Lazy Man and Money

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?

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.