Is Trading A Game of Skill Or Chance?

Three german researchers have written a study called Is Poker a Game of Skill or Chance? A Quasi-Experimental Study. I was made aware of this article in Peter Warrens’s blog (only in Norwegian).

I totally agree with the content. Most traders have too much confidence and have too much ego. Overconfidence is a trader’s worst enemy. The element of randomness and luck are underrated.

When someone is successful we immediately rate them as very smart. However, there are so many players in the markets that it’s inevitable that a lot of the successful funds are just plain lucky.  Think about Long Term Capital Management – the geniuses that failed.

The conclusion from this research study was quite interesting:

……results showed that experts did not outperform average players in terms of final cash balance. Rather, card distribution was the decisive factor for successful poker playing. However, expert players were better able to minimize losses when confronted with disadvantageous conditions (i.e., worse-than-average cards). No significant differences were observed between the game variants.

My personal opinion is that this does not differ very much from the stock market. You have to manage risk in a proper way.