Daily Fantasy, Gambling, and Sports

In the recent ‘scandal’ surrounding Daily Fantasy (DFS), it is frequently referenced as ‘gambling’. So one question in all this, is Daily Fantasy gambling?

Legal Definition

As in many such discussions, a large part of the issue depends on the definition. In this case what do we mean by ‘gambling’? Most states, and the federal government, use what is often called the ‘dominant factor test’. Essentially, the test is whether the outcomes of the game are more due to chance or due to skill. In general, if you can see players with greater skill winning the game more often than non-skilled players, that’s a good sign that the dominant factor is skill and not chance. Thus, such a game wouldn’t qualify as gambling under this description. (I want to thank the panel at ISLE symposium for the legal background.)

Fantasy (including Daily Fantasy) does seem to show that skill plays a large and dominant part in winning, rather than chance. Luck and chance play a role (e.g. players get injured), but a fantasy player’s knowledge and skill in drafting and building lineups is much more significant.

There are some states, including my own (Arizona), that don’t use this test and have a lower bar for considering something gambling. Thus Daily Fantasy is illegal in Arizona. (The other such states where DFS is illegal: Arkansas, Delaware, Iowa, Louisiana, Michigan, Montana, Tennessee, and Washington).

Common Usage

But beyond the legal definition, we might wonder what gambling means in more common usage and if daily fantasy fits that.

If we mean just any situation where you take a big chance, where you put something of significant value at risk, then a lot of things are ‘gambling,’ including fantasy. But so, it would seem, is the primary game of football itself. People use the term ‘gambling’ in ways like this all the time (I’m taking a gamble on taking the job offer in Austin over the one in Dallas), but this is not helpful in understanding the phenomenon at issue. We need to put aside these metaphorical usages and narrow our focus.

Gambling, then, usually refers to games where:

(1) The value at stake is financial or material (as opposed to an emotional value like pride or enjoyment).

(2) The role of chance is significant in the outcome. This is not just that the outcome is unknown but that chance plays a role in determining the outcome (e.g. roll of the dice, a random number generator, or the deal of the cards). It also means that the player is passive in terms of the outcome; that is, there isn’t anything they can do to affect the outcome.

(3) There is some financial/material prize for winning.

If I am correct, Daily Fantasy is not gambling because it fails #2. Namely, the main cause of winning is how one uses his or her skill and knowledge to create a line up. Chance plays a role, but the players are not passive. The more skill they have and the better they employ it, the better their chances of winning.

Paraphrasing Jerry Seinfeld, not that there is anything wrong with gambling. That is, even if DFS were gambling, I don’t think that matters from a moral perspective unless we have a prior argument that gambling is morally problematic. I don’t think we have such an argument. It matters, certainly, from a legal perspective given the current prohibitions in most states against gambling. (Prohibitions with which for the most part I disagree.)

Gambling and Sport

That said, the concern about gambling and sports is that there is big money at stake in gambling and the potential for, or even just the appearance of, corruption or interference in the game itself. There is, I think, a similar concern with daily fantasy. The professional sport leagues need to be careful here in working with fantasy companies. First, they need to make sure there isn’t any corruption going on. They need to have transparent and clear safeguards to prevent undue influence between the fantasy and the real games. Second, they need to make sure there isn’t even an appearance of anything corrupt. The same goes for the DFS companies themselves: the appearance of corruption is almost as damaging as actual corruption.

I don’t think there is a concern with the kind of marketing agreements between the leagues and the fantasy companies that we are seeing. The KC Royals have an official daily fantasy sponsor, but the sponsor doesn’t lose or gain anything depending on the Royals’ performances. So there is no real worry about the daily fantasy company trying to manipulate the game in the way a gambler might try to get a player to shave points or throw a game. The fantasy companies earn money by people participating, not according to the performances of a player/team.

But there could be concerns about players, coaches, officials, or others who can impact the outcome of games. They might have something personally at stake and use their position to manipulate the game so that outcome is achieved and they win. It might be best to prohibit or, in the case of the NFL, limit the participation of these individuals in such games. This wouldn’t be too dissimilar from a radio station employee not being eligible for the station’s contests. It prevents even the appearance of corruption.

The DFS scandal

Similar, the recent scandal involving DraftKings and FanDuel seems more about the appearance of corruption than actual corruption.

The information released, though not trivial, doesn’t strike me as the significant advantage that some have painted it. As I understand it, the information showed the percentage of players owned. Knowing what other players are owned can figure into your calculations about whom to start (in order to differentiate your team from the other teams). Nevertheless, I think most knowledgeable fantasy players probably have fairly good intuitions about this anyway. They won’t have the exact numbers, of course, but most will know, for example, that a good chunk of people are going to have Aaron Rogers as QB. Knowing the exact number doesn’t seem like it is going to make that big a difference. Still, it is not irrelevant or trivial information and safeguards (or at least better safeguards) should be in place regarding this information.

The real worry here is not the leaked information. It is that individuals at the company have access to this information when it is non-public and could, it seems, act on it. That seems like an unfair advantage (though we could quibble about that) and so people are concerned that the insiders at DFS companies could use this information to dominate leagues. Again, we could quibble about the fairness, appropriateness, or effectiveness of this. Nevertheless, the appearance that so-called insiders could be taking advantage of the market undermines the trust between players and fantasy leagues. So even if nothing untoward is actually going on, it is still damaging to this relationship and needs a transparent fix. The obvious fix seems to be, similar to the NFL limitation, a contractual prohibition or limit on playing DFS for individuals with access to this non-public, advantageous information. Companies that do not fix their trust dimension will lose out in the marketplace.

Regulating DFS

I don’t play DFS (mostly because it is illegal in AZ). But I think it is an exciting and dynamic industry. It highlights how markets can respond to individual tastes and desires in unforeseen and creative ways. What I fear from this situation is that lawmakers and regulators will come in and in the name of consumer protection or some such thing, kill or weaken this growing market. This situation certainly shows that the industry needs to make some changes as it matures. Competition and consumers should drive those changes and will do so in ways we can’t predict, finding solutions to problems in fitting and creative ways. Government regulations, on the other hand, will tend to hamper and prevent such dynamism; imposing one-size fits all, costly rules. The likely outcome of government regulation of DFS, based on what normal happens in regulated industries, is the cartelization into a few dominant players (instead of today’s dynamic and growing field of competition) and the locking in of current practices and standards (instead of seeing ingenuity and development of new more effective and appropriate practices).

Lastly, if I had to gamble I would bet (see what I did there?) that the main forces driving the ‘regulate DFS bus’ are those connected in some way to the heavily regulated gaming/gambling industry. DFS is a competitor and this would be an easy way to weaken it. (One might compare this to Uber and the taxi companies—the same phenomenon seems to be at work there: a dynamic new business is threatening the old way of doing things, providing greater choice and options to meet individual desires and needs in unforeseen ways.)