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Why Is The FBI Investigating Fan Duel and Draft Kings?

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Back in August, Lazy Man gave us a tip - avoid DraftKings and FanDuel.  I won't recap the entirety of his article (I may get paid by the word, but I have scruples.  I'm getting paid for this parenthetical explanation, though.  Jackpot!).  In a nutshell, you create a fantasy team (staying within a "salary cap") and your team competes against millions of other entries.  If your collection of players does really really well, you win money.  Otherwise you lose your entry fee.  Because of the number of competing entries, you have to do amazingly incredibly awesome to cash in.  Having a team that is merely "great" won't be enough.

Gambling or not gambling

There's been  lot of discussion about whether daily fantasy sports (DFS) such as DraftKings and FanDuel are gambling.  It's very clear cut to me.  It's definitely gambling.  Gambling does not always mean a contest of pure chance (slot machines) - gambling can also be a contest with a large element of skill.  Poker and horse racing fit this mold.  Horse racing is unequivocally gambling, but it's clearly not a game of pure chance.  Someone who has expert knowledge is going to do far better (over the long run) betting the horses than I will.  Daily Fantasy Sports is basically betting the horses, but swapping out humans for the horses.

The question of whether DFS should be legal or not is an entirely different question.  Currently, Daily Fantasy Sports are legal in 45 states.

FBI Investigation

Several days ago, the FBI began an investigation into DraftKings and FanDuel.  The event that triggered this was a DraftKings employee winning $350,000 in a contest on competitor FanDuel.  Until recently, employees were banned from competing in contests run by their employers, but not those run by competitors.  They are now banned from competing on contests on competing site.

How much do these employees win?  At a conference last month, the co-founder of DraftKings bragged that some employees made more from contests on other sites than they did from their salaries at DraftKings.  A FanDuel spokesperson recently said that DraftKings employees have won 0.3% of the money the company has awarded in its history.  This might sound like a small number, but bear in mind that there are millions of people playing and that this relatively small group is winning 1 of every $300.

What's the Problem?

These employees are probably winning because they're huge sports fans, right?  Well, not necessarily.  Some of these employees have access to ownership data - they know how many people have selected each player.

How does this help?  Let's look at a completely hypothetical example.  Let's say that Tom Brady and Peyton Manning have the exact same salary and are projected to have the exact same value in the coming week.  It's a coin flip.

Let's also say that 100,000 people picked Peyton Manning and 200,000 picked Tom Brady - and as an employee with access to ownership data, you know this.  Why the disparity?  Perhaps non-football reasons that are not obvious to the casual fan.  Peyton's brother Eli threw four interceptions last week and is pulling Peyton down with him.  Meanwhile Giselle was in a popular commercial and Tom got a bit of a boost from that.  These are obviously stupid reasons to pick Tom over Peyton, but subtle things often affect us subconsciously.

Who do you pick?  You pick Peyton.  Why?  Because the projected payoff is exactly the same, but you get a better boost with Peyton.  If Peyton outperforms Tom, you get a boost that you have to share with 100,000 people.  If Tom outperforms Peyton, you get a boost that you have to share with 200,000 people.   Tom helps you less.

If the point isn't clear, perhaps this will help.  You're in a March Madness pool with 20 people.  There are two equally dominant teams - Lazyford and Kosvard.  Since Lazyford's campus is twenty miles away, 16 people have picked them to win.  Which team do you pick in order to maximize your potential payout?  Kosvard, of course.  It's the same basic concept - when the projected cost/reward ratio are the same for teams/players, pick the least popular one.

What Does the Future Hold for DFS?

Honestly, I don't know.  While employees of the sites are now banned from playing on competing sites, this really doesn't fix the problem of ownership data being used to optimize lineups.  An employee could simply share (or sell) this data to family and friends, have them play, and take a cut.  If they are smart enough - playing medium-sized games and spreading out the people geographically - they can probably get away with it.

 

Last updated on October 18, 2015.

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3 Responses to “Why Is The FBI Investigating Fan Duel and Draft Kings?”

  1. My husband and I had a long discussion about whether DraftKings is gambling. I said that you’re putting down money on something whose outcome you can’t really predict/control. So… yeah. He pointed out that the same could be said of the stock market. I pointed out that you have information on the stock market yada yada. He pointed out that past performance can indicate players’ performance just like a company’s performance.

    I have to admit, he made a compelling point. But DraftKings is still gambling, not investing.

  2. Kosmo says:

    One key difference to me is the length of the event. With the stock market, you’re generally holding for a significant amount of time (a year or more).

    Past performance and other information about the company are reasonably predictive over a relatively long term.

    Likewise, sports performance is relatively predictable over a long term, given the right information.

    These contests aren’t predicting performance over the long term, though. They’re predicting it for one day.

    Can you predict how Apple, Ford, Nike, and Procter and Gamble will do over the next year? With the right information, I believe you can do this with some regularity.

    But can you predict how these stocks will do tomorrow? Not with anything close to the same regularity. The strongest company in the world is still going to have a lot of days where the stock drops in price.

    That’s what you’re trying to do with DK and FD. You’re not predicting how well Mike Trout will do in 2016; you’re predicting how he will do on May 22, 2016. As great as Trout it, he’s going to have a lot of days where he’s 0-4.

    Also, the daily nature of the contest means that the operator is taking their cut again, and again, and again. That makes it less likely that you’ll come out ahead. Conversely, if you buy and hold a stoke, you can keep fees to a pretty low percentage of your investment.

  3. Kosmo says:

    Here’s an interesting ESPN article on the topic:

    http://espn.go.com/chalk/story/_/id/13924648/investigation-commissioned-draftkings-says-employee-locked-lineup-receiving-internal-data

    There are a couple of interesting quotes buried deep in the article:

    1) “In an interview on ESPN’s Outside the Lines, [DraftKings CEO] Robins estimated a “few dozen” of his employees competed on FanDuel”

    2) “FanDuel told ESPN that roughly 0.3 percent of overall winnings on its site, believed to be in the $6 million range, were awarded to DraftKings employees playing on FanDuel”

    Let’s assume that both companies are giving truthful and accurate statements. This means that a few dozen (~36) DraftKings employees are winning 0.3% of winnings at FanDuel. That’s an absurdly high percentage for what is really a tiny group of users (compared to the entire FanDuel customer base).

    Either someone (or both companies) are wrong, or some of these people are using player ownership data to determine optimal rosters.

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