs. If he gets unlucky and misses on the cashout, we assume it is lost forever.
- At the end of each day, the site closes down according to the chosen per-day probability. If the site shuts down, the player's balance is returned to him according to the probability of getting paid if the site closes. Either way, if the site closes, we exit the loop and go directly to step 7, as there's no longer any poker to be played (we neglect the possibility of choosing another remaining site for the rest of the year).
- Repeat steps 2-5 for each of the remaining N days.
- At the end of the year, if the site is still open, for the purposes of evaluating his year-end utility, the player withdraws his balance (and receives it according to the chosen probability). This gives his final net winnings for the year, and we evaluate the after-tax utility of this amount.
- Repeat steps 1-7 in a Monte Carlo simulation to simulate the average expected utility.
Some results
For the parameters we chose, we can look at how the results change as we perturb the most uncertain parameters, those related to site-specific risks.
First, if we disregard the assumption of getting paid 50% of the time if the site closes, and instead vary that, we can see what the effects of additional liquidity are and find the break-even liquidity level. Since this liquidity and the probability of successful cashouts are linked, it is desirable to adjust both at the same time, so as we vary the liquidity level, we will assume that the risk of losing a cashout is always half the risk of losing a bankroll in the event of closure.
The rightmost point is when the site is fully secure, which is what decision-makers have been roughly used to in the pre-Black Friday environment. In this case, the player prefers to play his more pure-EV-profitable stake of 100NL. As the site gets less and less secure, the need to keep a higher bankroll at the site for 100NL will create more and more risk, and 50NL becomes better when the site liquidity falls below about 38%. For less than 5% liquidity, the increase in the player's utility by playing either stake is negative, so the player should refrain from playing at all, unless the entertainment value or the value of being able to practice and work on his game is worth the cost.
If we return the liquidity probability to its original default rate of 50%, we can instead look at how expected utility varies with the per-day probability of site closure.
When changing the average lifetime of the poker site, we see that the effect is less linear. Again, the rightmost point corresponds to perfect safety, a site that has no risk of closing. As the probability of closing is increased (and we assume a 50% chance of not being able to get money back after closure), the expected utility drops off significantly. 50NL overtakes 100NL around a per-day closure probability of 0.004 (i.e. a mean lifetime of 250 days). Not playing at all becomes the best choice at a per-day closure probability of around 0.01 (i.e. a mean lifetime of 100 days).
If we return to the original, fixed best estimates of these parameters (50% liquidity, average site lifetime of 500 days), we can tweak the deposit and withdrawal strategies to see which one works best. We'll stick with just 50NL here, since it seems to be the better choice. We need to keep the lower deposit threshold at $800 in order for the player to have enough bankroll to be able to play a bunch of tables of 50NL during his sessions, but we can vary the other three account balance strategy parameters.
We see that we can actually do better than the deposit and withdrawal strategy that we initially chose. It turns out to be better to wait to withdraw until at a higher balance, but still to deposit up to just $1,200. I suppose that this asymmetry comes about due to our utility function; we have a higher relative risk tolerance when we have earned more money on the year. We see that the "tightest" deposit and withdrawal thresholds do not do well here. This is all due to the interplay between the site-specific risks and the costs of moving money, and this behavior will probably change when any of these are modified.
Conclusions
If we compare the middle parts of each of the graphs to the rightmost points (which correspond to perfect safety), we can really see how much our utility suffers under these new risks. Players will need to have significant edges over their competition to overcome this.
In these results, the "shape" of the results is no surprise. We're not seeing anything we wouldn't have been able to guess without doing the math, but quantifying it provides a useful framework for guiding our play decisions under the uncertainty of the site-specific risks.
For our example player here, we see that, under the default assumptions with 50% liquidity and an average site lifetime of 500 days, playing 100NL will be a better risk-adjusted value than 50NL, though it's close enough that the player should move down if he feels the liquidity risk is greater, or that the sites have a significantly shorter expected lifetime. To dissuade him from playing entirely, there would have to be either a very low probability of getting paid back if the site closed, or withdrawals while the site is still operating would have to be less than 50% likely to go through. So, for this winning player, it looks like playing on a remaining U.S.-facing website should be better than quitting entirely as long as he has at least some faith in the current market. Many less skilled players with thinner winrates will be forced out of the market entirely from these additional risks.
This model is well-suited to being dynamically updated as the year goes on. The time horizon and year-to-date winnings will change constantly, which will shape bankroll decisions. Also, it should be useful to update the site-specific risks with better estimates as time goes on and as more information develops in the wake of Black Friday, or as the market positioning of the remaining U.S.-facing sites change.
While it's easy to see results by varying the site-specific parameters in this model when the player-specific variables (utility, income, winrate, etc.) are fixed, it's hard to draw broader conclusions over a more general player base. This is the sort of model that is best applied on a case-by-case basis, with each user's particular play variables fixed and known. If enough people are interested in using the spreadsheet I wrote for this, I might consider cleaning it up and hosting it somewhere.
Wednesday, April 20, 2011
Apocalypse
Last Friday, the webpages at PokerStars.com and FullTiltPoker.com were replaced with the following image. Shortly after that, Americans were no longer able to play poker on these sites. Regardless of the immediate outcomes of this event, and regardless of the eventual future that online poker will have in the U.S. and in the rest of the world, this destructive change marked the sudden and immediate end of the first era of online poker.
After my dozens of hours of wading through online discussions over the past several days, I have been at a loss for what to say regarding what the poker world is calling "Black Friday". I don't have anything valuable to add to the ongoing community conversation for now, so I've erred on the side of staying quiet so as not to add to the chaos.
Nonetheless, I wanted to at least provide a brief summary and a few thoughts, mostly for the benefit of my personal acquaintances who may not be familiar with poker, or who may not have followed this particular issue closely. Since I have this blog, I might as well put it here. It won't be anything new for anyone who has been following the forums.
This is the biggest news in poker history, and the biggest damage ever done to the entire game's economy. It may even be the single highest-impact adverse event in the history of any competitive game.
In as few words as I can:
What happened?
Friday afternoon, the Department of Justice unsealed indictments against individuals associated with the largest U.S.-facing online poker sites, including PokerStars and Full Tilt Poker. These sites served only as a venue for players to play poker against each other, and they did not offer any casino gambling. The charges against the sites include both illegal gambling charges and bank fraud charges. In response to the indictment, these sites blocked U.S. players from depositing, withdrawing, or playing in their games.
Since 2006, there was a reasonable probability that the DOJ would take an action like this at some point. It was more of a matter of when it would happen, rather than if it would happen.
No federal law addresses online poker, though some outdated laws cover sports betting or general gambling games played against the house (rather than between players). The DOJ has felt for years that online poker is illegal under these existing laws, and they have been alone in this assessment.
The UIGEA, passed in 2006, did not change the legality of any form of gambling and failed to provide a framework with which the DOJ could actually prosecute poker sites. However, this law, which targeted banks and other financial intermediaries that dealt with illegal gambling websites, allowed the DOJ to go after the processing of deposits and withdrawals for poker sites. For most major banks, the threat that poker sites might be considered "unlawful online gambling" and that servicing them might attract the costly attention of the DOJ was enough to make it a bad business decision to accept such transactions.
Thus poker sites that continued to serve the U.S. were inevitably destined to work with increasingly less reputable banking partners. At some point, the DOJ was bound to have enough information to make some claim against the poker sites under the broad classifications of money laundering and/or bank fraud. That is the nature of the bank fraud charges in this indictment.
Aside from the alleged bank fraud, which presumably became necessary in order to continue to serve the largest poker market in the world, PokerStars and Full Tilt Poker are reputable, legitimate, global companies. They are explicitly licensed in every country which provides licensing for online poker; the sites would be happy to pay U.S. taxes in exchange for the benefits of U.S. licensing, but the U.S. still has not established a licensing framework. The sites operated in the U.S. under strong legal opinions that peer-to-peer strategy games like online poker do not constitute illegal online gambling. If they can demonstrate that the business of offering online poker to Americans does not constitute illegal online gambling, the bank fraud charges may not apply. It's complicated.
While I generally trust in PokerStars and Full Tilt Poker, I do not support their misrepresentation of their transactions to banks, if the allegations are true.
What are the immediate effects?
Nothing has changed with regard to the legality of online poker for the player. American players are not targeted in any way in this indictment, nor under any federal laws. Even the DOJ agrees that playing online poker does not violate any federal law. All of the laws at play here are those which target only businesses that operate or profit from "illegal gambling".
Despite the fact that the players have broken no laws, their account balances with these sites are currently inaccessible. The sites will attempt to return U.S. players' funds as soon as they are able, but presumably, with an ongoing investigation into allegations of bank fraud in the U.S., the sites are having trouble initiating any further financial transactions in the U.S.
PokerStars and Full Tilt Poker were the only licensed and reputable online poker sites that were willing to accept American players amid the country's ambiguous legal landscape. Other smaller sites continue to serve the U.S., but are neither safe nor liquid enough for the consideration of serious poker players, especially as moving money to and from international poker sites will continue to become more and more difficult until the U.S. changes its laws.
Even if the indicted sites go on to win in court and to clear themselves of all charges, which would allow them to resume their U.S.-facing business, this will take years.
So, basically, for now and for the immediate future, online poker no longer exists in America.
What happens next?
Americans will continue to be unable to access their balances with these sites for some time. While historical precedent and most of the informed legal opinions I've read say that the players will get their money back eventually (possibly years), there's some chance that these funds are permanently seized by the DOJ due to the nature of the fraud charges or otherwise lost due to a future bankruptcy of these one-time giant global poker companies. Having read many different perspectives on this complex legal situation, I think there's at least a 95% chance that U.S. players will eventually get back their money. edit: Just now, a DOJ press release confirmed that the DOJ is looking to allow the sites to return players' money in an expedient manner, so upgrade this to 99%.
Tens of thousands of American online poker pros are essentially out of a job (I do not expect the general public to sympathize with this). Millions more American gamers have lost the opportunity to conveniently and efficiently play the game that they love and responsibly enjoy. Those few that are addicted to gambling on poker will continue to play at the remaining unsafe sites. For both professional and recreational players, replacing online poker with live, brick-and-mortar poker at U.S. casinos is rarely an option, due geographical concerns as well as a variety of economic and efficiency reasons. Serious players will have few options for practicing and improving their game, and the rest of the world will pull ahead of America at competitive poker.
The entire modern global poker industry of the past several years has been built upon PokerStars and Full Tilt Poker, and the damage done to these two big online sites will have effects on the entire world of poker. Some poker tournament circuits and televised poker programs have already been cancelled, and countless more industry and media jobs will be disappearing as the poker economy contracts. I expect that this amounts to thousands of "real-life" jobs lost for Americans. The same negative effects will also carry over into other countries to some extent, as international players will have lost the ability to compete in a fully global player pool.
When the indictments are resolved, hopefully the illegal gambling charges are addressed in a way that leads to a court case that definitively establishes that poker is not unlawful gambling under U.S. law. Depending on who you ask, the illegal gambling charges are somewhere in between a real stretch legally and purely frivolous or just for show. However, the bank fraud charges are severe, and while not necessarily an unwinnable battle for the poker sites, it looks pretty bad for them — though, as I noted earlier, some say that the nature of whether or not fraud was committed does depend in some way upon whether or not the underlying operations were illegal gambling. Nonetheless, because of the severity of the bank fraud charges, the full set of indictments may be settled out-of-court, which would be a tremendous loss for the game of poker.
The silver lining in this catastrophe is the opportunity for poker to finally get its day in court, and I hope that those associated with PokerStars and Full Tilt Poker will push for this.
The other possible silver lining would be if this indictment sped up the process of passing U.S. legislation to allow for domestic licensing of online poker. Some speculate that it will help compel U.S. interests to work towards it faster, as domestic casino companies will no longer need to worry about competing with established international sites for the U.S. player base. Others expect the controversy of this event to dissuade our elected representatives from embracing anything related to online poker. There does not seem to be a consensus.
Personal impact and thoughts
While I knew this day was likely to come at any moment in the past 4.5 years, and while I managed my money and planned my poker career accordingly, that hasn't made it easy to handle.
I play the vast majority of my poker online and will not be able to replace it with live poker to any meaningful degree. Moving to another country to play online poker would be incompatible with the rest of my life. This affects not only my finances, but also my happiness and life balance. Poker has been invaluable to me over the years as a unique outlet for mental exercise, strategic competition, and social interaction, all while being an excellent complement to my academic lifestyle. Over the past few days, it has really sunk in that I truly do value the game on these merits, rather than solely as an income source.
The entire premise of the government's various aggressive actions against online poker as "gambling", as well as society's refusal to properly treat poker the way identically-structured strategy games are treated, is something I have always taken serious issue with. This event is the culmination of a decade of ignorant and misguided policy towards my game, and it really hurts.
I was prepared for this and I'll be okay, but this is life-changing for me — and not in any good ways.
What to do?
If you have any interest in supporting the game of poker, the rights of competitive strategy gamers, or even just in supporting this because it is important to me, I would encourage you to take a look at the PPA's action plan and contact some of our elected representatives. While the charges against these particular poker sites may be legitimate, now that the perceived "bad actors" would be out of the picture anyway, this is an opportunity to gather support for U.S. legislation that will license and domestically regulate online poker. The government needs to hear that millions of its citizens are being negatively impacted by its policies towards online poker, and that its citizens deserve the consumer protections of a safe and explicitly-legal online poker landscape.
The poker world will never be the same as it was prior to Friday, but it will inevitably be rebuilt sometime in the next few years. The second, permanent era of online poker will emerge in a way that suits the interests of U.S. politicians and powerful domestic casino interests. This is discouraging at best, but it's the way laws get changed. As far as the health of poker and its players are concerned: the sooner it happens, the better. Every day in which well-minded, law-abiding, tax-paying Americans don't have access to compete at online poker is an undue intrusion into personal liberties and an insult to the integrity of this great game.
Links to more information
Ongoing 2+2 sticky thread with links to all relevant documents, press releases, and media coverage
Active Twitter folks on the issue and its aftermath: CKrafcik, GaryWise1, Karak2p2, Kevmath, Pokerati, taxdood
PPA's action plan
That's it for now. In general, this blog will continue, as most of my planned future topics were not entirely confined to online poker.
After my dozens of hours of wading through online discussions over the past several days, I have been at a loss for what to say regarding what the poker world is calling "Black Friday". I don't have anything valuable to add to the ongoing community conversation for now, so I've erred on the side of staying quiet so as not to add to the chaos.
Nonetheless, I wanted to at least provide a brief summary and a few thoughts, mostly for the benefit of my personal acquaintances who may not be familiar with poker, or who may not have followed this particular issue closely. Since I have this blog, I might as well put it here. It won't be anything new for anyone who has been following the forums.
This is the biggest news in poker history, and the biggest damage ever done to the entire game's economy. It may even be the single highest-impact adverse event in the history of any competitive game.
In as few words as I can:
What happened?
Friday afternoon, the Department of Justice unsealed indictments against individuals associated with the largest U.S.-facing online poker sites, including PokerStars and Full Tilt Poker. These sites served only as a venue for players to play poker against each other, and they did not offer any casino gambling. The charges against the sites include both illegal gambling charges and bank fraud charges. In response to the indictment, these sites blocked U.S. players from depositing, withdrawing, or playing in their games.
Since 2006, there was a reasonable probability that the DOJ would take an action like this at some point. It was more of a matter of when it would happen, rather than if it would happen.
No federal law addresses online poker, though some outdated laws cover sports betting or general gambling games played against the house (rather than between players). The DOJ has felt for years that online poker is illegal under these existing laws, and they have been alone in this assessment.
The UIGEA, passed in 2006, did not change the legality of any form of gambling and failed to provide a framework with which the DOJ could actually prosecute poker sites. However, this law, which targeted banks and other financial intermediaries that dealt with illegal gambling websites, allowed the DOJ to go after the processing of deposits and withdrawals for poker sites. For most major banks, the threat that poker sites might be considered "unlawful online gambling" and that servicing them might attract the costly attention of the DOJ was enough to make it a bad business decision to accept such transactions.
Thus poker sites that continued to serve the U.S. were inevitably destined to work with increasingly less reputable banking partners. At some point, the DOJ was bound to have enough information to make some claim against the poker sites under the broad classifications of money laundering and/or bank fraud. That is the nature of the bank fraud charges in this indictment.
Aside from the alleged bank fraud, which presumably became necessary in order to continue to serve the largest poker market in the world, PokerStars and Full Tilt Poker are reputable, legitimate, global companies. They are explicitly licensed in every country which provides licensing for online poker; the sites would be happy to pay U.S. taxes in exchange for the benefits of U.S. licensing, but the U.S. still has not established a licensing framework. The sites operated in the U.S. under strong legal opinions that peer-to-peer strategy games like online poker do not constitute illegal online gambling. If they can demonstrate that the business of offering online poker to Americans does not constitute illegal online gambling, the bank fraud charges may not apply. It's complicated.
While I generally trust in PokerStars and Full Tilt Poker, I do not support their misrepresentation of their transactions to banks, if the allegations are true.
What are the immediate effects?
Nothing has changed with regard to the legality of online poker for the player. American players are not targeted in any way in this indictment, nor under any federal laws. Even the DOJ agrees that playing online poker does not violate any federal law. All of the laws at play here are those which target only businesses that operate or profit from "illegal gambling".
Despite the fact that the players have broken no laws, their account balances with these sites are currently inaccessible. The sites will attempt to return U.S. players' funds as soon as they are able, but presumably, with an ongoing investigation into allegations of bank fraud in the U.S., the sites are having trouble initiating any further financial transactions in the U.S.
PokerStars and Full Tilt Poker were the only licensed and reputable online poker sites that were willing to accept American players amid the country's ambiguous legal landscape. Other smaller sites continue to serve the U.S., but are neither safe nor liquid enough for the consideration of serious poker players, especially as moving money to and from international poker sites will continue to become more and more difficult until the U.S. changes its laws.
Even if the indicted sites go on to win in court and to clear themselves of all charges, which would allow them to resume their U.S.-facing business, this will take years.
So, basically, for now and for the immediate future, online poker no longer exists in America.
What happens next?
Americans will continue to be unable to access their balances with these sites for some time. While historical precedent and most of the informed legal opinions I've read say that the players will get their money back eventually (possibly years), there's some chance that these funds are permanently seized by the DOJ due to the nature of the fraud charges or otherwise lost due to a future bankruptcy of these one-time giant global poker companies. Having read many different perspectives on this complex legal situation, I think there's at least a 95% chance that U.S. players will eventually get back their money. edit: Just now, a DOJ press release confirmed that the DOJ is looking to allow the sites to return players' money in an expedient manner, so upgrade this to 99%.
Tens of thousands of American online poker pros are essentially out of a job (I do not expect the general public to sympathize with this). Millions more American gamers have lost the opportunity to conveniently and efficiently play the game that they love and responsibly enjoy. Those few that are addicted to gambling on poker will continue to play at the remaining unsafe sites. For both professional and recreational players, replacing online poker with live, brick-and-mortar poker at U.S. casinos is rarely an option, due geographical concerns as well as a variety of economic and efficiency reasons. Serious players will have few options for practicing and improving their game, and the rest of the world will pull ahead of America at competitive poker.
The entire modern global poker industry of the past several years has been built upon PokerStars and Full Tilt Poker, and the damage done to these two big online sites will have effects on the entire world of poker. Some poker tournament circuits and televised poker programs have already been cancelled, and countless more industry and media jobs will be disappearing as the poker economy contracts. I expect that this amounts to thousands of "real-life" jobs lost for Americans. The same negative effects will also carry over into other countries to some extent, as international players will have lost the ability to compete in a fully global player pool.
When the indictments are resolved, hopefully the illegal gambling charges are addressed in a way that leads to a court case that definitively establishes that poker is not unlawful gambling under U.S. law. Depending on who you ask, the illegal gambling charges are somewhere in between a real stretch legally and purely frivolous or just for show. However, the bank fraud charges are severe, and while not necessarily an unwinnable battle for the poker sites, it looks pretty bad for them — though, as I noted earlier, some say that the nature of whether or not fraud was committed does depend in some way upon whether or not the underlying operations were illegal gambling. Nonetheless, because of the severity of the bank fraud charges, the full set of indictments may be settled out-of-court, which would be a tremendous loss for the game of poker.
The silver lining in this catastrophe is the opportunity for poker to finally get its day in court, and I hope that those associated with PokerStars and Full Tilt Poker will push for this.
The other possible silver lining would be if this indictment sped up the process of passing U.S. legislation to allow for domestic licensing of online poker. Some speculate that it will help compel U.S. interests to work towards it faster, as domestic casino companies will no longer need to worry about competing with established international sites for the U.S. player base. Others expect the controversy of this event to dissuade our elected representatives from embracing anything related to online poker. There does not seem to be a consensus.
Personal impact and thoughts
While I knew this day was likely to come at any moment in the past 4.5 years, and while I managed my money and planned my poker career accordingly, that hasn't made it easy to handle.
I play the vast majority of my poker online and will not be able to replace it with live poker to any meaningful degree. Moving to another country to play online poker would be incompatible with the rest of my life. This affects not only my finances, but also my happiness and life balance. Poker has been invaluable to me over the years as a unique outlet for mental exercise, strategic competition, and social interaction, all while being an excellent complement to my academic lifestyle. Over the past few days, it has really sunk in that I truly do value the game on these merits, rather than solely as an income source.
The entire premise of the government's various aggressive actions against online poker as "gambling", as well as society's refusal to properly treat poker the way identically-structured strategy games are treated, is something I have always taken serious issue with. This event is the culmination of a decade of ignorant and misguided policy towards my game, and it really hurts.
I was prepared for this and I'll be okay, but this is life-changing for me — and not in any good ways.
What to do?
If you have any interest in supporting the game of poker, the rights of competitive strategy gamers, or even just in supporting this because it is important to me, I would encourage you to take a look at the PPA's action plan and contact some of our elected representatives. While the charges against these particular poker sites may be legitimate, now that the perceived "bad actors" would be out of the picture anyway, this is an opportunity to gather support for U.S. legislation that will license and domestically regulate online poker. The government needs to hear that millions of its citizens are being negatively impacted by its policies towards online poker, and that its citizens deserve the consumer protections of a safe and explicitly-legal online poker landscape.
The poker world will never be the same as it was prior to Friday, but it will inevitably be rebuilt sometime in the next few years. The second, permanent era of online poker will emerge in a way that suits the interests of U.S. politicians and powerful domestic casino interests. This is discouraging at best, but it's the way laws get changed. As far as the health of poker and its players are concerned: the sooner it happens, the better. Every day in which well-minded, law-abiding, tax-paying Americans don't have access to compete at online poker is an undue intrusion into personal liberties and an insult to the integrity of this great game.
Links to more information
Ongoing 2+2 sticky thread with links to all relevant documents, press releases, and media coverage
Active Twitter folks on the issue and its aftermath: CKrafcik, GaryWise1, Karak2p2, Kevmath, Pokerati, taxdood
PPA's action plan
That's it for now. In general, this blog will continue, as most of my planned future topics were not entirely confined to online poker.
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