In The Poker Face of Wall Street, Aaron Brown strives to correct middle-class morality’s low opinion of gambling. He insists that it is rational for poor individuals to spend their spare cash on low-payout lottery games. Otherwise, he points out, the money is likely to be stolen or, what amounts to the same thing, borrowed and not repaid.

Brown, an executive director at Morgan Stanley, also claims an important role for gambling in economic development. On the American frontier, he maintains, poker games frequently filled the role of banks. Some towns even financed their rudimentary law enforcement by such means—for example, says Brown, gunslinger Wild Bill Hickok was granted the faro concession in lieu of a marshal’s salary.¹

If not for people’s silly prejudice against gambling, Brown contends, stock exchanges would admit that the whole point of their existence is intraday trading. Instead, they cleave to the pious fable that their purpose is facilitating portfolio diversification, the achievement of which does not require execution on demand. Similarly, the author argues, uneasiness about being associated with gambling induces commodities exchanges to pretend that their raison d’être is enabling farmers to avoid risk by hedging the prices of their crops. In reality, says Brown, few farmers use commodity exchanges; avid risk takers do. “The vast majority of traders,” he continues, “have no connection to the physical commodity at all.”

Brown is on fairly solid ground in minimizing the difference between gambling and trading, which has negative expected value net of transaction costs and taxes. It is also true that speculators who disdain diversification and act on tips might fare no worse in a casino. Brown is less persuasive, however, in characterizing even the buying and holding of an indexed portfolio as gambling merely because that strategy is not totally devoid of risk. Some investors really do seek primarily to build their wealth over the long run by renting out their capital. They bet on nothing other than continuation of the centuries-long record of global economic growth. For such individuals, the services offered by Wall Street and by Las Vegas are not fungible.

Brown’s arguments, although provocative and well supported, seem to express a yearning for respectability. He has been highly successful in pursuits deemed legitimate by the bourgeoisie, but Brown has also devoted a sizable portion of his life to playing poker, an activity conventionally regarded as déclassé. In view of the unlikelihood that he will convert many Babbits to his point of view, Brown would probably be better advised to ignore them and continue deriving pleasure from his supposed vice.

Together with a defense of gambling, readers of The Poker Face of Wall Street will find insights into horse track betting and the October 1987 stock market crash. Brown also discusses laboratory and real-world experiments designed to induce an “information mirage.” This phenomenon occurs when some investors mistake a chance spike in price and volume for a response to information, resulting in a self-reinforcing price rise.

Especially fascinating is Brown’s account of devising a system to “bust” liar’s poker, a nonpoker game played on trading floors and involving bets on serial numbers of $20 bills. As Brown describes it, liar’s poker amounted in practice to organized exploitation of junior employees by senior traders. In this discussion, as throughout the book, he is unfailingly courteous toward others who have sharply criticized his views.

The author’s highly detailed discussion of poker strategy will be of interest primarily to devotees of the game. Brown connects card sense to the investment process only in a limited fashion, as when he describes how both poker players and security traders undercut their effectiveness by misinterpreting past successes and failures. He writes interestingly about problems in applying game theory to poker, but few applications to portfolio management pop out of these passages.

On the whole, Brown has been diligent in his research and attentive to details, yet a few errors crept into the text. For example, he states that G. Frank Lydston, the author of a classic work on poker, joined the California gold rush following his medical school graduation. Lydston may have mined gold in California, but he was only six years old when the rush ended because the surface and river sources were exhausted. Brown also depicts a finance professor “waxing enthusiastically,” which conjures up the image of someone polishing with great relish.

These imperfections, however, do not diminish the pleasure of reading The Poker Face of Wall Street. The author provides investment professionals an immensely valuable benefit by challenging them to consider familiar issues from new angles. His book is not only entertaining but also full of provocative ideas that merit lengthy and serious engagement.

—M.S.F.