[Closed] shortfuse, an aspiring economist's view

1st article

For you non economists or anyone unclear of how currency works I'll introduce the topic

The pound was very low in march at around $1.4 : £1 you could also view this as the dollar being relatively strong in this period.

However, the pound has now strenthenged (or dollar weakened) and is at around $1.6 : £1

You can now buy more dollars with a pound, or for most poker players it means that you get less pounds from each dollar!

Consider, for example, I deposit £71 in march giving me a bankroll of around $100

Pretend I have now doubled my bankroll, it is august now and the exchange rate has shown the pound to be stronger (or the dollar weaker)

With my new bankroll of $200 having played well, I shall now decided to give up poker and cash it all out! (no fees for cashout)

This now means, with the new exchange rate, I have a total of £125

I have made a profit of £54, good news!

However, how has the exchange rate volatility effected me?

Now, lets assume the exchange rate has NOT been changed from $1.4 : £1 to $1.6 : £1

In this situation cashing $200 out would mean I would have £143, a £72 profit (this makes sense, i have doubled by bankroll having doubled my initial deposit) excusing any rounding up errors.

As you can see, at a bigger bankroll, even without cashing it all out, it could still affect you living standards and purchasing power (if you're a pro)

I hope that made sense, and this idea came to me after a lesson about currency a while back, but I had no relevant audience to express this idea. If you have seen any articles which has similar revelation, then please do link me!

gl mate

I'm currently playing 9 tables in the beginners section at partypoker, where only new members within 45 days are allowed i.e. more fish

I usually play 3-4 tables of SSS and the rest 6-5 using BSS, I find this allows me to simultaneously improve my game whilst with the opportunity for a quick double up too, but not be subjected to too much variance if I played all 9 using SSS!

Here is my graph since 10th julywhen I joined and received $50 starting capital. I play around 1-2 hours per day, giving me around 600 hands per day since I play 9 tables at a time.

I have a question, what's the best currency to play with atm in your opinion?

I'm thinking between pounds and euros, but since i suck at knowing anything about what's going on in world outside of poker i might be wrong. ♦

Originally posted by NightFrostaSS
I have a question, what's the best currency to play with atm in your opinion?

I'm thinking between pounds and euros, but since i suck at knowing anything about what's going on in world outside of poker i might be wrong. ♦

If people (economists etc) knew that answer they would be rich...

Originally posted by NightFrostaSS
I have a question, what's the best currency to play with atm in your opinion?

I'm thinking between pounds and euros, but since i suck at knowing anything about what's going on in world outside of poker i might be wrong. ♦

If you were american, the answer is $ because the exchange rate would not be in effect; you deposit $100 and cashout $200 if you double up, there is pure parity.

However, if you are not in america, and from UK or EU there are many things to consider, but I will breifly touch up on some points which come into my mind right now, and perhaps expand later once I give it more thought.

1. Exchange rates, in the current economy, are influenced largely by speculative buying and selling i.e forex. people take a position in the hope of making profit, this is what some traders do.

What does this mean?

Well, since the currency is effectively the price i.e £1 can buy $1.6 , and with the free market for currency (largely free, besides goverment intervention) it means in general the prices for all currency are all relative of one another, there is little arbitrage (keep reading) as the exchange rate would balance out eventually.

e.g if $1 : £1 and $1: €1 but for some strange reason, £1: €2

If this was the case, then people would buy as much £ as possible and convert to € and then convert to $ and then back £ . This person has now doubled their number of £! (excluding fees)

However, in the process of buying pounds, in the long run the exchange rate would balance out evenly since it drives the deamnd for €, thus in the long run the ratio should be 1:1:1

So, to answer one part of your question, it shouldn't matter for a non-american whether you use € or £, as they should both follow the same trend when compared against $.

(check this with my following links)
euro http://www.x-rates.com/d/USD/EUR/graph120.html
pound http://www.x-rates.com/d/USD/GBP/graph120.html

2. However, whilst there is clearly a very similar trend (as expected), the market (for currency and most other things) is never perfect!

You can see that the $: € graph is noticebaly more volatile than the $: £ graph.

My reasoning?

This is largely due to the differences in EU and UK monetary systems! I don't want to bore you, but basically the two have close but different priorities when it comes to economic goals e.g EU could be seen as too wary of inflation (Germany having been scarred from WW2) is just one of a vast number of differences.

3. However, we also have to consider exchange rate fees! Having to change between three different currencies may be more costly in terms of additonal fees, than the gains made from 'incorrect' pricings in the exchange rate.

4. The answer in short:

a) american: use $ so the exchange rate will not affect you (this means you cannot make losses from the exchange rate, but cannot also make gains!)

b) non-american: use domestic currency ie. if you are UK, then use £

The fees which you will incur may be very signifcant if you keep switching around, depending on your cashout (the % won't change but obivously £1 loss from £100 impacts a pro more than 1p loss from £1 cashout)

Reasoning from the intro about the currency market, there will little mispricing so it is far simpler to stick to domestic currency.

The poker sites could also be used as a medium for currency swaps! (though I don't suggest this, in fact- I would suggest you don't!)

If I deposited £100 back when the £1 could buy $2, then I would have $200

I then wait a year, for the £ to fall (ie $ strengthening) till the exchange rate is £1: $1.4 and cash my $200 out.
I now have £143! (excluding fees)
I didn't even have to play a hand!

Conclusion

If you are from UK or EU and have recently only started playing or started a few months ago (even worse when £1 could only buy $1.4), but plan to cashout (a bit) in a few months time then my suggestion, if the pound and euro keep rising against the dollar, would be to cashout out as soon as possible.

Why? (I will use £, but if you subsitute € in the next point it still makes logical sense, if you have been following then you should be enlightened that they both have similar trends against the $)

The exchange rate is now around £1: $1.6 and say you have $100 in your account.

You could cashout $50 now, and get £31.

But, you tell yourself you will grind for a few more months and the time has now passed, you now have $150! cool!

But, given the £ (or euro) has strengthened (which I believe will) and the exchange rate by the end of the 2009 is £1: $1.8 for example

You decide to cashout out $50 of your $150 at this later date, assuming the pound (or euro) has strengthened. You have cashed out £28

So, a £3 loss from the exchange rate in this case.

Now imagine, the numbers are far bigger since you are a pro!
You also need to consider; Can I sacrifice a bigger bankroll by cashing out right now and reduce the loss, given my belief the £ will rise? Is £3 loss worth that much to me by the end of 2009?

Now heres the real tasy bit: imagine the £ will fall in future! (highly unlikely imo) I can now make tax free capital gains! It would boost my spending power without even having to play! Or, my profits will appear bigger!

But heres the dilemma for when the £ is set to rise: Can you afford to postpone spending now, for spending more in the future? Are you willing to not fix the leaking roof now so you can redecorate your whole house in 10 years time? (Massive exaggerations, but best way to visualise this concept)

The key assumptions rely on the hardest things to predict; the markets. It would also require an extremely adept instinct and understanding for timing when to cashout or not.
BIGGEST ASSUMPTION IN THIS ARTICLE
I assumed the poker site is using $.
But some poker sites work in £ or €, in which case if you want no risk (also no gains) then try and find a site which operates in YOUR domestic currency.

E.G UK people may choose Skypoker (I think they operate in £)

BUT- THE MAIN PROBLEM WITH THIS IS THAT WE LIMIT OUR CHOICE OF PLAYERS, ALMOST ALL THE BIGGEST SITES ARE OPERATING UNDER $

There is a tradeoff.

Should poker players care about exchange rates? Absolutely.

Wow, did not expect such insightful response.

Thanks, helped me out to make up my mind.

Is it just me or is this just common sense? it's just plain old exchange rates that you use for when going on holiday. Not really economics lol and anyone could have figured it out regardless of whether or not they're an economist or not

The currency market is very hard to predict, so you really shouldn't try to "beat" the market as you will fail as often as you will end up succeeding. The money you keep back on currencies would be better spent elsewhere (shares, funds) because on average they will earn ~10% a year. So you should just withdraw when necessary. If you really want to lessen the swings, you can withdraw a set amount each day as well, but not really worth it because you don't want to keep any excess money on your poker account unless they are paying you for it (I think Betfair, Ultimatebet and Absolute Poker pay interest for your money). Even then it is not really worth it but better than nothing at least.

Oh, try to keep the poker account in Euros, it is the strongest currency by far.

As a fellow economist I wish you good luck!

Be aware of the marginal utility of hands. Applying the Utility theory to poker can be fun.

@Jonnym32

The concept on exchange rates may seem very easy and obvious if your in the know. However, many people may find this idea difficult to get their head around. Why doesn't the world only use one currency? What determines the exchange rate?

And more importantly, for poker players, what effect would it have upon my profits? When was the last time you seriously considered exchange rate as a crucial factor as part of your poker life?

The real economics is in analysing why the exchange rates fluctuate! But this is far more complicated and may bore the hardcore poker readers.

Economics isn't just about governmental policies and taxes etc. It is interesting in that it examines incentives, e.g the force which drives the currency markets and the world in general

@Anssi

You are 100% correct about the market being hard to predict! I am not suggesting to any readers to try and beat the market which we agree. It is very risky, only the knowledgable can have the slightest edge e.g traders. And most of them are also 'wrong'!

As for your investment strategy, I'm not sure what you mean. Shares and funds have been plummeting in this recession so you would really not want to invest yet unless you had insider information! As for the 10% I can only assume that is a guess... if you work out the maths, an investment fund which increases at that rate would double in less than 8 years (a rather overly optimistic projection)

Your suggestion of keeping poker account in euros would only be useful under certain assumptions:

a) The user is in the EU, thus exchange rates do not have effect

but most importantly:

b) You can find a 'decent' (or rather, preferable) poker site using euros!

As for your statement 'the euro is the strongest currency by far', this is flawed on so many levels.

What do you mean by strong?

1. If you mean strong, as most economists do, compared to the dollar (since the $ is world reserve currency - can be see since oil is known to be bought in dollars in barrels)

then this is wrong!

See my links to up to date graphs and you will see that you can buy more dollars with the pound than the euro can buy dollars

this is also proven, thanks to the wonderful function of price, by the pound being able to buy more euros! £1 : 1.15 euros currently

2. If you mean strong in terms of stability (in this period), then again please do read my above post again, I have already noted about how unstable the euro is compared to the dollar whereas the pound is less volatile against the dollar.

This highlights how many misconceptions there are over one tiny topic!

@MigArt

Hi! I'm glad to find another 'pokernomics' enthusiast (term from Steven Levitt- he has some interesting blogs and books I suggest for a bit of fun but nothing serious!)

Game theory is also a fascinating topic which is so evidently used in poker (whether you realise or not!)

So, you can understand why browsing through the strategy articles I was more than pleased to see Nash Equilibrium being introduced in the Platinum section!

GOOD LUCK AT THE TABLES TO ALL OF YOU

Originally posted by shortfuse
@MigArt

Hi! I'm glad to find another 'pokernomics' enthusiast (term from Steven Levitt- he has some interesting blogs and books I suggest for a bit of fun but nothing serious!)

Game theory is also a fascinating topic which is so evidently used in poker (whether you realise or not!)

So, you can understand why browsing through the strategy articles I was more than pleased to see Nash Equilibrium being introduced in the Platinum section!

Yeap, I noticed that too. Economics has a science does fit quite well with learning poker and using strategy to improve our play.

Good luck and keep reporting, I'll be curious to see your progression. I'm tempted to start a blog myself as well.

Originally posted by shortfuse
@Jonnym32

The concept on exchange rates may seem very easy and obvious if your in the know. However, many people may find this idea difficult to get their head around. Why doesn't the world only use one currency? What determines the exchange rate?

And more importantly, for poker players, what effect would it have upon my profits? When was the last time you seriously considered exchange rate as a crucial factor as part of your poker life?

The real economics is in analysing why the exchange rates fluctuate! But this is far more complicated and may bore the hardcore poker readers.

Economics isn't just about governmental policies and taxes etc. It is interesting in that it examines incentives, e.g the force which drives the currency markets and the world in general

Whether or not the world uses one currency or how the exchange rates are determined (unless of course you're looking at a fixed exchange rate as opposed to a floating exchange rate) is still copmletely irrelevant lol. All you've got to know is if the exchange rate goes up, it's bad for me. If it goes down, it's good for me. I struggle to see how people may find it difficult to grasp as they use exchange rates every time they go on holiday ♠ Surely they must visit the buraeu de change, get the foreign currency and realise a high currency is good whereas a low currency is bad

I've never considered exchange rates (mainly because i'm still on bonus money lol) but a poker player needs no economic knowledge to consider exchange rates when playing poker as it's common sense and in the current economic climate, the exchange rate is mentioned almost every day. And tbh, i never really would. If you're going to bring in exchange rates into poker you may as well use your money and go invest by buying and selling currencies

And yea i know it's not just government policies and taxes - i'm an economics student myself

Well isn't the real point here that the currency effect on poker winnings is very small indeed compared to the skill/discipline effect?

If I win $100,000 playing poker with $50 free starting capital, I'm not sad that my poker accout is not in Euros.

And if I play like an idiot and go busto, I don't think: "if only I'd opened a £ Sterling account, I'd have been alright"

♦

If we look at last 70 years, shares have gone up 10% on average each year. Yes, in some years they will go down, but most of time they will go up. There have been recessions back then too, even worse than the current one.

Originally posted by Anssi
If we look at last 70 years, shares have gone up 10% on average each year. Yes, in some years they will go down, but most of time they will go up. There have been recessions back then too, even worse than the current one.

This

@Jonnym32

I'm glad you find this easy, but please don't just say it's common sense. I'll repeat: Not everyone understands it.

If you don't appreciate how important it is for poker, then that is fine but I suggest others don't make the same 'mistake' and pay attention!

@Tim64

I believe the exchange rate could affect a players REAL purchasing power immensely.

Have a look at the figures in my first example and you can see see how 0.2 drop within a few months in $:£ could affect your cashout profits very significantly! It is worth paying attention to, is my point.

I think you may have misunderstood me, I didn't say that currency A is better than currency B (only in certain situations), but was largely referring to the volatility of the exchange rates which WOULD affect your CASHOUTS (if your weren't working domestic currency and other conditions)!

Prentend you are from UK.
How would you feel about a change from £1: $1 to £:$2 ?

This would 'HALVE' your 'would have been' cahouts!

This is clearly an exaggeration, but a more realistic jump from £1:$1.6 (march) to perhaps close to £1:$1.7 in a month would still affect your cashouts! This is much more realistic.

Here is an excersise for you (and anyone interested):
Roughly think about how much you cashout in a lump sum every month!

Now using your figure of $100,000, say you want to cash out $2,000 now when the rate is £1:$1.6

Thus you have £1250 in cash!

What would have happened if you decided not to cash out now, and wait a month. By now the pound (as will the euro) appreciate to £1: $1.7

You still decide to cash out $2,000 from $100,000 (we have to assume there is no more profit, otherwise it is hard to compare since people value of time differently, a topic which I briefly touched upon earlier)

You now have £1176

So, you have 'forgone' £74 by waiting a month. You have LOST £74. £74 to me is a lot of money, again people's preferences differ, but assuming we are all rational- we cannot be pleased about this. We cannot neglect this! This is all from a 0.1 point drop in a month!

This effect would , counterintuitively, be larger the better a player you are! (since you earn more!)

A bad player would 'lose' money regardless of exchange rates, he/she does not care and will eventually go broke! (assuming the exchange rate impacts him/her for the worse)

Again I ask a you a question which i asked earlier, how would you feel if the exchange rate operated favourably to you?

We should be glad to maximise all our profits, by virtue of the market and or skill!
If we could be glad about this 'free' boost to our cashouts, then we should care just as much and equally but in opposite directions about 'losses' from the rates operating against our gains!

@Anssi

Let's say your figures are correct, then sure shares may be a good investment indeed!

But, my point wasn't to see the exchange rate as a tool for making money, it is more important to consider how it may impact your cashouts and ability to spend in your own country.

Furthermore, if we did really believe shares increase by 10% we would have to consider inflation. How can the value of all shares increase, whilst the 'amount' of money remains the same (Fisher equation if you're still interested!)? £100 in the year 1909 is worth far more than £100 today just as £100 today would be worth far more than in the future. We cannot takes these prices as face value! By 10% I'm also assuming this is 10% per YEAR.

In reality the gains would have to take into account inflation, ie 10%- X (X is rate of inflation, measured in RPI in this case)

However, the real pressing issue if we really did want to consider shares as an ALTERNATIVE investment (assuming we do) is that shares do nothing.

They literally sit there, and in this case they grow. However, we as poker players, if we care for our future potential, should be investing our money by playing and learning 'on the job'. If we can increase our skill by more than 10% per YEAR (or compared to whatever time period you had in mind for the share figures) then this is a far better alternative if we really did seek to maximise gains. But, I digress.

It is an exciting predicament we have, in that there are far too many factors to consider on the smallest of subjects in a limited time!

Yes, the 10% a year didn't take inflation into account. I still prefer that to the negative value I'd get if I just let the money sit on bank account (inflation>interest most of time).

As a poker player, there is also a limit how much money you need. For example:
player A Plays largest tournaments, so there is no next limit for him to go. He doesn't really need more than 20-30k in his account.
player B don't think he can beat the larger limits/thinks he is more profitable on current limit.

I personally don't really need more than 7-8k on my poker account because I play only Double or Nothing- sit and goes, and the largest ones currently are only $100+4.
When you play poker, it is also work. With shares you can do something else too.

Originally posted by Anssi
Yes, the 10% a year didn't take inflation into account. I still prefer that to the negative value I'd get if I just let the money sit on bank account (inflation>interest most of time).

As a poker player, there is also a limit how much money you need. For example:
player A Plays largest tournaments, so there is no next limit for him to go. He doesn't really need more than 20-30k in his account.
player B don't think he can beat the larger limits/thinks he is more profitable on current limit.

I personally don't really need more than 7-8k on my poker account because I play only Double or Nothing- sit and goes, and the largest ones currently are only $100+4.
When you play poker, it is also work. With shares you can do something else too.

OK I wasn't suggesting investment strategies. My point was to concentrate on the part when you decide to cash out a part of that nice 8k bankroll! e.g the effects of exchange rate for you.