Fantasy Sports Investments: A Warning

The following is a distillation of a post I ran and later withdrew the other day.

If you missed it, I combined two broad topics which I explored through the lens of an ongoing debate about the National Fantasy Baseball Championship (NFBC). My focus on NFBC was poorly received with some labeling it a “hit piece.” That was not my intent. In fact, I twice referred to the site as the “gold standard” for competitive fantasy baseball. I have nothing but respect and admiration for the format and everybody involved. Here is a full apology/explanation I posted to Twitter.

The easy thing to do would be to walk away from this topic, but I believe at least half of my message is important enough to revisit. And so, let’s talk about the money.

Maybe Not An “Investment”

As part of the Twitter debate about NFBC, some industry colleagues mentioned the high costs ($1,700 per Main Event entry) could be viewed as an investment by anybody sufficiently skilled. If you have the talent, you’re likely to make money over the long term. I have a few problems with this gambling-as-investment thesis.

First, let’s be clear about something. This rationale isn’t limited to NFBC. In fact, it’s far more pervasive and dangerous in DFS, sports betting, and poker. In NFBC, there’s almost an unofficial cap to the amount you can spend per season.

There are rapidly diminishing returns to making multiple Main Event entries. The more teams you have, the harder it is to run FAAB every week. The less efficient your FAAB, the less likely you are to win. It’s challenging to spend more than around $10,000 per sports season (they also have a football championship). You can drop $10,000 or more every day in DFS. I saw a screenshot just yesterday of somebody who entered $300,000 of football lineups.

The real problem is this conditional statement about sufficient skill. It’s extremely hard to self-assess fantasy baseball talent. So much of it is intangible. Are you good? Probably. How do you compare to other good players? Uh… who knows?

The best method – via the actual results – can be costly and misleading. An early positive outcome could be beginner’s luck. Personally, I’d need to lose five or six seasons – a sum of around $10,000 on NFBC – before I was convinced that maybe I’m not actually good enough to compete.

This observation that perceived skill makes gambling an investment can be ruinous. I’ve witnessed it first hand. I’ve known people to go broke playing DFS. I had friends go into crippling debt playing poker. The kind of debt where scowling bruisers show up on your doorstep. They were all sold the same story – you can get rich quick playing this game. You have the right stuff.

Some Simple Math

Beyond those prone to gambling addiction and poor self-assessment, many people miss a crucial step when calculating their chances to make money playing fantasy sports. Let’s say a $100 contest of 100 people pays the top 15 percent (15) of participants. Let’s say everybody has a roughly equal chance to win. You, with all your latent skill, have a 20 percent chance. We’ll keep the math simple by using averages. In actuality, nearly all of these contests are scaled – first place nets a lot of cash, 15th place wins a consolation prize.

The average winner gets $667, right? The average participant has around a 15 percent chance to win (expected value of $100), and you have a 20 percent chance (expected value of $133). So you plan to make an average of $33 per entry over the long term. Maybe you won’t win today, but everything will balance in time.

Not so fast! The site takes a rake to cover their operating expenses which include software, personnel, advertising, legal fees, and state-by-state fees. The rake is usually over 10 percent of the pie. On DraftKings, it’s often above 16 percent. So instead of a $10,000 prize pool, we now have a $9,000 prize split 15 ways. The average winner gets $600 (EV $90). Your extra talented expected value is $120. Still a profit!

If you win, you have to pay taxes. Depending on the size of your win, this could range from around 10 to 30 percent of the prize. Operationally, the prize pool looks more like $7,500. You’re paying in money which was already taxed, and you’re getting back money that needs to be taxed again. An average player now has an expected value of $75. You are now break even with an expected value of $100. Your expected growth over time is $0. You might still hit the lottery so to speak. In terms of investments, this is terrible.

To come out ahead long term, you have to be much better than the average participant. In our example above, you’re 33 percent better than average and it’s not enough. Is that likely to be true in a highly skilled game like NFBC? It’s possible. These professional-quality players do exist. Some participants are among the winners every year. But you need to be honest with yourself, how likely is it that you are one of these elite-of-the-elite fantasy players? And, given the preexistence of such players, the math is even muddier.

And so my point is simple. If you’re going to start playing NFBC, DFS, sports betting, or any other form of gambling, go into it with your eyes open. Be open to the idea that, maybe, you aren’t the prophesied savant king of whatever game it is you’re playing. Most importantly, google the term “bankroll management.” Pick the method best tailored to you and stick to it.