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Fantasy Football: Harmless Fun or Unregulated Illegal Gambling?

By Edited Oct 27, 2016 1 1

Fantasy football is controversial. Some claim it is online gambling, which is illegal in most states[5], while proponents claim it is a game of skill[2]. To see who is right, let's compare fantasy sports to a similar pursuit in which you make "bets" about the near future using limited funds: short-term stock trading.

NFL Game

By Paul Cutler from Chaska, USA (IMG_0954.JPG) [CC BY-SA 2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

What is Fantasy Football?

Fantasy football is a popular role-playing game in which participants pretend to own professional football teams. The participants select their team rosters in an imaginary draft in which all National Football League (NFL) players are available. Participants earn points based on the performances of the players in real-world football games. 

Fantasy football is a big business. Almost 75 million people will play this year and spend almost 5 billion dollars.[3] 

Example of Fantasy Football Scoring

Sample Fantasy Football Team (espn.com)

Fantasy Football and Stock Trading

In fantasy football, players are like stocks. They have a value, but unlike stocks, their value is not determined directly by the market, but by bookies - the operators of the fantasy football websites. 

Players are either fairly valued, overvalued, or undervalued. You win money by betting on (buying or drafting) players you think are undervalued who then prove your judgement correct by doing better than expected (catching more passes, gaining more yards, scoring more touchdowns). The same principle applies in stock trading. You make money by buying stocks in companies that outperform expectations. They increase sales and profits more than expected, which causes traders to bid up their stock price. 

Like penny stocks, which are very risky but have huge potential for returns, some football players are considered "flyers" in that they are long shots, not likely to even play. This makes them inexpensive. But these long shots can pay off in a big way. This can happen when an unknown player gets a chance when a starting player is injured. Predicting such events is difficult, and arguably impossible. 

As with stock trading, access to information in fantasy football gives you an edge. If you know a player is hurt before it becomes public knowledge, you have an edge. This can be problematic. Many rules and regulations are in place in the world of stock trading to prevent traders from benefiting unfairly from insider information. In fantasy football, there are no such safeguards. Players must trust that the fantasy football operators are trustworthy and that information about player health, pricing, and team strategy is made available publicly, and not leaked to a select few for financial gain. Common sense tells you that with the large amount of money at stake, valuable information will be leaked. In fact, this has already happened. According to the New York Times, an employee of DraftKings used insider information to make bets that earned him $350,000 on FanDuel.[1] 

So while fantasy football and short-term stock trading are similar, they have some important differences. First, fantasy football is not regulated. There are no external systems in place to prevent fraud or insider trading, other than the internal controls implemented by the fantasy football operators themselves. Second, in fantasy football, "price" is not set directly by supply and demand in the market, as is the case with stocks. Player prices are set by game operators, who use supply and demand to decide pricing, but indirectly. If a player is in unusually high demand one week, which indicates he is underpriced, the game operators likely adjust his price up for the following week. But they are not required to do so. The fact that the operators can manipulate the price of the players makes fantasy football distinctly different from stock trading, and more susceptible to fraud. It is comparable to stock market operators setting the prices of stocks, instead of letting the market directly determine their value based on supply and demand. 

FanDuel Logo

 

 

 

 

 

www.fanduel.com (FanDuel Logo)

Game of Skill or Chance?

Now let's look at the argument that FanDuel and DraftKings run games of skill. Personally, I consider fantasy football to be a game of skill if I win. Otherwise, it is just luck. But, let's try to be more subjective. To be a skillful fantasy player, you need to understand all the factors that influence how well a particular player might perform. Here are just some of these factors:

Is a player healthy? This information appears to be readily available. Teams must report when NFL players are injured. But players often hide or downplay injuries. Some coaches don't like to disclose the health of their players because it could give other teams an advantage. Sometime coaches bench players who are healthy, to save them for next game or punish them for violating team rules. So unless you are an insider, you likely don't know the true health or status of any player, regardless of your skill. 

What is the player's psychological state? Did the player have a fight with his girlfriend the night before the game. Does he have a grudge against the opposing team that would motivate him to play better than usual? Is the player unhappy and trying to get traded? Obviously, no amount of skill enables you to get inside the head of a player, so all of this information is left to chance. 

Is the matchup favorable? This is a an area where you might think that your skill comes into play. If you are playing a running back and you know that the opposing team is weak against the run, you might have a favorable matchup. But reality is far more complex. Sometimes the opposing team might decide to focus on stopping the run that week and instead force the other team to pass. Or your player's team might get behind early in the game and abandon the run for the pass, which can get you points quicker. Or the other team might have injured players and be forced to play second-string defensive backs, which your player's team decides to exploit by focusing on the pass instead of the run. Or an injury could happen during the game on either side that completely nullifies the favorable matchup. The outcome of all theses nuances is not predictable, much as the weather two weeks from now is not predictable with any accuracy. 

Speaking of weather, what will the weather be like at game time? Some players don't like playing in foul weather. In snow and rain, teams usually run more than they pass and attempt fewer field goals. But, these are just generalities. They are not always true. In any event, predicting the weather at game time is difficult because you usually have to pick your players several days before the games are played. 

Conclusion

Stock trading is heavily regulated and yet scandals and fraud occur with regularity. Think Enron, Martha Stewart, boiler room operations, etc. Given that fantasy football is much less regulated, and given the large amounts of money involved, you should expect shenanigans. If nothing else, as a player you should go into it with eyes wide open. Finally, as shown here, arguing that these contests are games of skill is dubious. In fact, FanDuel and DraftKings probably know this, which might explain why they have been in an all-out marketing blitz, reportedly spending $150 million in advertising in just 3 months[4]. Perhaps they are trying to become entrenched before regulators catch on. They know they have a short window of opportunity. I am not suggesting you should not play, but don't bet the farm and don't be fooled into thinking it is a game of skill. 

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Comments

Feb 1, 2016 11:46am
josephnvadala
Good thoughts, I was thinking through the gambling vs fun when I was debating whether to create my company's fantasy football leagues pay-in or free. Decided to go with free to be safe :)
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Bibliography

  1. JOE DRAPE and JACQUELINE WILLIAMS "Scandal Erupts in Unregulated World of Fantasy Sports." New York Times. 5/October /2015. 29/11/2015 <Web >
  2. Max Miceli "Betting on the Fantasy World." U.S News and World Report. 30/October /2015. 29/11/2015 <Web >
  3. Gregory Bresiger "Nearly 75M people will play fantasy football this year." New York Post. 15/September/2015. 30/11/2015 <Web >
  4. Peter Kafka "Those DraftKings and FanDuel Ads You’re Already Sick of Are Keeping the TV Business Afloat." Re/code. 18/September/2015. 30/11/2015 <Web >
  5. Richard Finger "Online Gambling: A Pastime Whose Time Has Come." Forbes. 30/June /2013. 1/12/2015 <Web >

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