Poker players battle rather than settle, says U of T study

Toronto, Canada -- Negotiation to benefit all parties not prevalent

Negotiating a settlement instead of continuing the fight is a known way to reduce costs and increase gains in a variety of areas such as litigation and labour conflicts.

But a study of high-stakes, online poker tournaments shows that even when conditions are ripe for deal-making and all parties can walk away with substantial winnings, the tendency is to continue to battle it out in a winner-takes-all fashion.

“People aren’t making as many deals as they could that would be beneficial to them. Perhaps they are overly optimistic,” said David Goldreich, a finance professor at the Rotman School of Management who conducted the study with his colleague, Lukasz Pomorski, also a finance professor at the Rotman School.

The researchers studied information from 1,246 online poker tournaments. Games typically started with about 1,000 players, each putting in an average of $77. Prize pools averaged $88,000, but the largest pools were well over $1 million. Deals, called “chops,” are agreements between the final few players to divide the prize money without playing the tournament till the end.

Despite the big spread between the entry cost and potential winnings, the researchers were surprised to find that deals were only made 31 per cent of the time. Deals tended to involve only two or three players and were more likely to happen when the prize pools were more than $100,000.

Surprisingly, there was no relation between deal making and the size of the prize below that amount. A deal was also more likely when the player proposing it was leading in the game, suggesting that the characteristics of players influence the likelihood of a deal and even how the winnings are divided.

While poker is not mergers and acquisitions, the researchers – not avid poker players themselves -- say the scenario they observed is similar to other economic situations, such as the negotiations between a firm and its various creditors when faced with bankruptcy.

University of Toronto News

News Added: 22 November, 2007

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