Lazy Man and Money

Gambling on the Election

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[The following is an article written by the occasional staff writer, Kosmo. He mentioned this to me months and months ago and I am kicking myself that I didn’t partake for the experience.]

Would you like to gamble on the upcoming election?

I don’t mean an indirect gamble, like putting money into (or pulling money out of) the stock market.  I mean an actual direct wager.  You can do it, regardless of your state of residence, and it’s even apparently legal.

I’m talking about the Iowa Political Market.  It is a non-profit market operated by the University of Iowa’s school of business.  The site essentially allows what would otherwise be illegal gambling for the purposes of academic research and teaching (in other words, you are the product).

How it works

You send a check to fund your account.  An actual paper check, sent via snail mail.  A one-time account setup fee of $5 is deducted.  Investments are limited to $500.

Now you buy and sell contracts that are based on the candidates or parties.  There are two basic varieties:

  • Winner-take-all: If your candidate wins, your shares can be cashed in for $1 each after the election.  If your candidate loses, your shares are worthless.  The presidential winner-take-all is by far the most popular market, with more than $100,000 invested.
  • Vote share:  You can cash in your shares for ($1 * the proportional of the two-party popular vote).  For example, let’s say the Democratic candidate gets 69% of the vote, the Republican candidate gets 23%, and candidates for the other parties combined for 8%.  We exclude the third party vote to get a ratio of 69:23, or 3:1.  This means that the Democrat share would be worth 75 cents and the Republican share would be worth 25 cents.

What can you buy

(Note: quoted prices are around noon Central time on October 11.  They will change by the time you read this.)

Presidential race:

  • In the winner-take all race, Hillary Clinton last traded at 83 cents per share and Donald Trump traded at 17 cents (technically they are Democrat shares and Republican shares).  If you bought $500 worth of Trump shares (2941 shares) and he wins in November, you could cash out for $2941.  It seems like there might be an opportunity to make a few dollars betting on Trump.  If you buy at 17 cents (which is the all-time low for Trump) and it bounces up to 22 cents next week, you can sell those shares for 22 cents and make a profit.  Surely at some point Hillary will have a bad day and Trump will spike a bit – that’s the ebb and flow of a campaign.  You don’t need to hold until maturity, and there are no per-trade fees.
  • In the vote share market, Hillary Clinton last traded for 60 cents and Trump traded for 38 cents.  In an efficient market, these would always add up to 100, but this is a relatively small market.  If you actually bought both investments at those prices, you’d be guaranteed a profit – it would cost 98 cents and would be worth $1 after the election.  We first must exclude any third party votes and look at just the votes cast for those two candidates.  Let’s say there are 100 million votes case.  If you bought Hillary shares and she gets 60 million votes, you break even.  If she gets 55 million votes, you lose 5 cents per share.  If you own Trump shares and he gets 38 million votes, you break even.  If he gets 45 million votes, you have a profit of 7 cents per share.  I think the Trump shares are also a good buy here.  He only needs to get 38% of the two-party vote to break even.  For example let’s say that the third parties combine for 10%, leaving Clinton and Trump to split the remaining 90%.  If Trump got 38% of the 90% – or 32.4% of the total votes cast – to break even.  As divided as we are politically, that’s a pretty low bar to clear.

Congressional Races

You can also wager on control of congress.  These are all winner-take-all – whichever scenario plays out will be worth $1 and the others will be worthless.

There are four scenarios:

  • Democrats control the Senate, Republicans control the House – 37.8 cents
  • Republicans control the Senate and the House – 28.0 cents
  • Democrats control the Senate and the House – 20.2 cents
  • Republicans control the Senate, Democrats control the House – 0.3 cents (not 3 cents, 0.3 cents)
  • Other (there’s a tie in either the House or the Senate) – 19.4 cents

Again, this is not a perfectly efficient market, since you can also a bundle of all five for $1.

Some knowledge of politics helps here.  After each census, congressional districts are redrawn to have equal representation (some states may gain or lose representatives, but even within a state, the population will shift).  Some states have non-partisan (neutral) committees to re-draw districts, in an effort to ensure fairness.  However, in most states, state governments control redistricting.  If your party controls the state house, state senate, and governorship, you can re-draw the districts to help your part.  This is called gerrymandering.  Both parties engage in the practice, but Republicans had more opportunities following the 2010 census, simply because they had complete control in more states than the Democrats did.  As a result, the Republicans have a pretty firm grip on the US House, at least until the next census, after which the districts will be re-drawn once again.

In the Senate, one third of the seats are up for election every year.  This year, the Republicans have 24 seats at risk and the Democrats have just 10.  If the Democrats win 15 seats and the Republicans win 19, the Democrats would gain control of the Senate, 51-49.  This is considerably more likely than the House flipping, although even this is a coin flip at this point.  For this reason, the combination of the House flipping and the Senate not flipping is an extreme longshot – it would pay out $1 on an investment of 0.3 cents.

I Have No Clue What (Illegal) Gambling is Anymore

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There was a time when I thought I knew was legal and illegal gambling was. Now, I have no clue. It’s fine if I’m clueless (I’m used to it), but it seems like the rest of American and even the courts are unsure. That’s a problem.

We can’t obey the rules if we can’t even agree what they are.

The reason why this all changed seems to be Daily Fantasy Sports (DFS) websites like DraftKings and FanDuel. John Oliver explains them (and the situation) in hilarious fashion here:

Before Oliver’s great video I wrote about DraftKings and FanDuel.

The confusion comes about in that there’s a carve-out of some federal gambling law (2006 Unlawful Internet Gaming Enforcement Act) that allows for fantasy sports. The idea was to enable your office to run a March Madness bracket.

Here’s a rundown from that previous article of what I think I understand about gambling.

That description makes it sound like a lottery right? You put in some money and some event churns out a winner who receives the bulk of it, with a sizable portion siphoned off for the lottery operator. Except that companies can’t operate lotteries. State laws vary, but almost all of them frown on that. The states make an exception for a few operations that give the operating back to the state to fund infrastructure.

What’s the difference? Law is just a passing interest of mine, but it seems to whether it is a game of luck or a game of skill. Games of luck are “bad.” Games of skill are “maybe okay?”

State lotteries are quite clearly games of luck. Anyone trying to claim they know which way the ping-pong balls are going to bounce is simply nuts…

This has always been interesting to me. I don’t understand why regulators would draw a line in the sand between luck and skill. It opens up a ton of issues. There are many, many cases where gambling is a combination of luck and skill.

Let’s take some casino games for example. Roulette seems to fall under luck. As a (rare) craps player, I’d say there’s some skill in making bets that gives the house the least advantage. Many argue that if you can count cards, you can even beat the house at ’21’. I’d say that counting cards is a skill and thus I could be justified in opening a ’21’ casino. Of course poker is the most obvious example. The cards you are dealt are luck, but the decisions you make after that are firmly in the skill category.

Staff writer Kosmo made a better, more succinct point:

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.

There have been questions for some time about the legality of Daily Fantasy Sports, but they sure seem legitimate when you read the companies that have taken investments in the companies. (John Oliver points this out in his video well.)

I’m left to wonder about all other gambling. Using the casino logic above (and the fact that casinos themselves are legal in many, many states), it seems that gambling websites such as Guts would be legal too.

It seems like at some point we need a bright line to know what is illegal gambling and what is legal gambling. I’m not convinced that the difference between skill and luck is where that line should be. Maybe you can say that if anything is 100% luck it is gambling, but even then lotteries are legal, so you can’t call them illegal gambling.

This is one of the few areas where my gut isn’t telling me what is right and what is wrong. I like for people to have freedom of choice to spend their money on the entertainment they want. At the same time, I like to protect consumers from potentially harmful addictive behaviors whenever possible.

So I leave it to the readers? What do you think?

Tip: Avoid DraftKings and FanDuel

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I’ve been meaning to write sports gambling “contest” sites for some time. Fortunately an article on DraftKings in The Boston Globe kickstarted my attention.

If you don’t know what DraftKings and FanDuel are, you should probably remove the large rock you’ve been living under. Just kidding, I watch a good amount of sports and the commercials are everywhere.

These websites, along with some smaller ones, are known as Daily Fantasy Sports or DFS. People go to the websites, pay a fee, and create a team of players. The entry fee money is pooled and the team with the best performing players is the winner getting the bulk of the money.

That description makes it sound like a lottery right? You put in some money and some event churns out a winner who receives the bulk of it, with a sizable portion siphoned off for the lottery operator. Except that companies can’t operate lotteries. State laws vary, but almost all of them frown on that. The states make an exception for a few operations that give the operating back to the state to fund infrastructure.

What’s the difference? Law is just a passing interest of mine, but it seems to whether it is a game of luck or a game of skill. Games of luck are “bad.” Games of skill are “maybe okay?”

State lotteries are quite clearly games of luck. Anyone trying to claim they know which way the ping-pong balls are going to bounce is simply nuts. However, there is a 2006 federal Unlawful Internet Gaming Enforcement Act that allows for fantasy sports to count as games of skill.

This has always been interesting to me. I don’t understand why regulators would draw a line in the sand between luck and skill. It opens up a ton of issues.

There are many, many cases where gambling is a combination of luck and skill. Let’s take some casino games for example. Roulette seems to fall under luck. As a (rare) craps player, I’d say there’s some skill in making bets that gives the house the least advantage. Many argue that if you can count cards, you can even beat the house at “21.” I’d say that counting cards is a skill and thus I could be justified in opening a “21” casino. Of course poker is the most obvious example. The cards you are dealt are luck, but the decisions you make after that are firmly in the skill category.

Gambling on sports, for some reason, is illegal in most states. One could claim that they are games of skill too. In fact, some experts have.

The result is a discussion of what games have substantial luck vs. substantial skill. I don’t see how such a discussion is productive. It seems very subjective to attempt to quantify the luck vs. skill in a game that relies on both. Bad luck in poker can doom the most skillful player. Good luck can defeat the most skillful player.

Daily fantasy sports is the same way. I don’t think anyone expected Jackie Bradley Jr. to have an offensive breakout game yesterday raising his slugging percentage by a hundred points. That’s like picking the Bradley Jr. ping pong ball and having it come up in a lottery.

Logically, I keep coming back to sample size. If I’m playing one poker hand, my best friend is going to be Lady Luck. If I’m playing hundreds or thousands, I better develop some skill.

The problem with huge daily fantasy sports sites is that you are competing against potentially thousands or tens of thousands of people. If one of them picked that Bradley Jr. ping pong ball yesterday, you were at a significant disadvantage. Odds are that a hundred or more of your competitors did. Even if you were a baseball expert, you wouldn’t have seen that coming and would have likely lost. Tonight it will be another player playing the role of Bradley Jr. Do you feel lucky is guessing him?

Don’t feel bad if don’t. Even computers aren’t great at predicting March Madness. That brings up the point that even the top experts in college basketball bust their brackets just like a monkey throwing darts.

This is all long-winded way of saying, participating in these sites is not sound personal finance. I’m not sure if many thought it was. However, there are probably a few out there swayed by commercials of people holding million dollar checks. I suggest treating it like going to the casino, set a small budget. When you are out of money, stop and leave.

Fantasy sports can be a lot of fun… I’ve been in a couple of leagues that have existed for more than 10 years now. These free leagues don’t cost money and winning is just for bragging rights. What’s wrong with leaving fantasy sports as just that?