The Latest DFS Fallout
I had hoped to be done with this topic for the offseason. The mistakes of the two main daily fantasy (DFS) operators – FanDuel and DraftKings – have become increasingly apparent. After slowly ramping up advertising in 2013 and 2014, we’ve been hit with a flood of TV and radio spots pushing daily fantasy as a get rich quick scheme.
Now we’ve entered a new chapter of the daily fantasy drama. Last week, New York’s Attorney General Eric Schneiderman declared daily fantasy to be gambling. He asked FanDuel and DraftKings to cease and desist all operations in New York. They’re now the seventh state to ban the games. And once again, DFS has drawn negative press in comedy news – this time from John Oliver.
Let me be clear, my educational background is in behavioral economics. I have no legal expertise to offer. Since much of the following pertains to legal issues, you should take my opinions with a grain of salt.
With the exception of gambling states like Nevada, I see no reason why states would seek to ban daily fantasy. The sites practically force you to report your earnings to the government so the state and federal folks get a slice of your winnings. You can think of daily fantasy as a zero-sum game with the sites taking a rake and the government taxing winners. Because you can’t report daily fantasy as a job (and thus losses as a business expense), it’s simply a way for the government to tax us at a higher effective rate. Rationally, why would they ban a revenue source?
It also seems to me that the industry brought this upon itself by increasing its visibility without good self-regulation. The “insider trading” scandal is the biggest to hit the industry thus far. DraftKings employees have used information from their site to leverage winnings on FanDuel. Presumably, the same has happened in the other direction. I think we all agree that’s unfair. The sites should have foreseen the issue and prohibited their employees from playing any DFS.
The other problems facing the industry – namely the question of skill or luck – strike me as semantics. I usually cite a simple smell test – do you have an equal chance to win with a random roster? If the answer is yes, then it’s a game of luck. If it’s no, then it’s a game of skill. If you randomly select your roster, you’ll probably be stuck with several dead spots. Therefore, it’s a game of skill.
Related to this luck or skill issue is their disingenuous advertising position. Nowadays, anyone playing DFS to get rich is a fool. When the industry was new, there was easy money to snipe. Not anymore. Unfortunately, the sites still advertise to the “play once and win big” mindset. Any one-off contest is mostly luck. But the point of the game is to play an entire season.
For all their mistakes, the sites are trying to fight back. It’s unclear if their efforts will help or exacerbate their problems. Both DraftKings and FanDuel have sued the Attorney General over the decision to ban the game. New York represents a substantial customer base, so the financial damages to both sites could be staggering.
New York is also an influential state. It’s possible other states will now consider changing their interpretation of the game as a “skill.” If New York’s position cascades to other states, daily fantasy will be fighting for its life. While they have a presence in other countries, most of their business is via American customers.
I don’t know anything about the legal standing of FanDuel and DraftKings’ cases against Schneiderman. My instinct says they’re unlikely to succeed. And if they fail here, they may soon find themselves fighting for their lives elsewhere too.
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Aren’t blackjack, poker, craps, etc. considered a form of gambling? Surely your chances of winning at those games would decrease if you made random plays. By your test, only slot machines would justify regulation. Additionally, there’s something to be said for the addictive and predatory nature of gambling and what might be termed pseudo-gambling that you fail to account for. There’s more to regulation than managing a revenue stream.
I didn’t care to write a 300 word qualification of that statement. It was intentionally vague because it’s not the point. The smell test has to be adjusted to the nature of the game. Your decisions in blackjack and craps are based on simple math. Hold ’em is also simple math with an added layer of reading other players/bluffing.
Poker is widely considered a game of skill, and I would hazard that it’s more skillful than DFS. Of course, that hasn’t stopped others from calling it luck-based.
The fact that experts have devised algorithms for selecting DFS rosters suggests the game is also a matter of understanding mathematics. Poker at least has an element of player interaction (e.g., bluffing).
Bluffing ban be quantified as well.
I point you here: http://www.amazon.com/The-Mathematics-Poker-Bill-Chen/dp/1886070253
The thing about poker in Vegas is that you don’t play against the house. The house provides the table and takes a cut of the pot. You can make a pretty good argument that poker is a skill game (which is one reason the house doesn’t play), but for historical reasons most states are still going to consider it gambling.
All other casino games, with the just-barely exception of blackjack, are structured so that over the long run, the player will always lose. A knowledgeable player can reduce the house edge some, but not enough to turn the odds in the player’s favor. That’s one characteristic that makes them be considered gambling — winning is only possible with a short-term run of luck. (Followed immediately by a judicious exit.)
Poker and Blackjack are demonstrably skill games. I don’t see the former as controversially so (there are entire sections in Barnes and Noble dedicated to poker skill development). The latter is perhaps less intuitively so, but it it is. The reason it gets muddy is two-fold:
1) The most skill intensive aspects of it–those that can provide players with an “edge,” such as card counting–are effectively banned in casinos.
2) Without card counting, and just playing the odds of each hand identically without tracking the cards that remain in the shoe whatsoever, it’s mathematically impossible for players to generate an edge on the house (though maximizing winnings, or rather, minimizing losses, is still a question of skill–some players will do better than others, and players can perform better than they would with strictly random play selections).
I don’t know enough about craps to comment, but games like Roulette are certainly luck based (as are slots, lotteries, etc).
As someone who sometimes plays craps, it’s basically all luck. I mean, randomly placing bets isn’t a good idea because some bets have more of a house advantage than others, but if you win money (on one roll or in a night playing), it’s becuase you were on a lucky streak. You didn’t do anything to really skillfully “earn” it. Blackjack (without counting cards) is the same. Poker is different, in my mind.