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Daily fantasy sports are more skill than chance

Market inefficiency makes the case against gambling

Financial trends and news by Ezra Roizen
November 11, 2015
Short URL: http://vator.tv/n/4165

I love sports, and I love numbers. Daily Fantasy Sports (aka DFS – FanDuel, DraftKings, etc.) bridges these two passions in a compelling sports-math offspring that's hard not to embrace.

So when the recent opinion of the NY Attorney General concluded that DFS is gambling, and whose operators have intentions to "fleece sports fans", I thought it worthwhile to explain the subtleties I see that make fantasy sports less of a game of chance and more of skill. 

I’m not a lawyer, and I don’t know all of the nuances of the legal definition of “gambling,” but here is my “common sense” view of the dynamics at play.

For me there are three players on this stage: The gamer, the sport, and the platform.  I’ll look at each.

First, the gamer (me as a DFS player).  Sports gambling is a about playing the “spread” - the points added or deducted from a team's chance of winning a game.  The spread is designed to ensure that both sides have an essentially equal chance.  The spread is based on a prediction of what *will* happen in a specific game.  The spread turns a sporting event into a coin toss.  Sports betting, with a spread, is gambling.

DFS doesn’t have a spread, but rather a set of constraints.  You have a team payroll, and you have to pick players based on an estimated market price for their potential contribution.  I don’t know the exact dynamics DFS platforms use in setting market pricing, but I believe they are based on *past* performance, and *past* player popularity, and aren’t (at least for the most part) anticipating the dynamics of the specific matchup.

A player price isn’t a spread.

This means the player-price-market is highly *inefficient*. If the market were efficient, then that would mean skill had been priced out. 

The inefficiency of the market ensures it requires skill to navigate.  This is also why a few people who are good at DFS win a LOT more often than the many people who aren’t. 

If everyone won about equally. Then at a macro level, it would look like gambling.  From what I understand of DFS, returns are massively skewed towards a few skilled players.  This is a good thing.

For the two sports for which I play DFS, baseball and football they both fall on the skill side of the chance/skill spectrum.  I can’t speak for other sports, but I’m guessing pretty much any team sport shares roughly the same DFS DNA.

Now let’s look at the impact on the sport.  The black-and-white nature of sports gambling creates a powerful incentive to cheat.  There is a binary win-loss situation, where significant amounts of money can change hands based on the orchestrated actions of a small number of people. 

The moral hazards represented by sports gambling are clear.  However, given that a DFS game lineup has to represent players from at least three teams it makes this orchestration extremely difficult.  Further, since the payout isn’t binary, but rather graduated, a prospective mastermind would have little idea what the return would be on the scheme.

Given this, it’s really hard to see how DFS corrupts the underlying sport, and in fact, by attracting money *away* from sports gambling, I believe a good argument could be made that DFS in fact has a purifying, rather than contaminating, impact on the sports world.

Lastly, the platforms.  I have no problem with the platforms making tons of money, provided they are transparent and operate an orderly marketplace.  Good for them for creating an innovative product.  In the long run, this market is going to be highly competitive, platforms will come and go.  The current innovators appear to be doing very well, and I’m sure new entrants will enter the market in time.  Pricing will be driven by competition, and we will see various tiers of offerings, and numerous business models emerge on the supply side.  It’s un-American to hold the success of their platforms, and the popularity of their product, against them!

It’s good that our regulators are taking a careful look at this emerging market.  That’s their job, and I’m fully supportive of thorough investigation and consideration.

But DFS isn’t gambling. 

Now, I have to go get my lineup in before Thursday night!