If it isn't really gambling, how can you lose money?

Photographer: Gabe Ginsberg/FilmMagic/Getty Images

Don't Be the Patsy in Fantasy Sports

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
Read More.
( Updated
)
a | A

As they say in poker, If you've been in the game 30 minutes and don't know who the patsy is, you're the patsy.

-- Warren Buffett

By now, you may have heard about the insider trading scandal at the two biggest fantasy sports companies. DraftKings employees, based on the bets they saw laid down by their clients, made a killing at competitor site FanDuel.

Let's get one thing out of the way: This isn't insider trading, at least as it's commonly understood. These aren't trades based on material nonpublic inside information about publicly traded companies. These look to my eyes more akin to one bookie laying off bets on another.

This black eye aside, fantasy sports is becoming a very big business. ESPN, the sports channel owned by Walt Disney Co., made Boston-based DraftKings the official daily fantasy unit of the giant entertainment company for undisclosed terms; the fantasy sports site also raised $300 million, led by Twenty-First Century Fox's sports division.

There is now a Fantasy Sports Trade Association, and that means lobbying dollars are not very far behind.

Here's how I look at it. There are two big issues: 1) Is this gambling?, and 2) Is this a sucker's bet? There is a technical debate about the former question; there is no debate about the latter.

Let's try to determine whether fantasy sports (professional football dominates the business) is a game of skill or chance. The answer is somewhat nuanced, as we will see below. There are some consistent winners, and that implies there is some skill involved. But there's a counterargument based on a simple question: "Can you lose on purpose?" If you can't, then it's a game of chance and not skill.

Just by way of background, if you thought online gambling was illegal in the U.S., you are correct. The 2006 Unlawful Internet Gaming Enforcement Act (UIGEA) did away with online poker and other such games. But a technical loophole created an opening for a fantasy sports exemption. In short, the way the companies get around it is that participants don't bet on the outcomes of real games; instead, participants assemble imaginary teams made up of real players whose actual statistical performance is crunched to come up with a point total.

Timothy Fong, associate clinical professor at the University of California-Los Angeles Gambling Studies Program, is one of America's foremost researchers on fantasy sports. Fong scoffs at "the notion that fantasy football is a skill-based game and thus exempt from larger gambling concerns." It's not, he tells The Kernel in a recent interview, where he observed:

Very simply, it’s gambling. … It's putting money on an event with a certain outcome in the hopes of winning more money.

To call it anything else is really just not accurate. That link hasn't really been made by the players and the public—that what I'm doing is no different than playing blackjack or craps or betting on sports in Vegas casinos.

Although the legal issue about whether these games should be allowed to exist was settled by statute, perhaps the better question is, Should you bother playing?

The simple reality is that for the vast majority of participants, it's a losing deal. But that doesn't mean everyone loses. There is a small dedicated group of players who consistently win: An analysis by Rotogrinders -- which bills itself as "The Daily Fantasy Authority" -- conducted for Bloomberg Businessweek "shows that the top 100 ranked players enter 330 winning lineups per day, and the top 10 players combine to win an average of 873 times daily. The remaining field of approximately 20,000 players tracked by Rotogrinders wins just 13 times per day, on average."

In other words, 99 percent of the participants in fantasy sports are the patsy at the table.

In some ways, most players aren't all that different from amateur stock-market traders. Almost all of them get their clocks cleaned by the professionals. Between the high-frequency outfits and better capitalized and more knowledgeable traders, virtually all the rookies get walloped. But here's why people keep trying: A minuscule percentage manage to go on to have terrific, lucrative trading careers.

If you are interested in wagering on fantasy sports, I have one piece of advice for you: Don't kid yourself about who probably you are.

(Corrects fourth paragraph to indicate that Walt Disney Co.'s ESPN channel reached an operating agreement with DraftKings. Although terms were not disclosed, the deal doesn't include a $250 million equity investment as originally reported.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Barry L Ritholtz at britholtz3@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net