The Economics of Sports Gambling (Replay)

Before we get started, this week marks the debut of People I (Mostly) Admire, the new podcast from my Freakonomics friend and co-author Steve Levitt. So, go subscribe right now, wherever you get your podcasts. The first episode comes out at 11 p.m. Eastern time on Friday, August 21st. We’ll actually be putting out the first four episodes of Levitt’s new show right here in the Freakonomics Radio feed, every other Friday night. But we encourage you to subscribe to People I (Mostly) Admire on your favorite podcast app. That way, you’ll be sure to never miss an episode.

And now, we’re playing for you an episode about the economics of sports gambling that we first released last year. You remember sports, right? Back in March, as the Covid-19 pandemic was setting in, the sports industry went dark, including the professional leagues, March Madness, the Summer Olympics. In their absence, e-sports continued to grow — along with gambling on e-sports. And now, live sports are making their way back onto television, albeit without live fans.

This is good news not only for people who like to watch sports but, again, for those who like to bet on them. The pent-up demand for betting opportunities, coupled with the fact that online betting is a very pandemic-friendly activity, means that the sports-betting industry, which seemed to be in pretty good shape last year when we reported this episode, is now heading for blockbuster territory. So, here’s our look at the past, present, and future of sports gambling. Hope you enjoy. 

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Stephen DUBNER: I understand that you may be the longest-running player in fantasy-sports history, the longest-running continuous player. Is that true?

Peter GETHERS: Not “may be.” No question about it. Absolutely. Because I was in the original Rotisserie League, so one of the founders of fantasy sports. Nobody from that league is still playing. I’m still in the original league. Everyone’s been replaced. So, there’s no question. I’m the longest-living continuous fantasy-sports player on the planet Earth.

That is Peter Gethers.

GETHERS: I do various things.

Most of these “various things” involve words.

GETHERS: I’m a novelist and nonfiction book writer, a screenwriter, a television writer and producer, a playwright, and I’m an editor and publisher at the Knopf Publishing Group at Penguin Random House.

In 1980, Gethers belonged to a gang of other people who worked with words:

GETHERS: Lee Eisenberg, who then was the editor-in-chief of Esquire. A couple of people at Sports Illustrated: Rob Fleder; Harry Stein, who I think then was writing for The New York Times. There was one woman, Valerie Salembier, who was a magazine publisher.

Their ringleader was the magazine editor and writer Dan Okrent.

GETHERS: Dan had played a very loose version of this in college and then went, “Wait, this would be really fun.” It’s for people who would want to own a baseball team, but aren’t rich enough to own a baseball team. In those days, to be George Steinbrenner without George Steinbrenner’s money was the way he thought of it.

Steinbrenner was the autocratic owner of the New York Yankees. You may know him best from the parody version, in Seinfeld.

Larry DAVID: George Steinbrenner here. I want to talk about George Costanza. I understand he’s been dividing his time between us and you. I cannot have that.

DUBNER: Okay. So, for someone who doesn’t know fantasy sports at all, and maybe doesn’t even really know sports at all, give me just a very nice elevator description of fantasy baseball, how it worked.

GETHERS: So, you put any sum of money that works — in the league I play in, the initial input is $260, and you have to put together a team roster, the same way the Yankees or the Mets or the Dodgers or the Kansas City Royals do, within a budget of $260. In my league, we do it by auction. So, if you bid $8 for a player you then have $252 to pay for the rest of your players. And what the player you own does every day, that goes into your stat sheet and it’s cumulative. And at the end of the year, the team with the best statistics wins the pennant.

There had been plenty of earlier games that replicated baseball and other sports — dice games, board games, even games with statistics. But Gethers says this league was the birth of fantasy sports as we know it.

GETHERS: It’s pretty definitive.

The Rotisserie League was named after the restaurant where the founders often ate lunch. Gethers wasn’t supposed to be an original member.

GETHERS: I was called in because there was someone else who had a team who decided he couldn’t afford the original $250 entry fee.

DUBNER: Oh, you were a minor-leaguer who was called up.

GETHERS: Exactly. And I couldn’t afford the $250 fee either, so I split it with a guy named Glen Waggoner. And we became partners and we won the first year.

DUBNER: How much did you win, then?

GETHERS: We won close to $3,000.

DUBNER: Now, was this considered gambling at the time, do you know?

GETHERS: Do you have people from the I.R.S. listening?

DUBNER: Not yet. We’re going to forward the tape to them as soon as we’re done.

GETHERS: Okay. Then, no. If you’re not from the I.R.S. — yes, of course it’s gambling. The whole thing was created to gamble.

Gethers is, to this day, a big fan of sports gambling.

GETHERS: On Final Four weekend of March Madness, I have, for the last 35 years, gone to Las Vegas with the same group of guys. And we gamble non-stop for 48 hours. And I like gambling so much that I don’t really care if I win or lose. I can’t think of anything that’s as much fun for me.

The Rotisserie Baseball League, being based in Manhattan and comprised of Manhattan media elites, quickly gained attention.

GETHERS: We were invited on to The Today Show and we talked about how it worked and what we did. And then —  Bryant Gumbel was the host of The Today Show then — he started a league and then it started to really, really catch on.

Just how much did it catch on? Today, roughly 60 million people in the U.S. and Canada play fantasy sports. India has 100 million players, with cricket the most popular sport. Here, the most popular sport is football. But you can also play fantasy baseball, basketball, hockey, soccer, cycling, tennis, golf, e-sports, you name it. Those 60 million people play for fun, they play for pride, and they play for money. Fantasy revenues in the U.S. alone are around $8 billion a year.

DUBNER: So, as you well know, fantasy sports has become really big business.

GETHERS: Yes.

DUBNER: As an originator, how big is your Tuscan villa?

GETHERS: It’s about the size of a small Days Inn hotel room. No, here is what happened. We invented this thing. We did it for fun. It truly never occurred to us that a ton of other people would also want to do this. Even though almost everybody in the league was a person whose whole life and job was to observe cultural trends and capitalize on them. It never occurred to us, and we did it before computers. When everything went online, everything changed.

Yes, everything changed with the computing revolution, as we’ll hear in a minute. But also, the sports industry itself has exploded in the decades since the Rotisserie League began. How much of this explosion has been driven by the fantasy-sports industry? It’s hard to say; it certainly makes the games themselves more relevant for more people. If you think it’s sad that Peter Gethers and his friends didn’t get even a tiny piece of the fantasy-sports bonanza — just wait; it’s about to get much worse. Because the big fantasy-sports companies recently got the gift of a lifetime, courtesy of the U.S. Supreme Court:

C.N.N.: Breaking news, the Supreme Court this morning, striking down the federal ban on sports betting.

That’s right: it is no longer the province of casinos in a few select places. Legalized sports betting — on real sporting events — is coming to America.

Jason ROBINS: We’ve seen hundreds and hundreds of millions of dollars worth of bets made since we launched, and it seems to be getting bigger every month.

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In 1980, the same year that Peter Gethers and his Manhattan media friends helped give birth to modern fantasy sports, there was an actual physical birth, of a boy named Jason Robins.

ROBINS: Pretty much from the earliest age I can remember, I had an interest in sports. My parents were both big sports fans. My dad and mom both also actively played sports. First thing I can ever remember watching on T.V. was E.S.P.N. As I got older and I got more into numbers and things — and also simultaneously I was finding out that I’m not so good on the actual field or on the court or whatever — at the time, there was still box scores in the newspapers, and I would play a game with my parents where they would quiz me after I would read the box scores, and I’d try to remember every little detail.

If Robins had been a contemporary of Peter Gethers, he might have been a candidate for the Rotisserie League. But this was a different era.

ROBINS: And as soon as the internet started to have fantasy sports come about in the late ’90s, early 2000s, it was instant love for me.

The early days of fantasy sports coincided with the rise of the dot-com boom.

ROBINS: There were a lot of startups, companies like MyFantasyLeagues, SportsLine — which C.B.S. eventually bought. There was some kind of joint venture between C.N.N. and Sports Illustrated. I was just trying every one of them.

During college at Duke, Robins had more than 100 fantasy teams, in various sports. He was majoring in economics and computer science, with the idea of becoming a tech entrepreneur. But his graduation coincided with the bursting of the dot-com bubble. So, instead:

ROBINS: So, I was — almost a decade, I was in corporate America.

Playing fantasy sports helped lessen the sting of not having his own startup. Robins had two co-workers — Paul Liberman and Matt Kalish — who were also way into fantasy sports and who also wanted to start their own company.

ROBINS: Matt, one day, sat me down, was like, “I have an interesting idea you’re going to like.” So, he told me the very high-level basis for DraftKings.

The high-level basis of DraftKings was this: millions of people already loved playing online fantasy sports. But most competitions had a really long timetable — an entire baseball season or football season, for instance. What if you could draft a new fantasy team every day? Daily fantasy sports — how much fun would that be? And how lucrative?

ROBINS: I went home, and I just couldn’t stop thinking about it that night, and then we proceeded for the next six months or so to just fumble around, trying to figure out how to get it off the ground.

Other people were already working on daily fantasy sports — most significantly, a company called FanDuel. But Robins and his friends thought they could do it better. So, they set up meetings with potential investors. Lots of meetings.

ROBINS: Oh, I mean, at least 50, maybe closer to 100, and some of them were brutal. I mean, they would take us to second, third, fourth meeting, where like, “Alright, they’re going to get there, they’re going to get there,” and then we just couldn’t get there.

One problem was that Robins and the other two guys still had their day jobs.

ROBINS: Everybody was telling me that’s a sin when you’re out trying to raise funding, that the investor says, “If you don’t believe in the idea enough to do it full-time, why should I believe enough in it to put a bunch of money in?” Which is fair, but there’s natural constraints. I mean, none of us came from wealthy backgrounds, and we were using what little money we had saved to fund the business. So, eventually we figured out a way to time it where we told an investor we were committed to quitting on a certain timeframe, assuming that they put money in, and that worked.

What sort of comparative advantage did the DraftKings founders think they had?

ROBINS: We had really been trained at companies and in areas — tech analytics and marketing — that we thought were core to really building the best mousetrap in daily fantasy sports.

Their mousetrap worked.

T.V. AD: Because DraftKings.com combines one-day fantasy sports with winning life-changing amounts of cash.

DraftKings launched in 2012, with Robins as C.E.O., and it quickly attracted a lot of users. Their numbers today?

ROBINS: We have north of 11, south of 12 million registered users that are playing a combination of free and pay games. As far as market share goes, our best guess in fantasy is we’re about 60 percent of the market.

With so many users, there are many different games and tournaments, and there are significant stakes.

ROBINS: In some of these games, where you have tens of thousands of participants, there can be prizes ranging in the $100,000 or even $1 million-plus range if you finish first.

DUBNER: And what cut has DraftKings historically taken?

ROBINS: We take about 10 percent.

Now, you may be asking yourself: was all this gaming — fantasy sports but real money — was it legal? The short answer: sort of. For the longer answer, we need to get into the legality of betting on actual sporting events. In 1992, the U.S. government passed a law that prohibited states from legalizing sports betting. Four states were grandfathered in — Nevada, Oregon, Delaware, and Montana — but betting on actual sporting events was explicitly illegal everywhere else. This, of course, did not mean that people were not betting on sports in those states.

Victor MATHESON: You might have as much as $300 billion being bet in the United States every year.

That is Victor Matheson, a sports economist at Holy Cross.

MATHESON: That’s what people estimate might be going on under the table.

“Under the table” meaning with amateur or professional bookmakers, on the black market.

MATHESON: For an economist, “black market” doesn’t mean “bad things.” Black market for an economist simply means that this is something that’s not recorded, and the government doesn’t know about. So, when I ask my students what sort of black-market activities are out there? They’ll tell me, “Drugs, prostitution, gambling, running guns,” and I will come right back, and I’ll tell them “Oh yeah — and babysitting and mowing lawns.”

Fantasy sports, meanwhile, as with many businesses born on the internet, fell into a gray area: unregulated but also not quite illegal. As it grew, it drew scrutiny, including a high-profile corruption charge. In 2015, The New York Times published an exposé about a DraftKings employee who had won $350,000 on FanDuel, the big rival fantasy site, by using what was alleged to be insider information. Jason Robins disputes this account.

ROBINS: So, what actually happened was, this employee got sent via secure means some data that included picks on our platform for later games. And those later games were not on our platform locked yet, but on FanDuel they were. FanDuel actually had a different setup where you could not enter players in later games and then change them during the earlier games. You had to pick all of them up front. So, that information could not have even possibly benefited that employee, not to mention the fact that FanDuel actually was making public the overall pick information, which is what he had published because they lock theirs. So, it was kind of a trumped-up story. Unfortunately, the media had already run with the story, calling it insider whatever.

DraftKings responded by, among other things, banning all its employees from playing fantasy sports.

ROBINS: It was damage-control time for us, and then that led to having state regulators start to come down on us.

Regulators came down on fantasy-sports sites because, upon close inspection, what they were doing looked an awful lot like gambling.

ROBINS: So, the way that something gets determined to be gambling in most states is it has to hit all three of three criteria. There has to be consideration, which means something of value is paid to enter.

Box number one: checked.

ROBINS: There has to be prizing, which means something of value comes out when you win.

Box number two: checked.

ROBINS: And then there has to be chance — and whether it’s chance or skill then falls at the state level to define.

So, the question of whether playing fantasy sports was an act of skill or chance — this became a very important question for DraftKings and their biggest rival, FanDuel.

ROBINS: In the early years, there was a pretty intense rivalry, and of course there’s still some element of that now. But as we were getting attacked by attorneys general in a handful of states, that forced us to come together on the legislative- and government-affairs policy front. And we’ve been collaborating on that since early 2015.

DraftKings and FanDuel in fact considered a merger.

ROBINS: The reason we tried to merge is both companies thought they could be successful combining forces and working together, and the reason it didn’t happen was the government blocking it.

The Federal Trade Commission blocked a DraftKings-FanDuel merger on the grounds that the new company would “control more than 90 percent of the U.S. market for paid daily fantasy sports contests.” So, the companies stayed separate. FanDuel wound up being acquired by PaddyPowerBetfair, which is now known as Flutter. It’s a gaming company based in England and Ireland, where, unlike the U.S., outright sports gambling has been legal for decades. And DraftKings stayed an independent operator. Still, the big question remained: in the U.S., where DraftKings is based, was fantasy-sports betting legal? As Jason Robins explained, the answer would hinge on whether it was considered an act of skill or chance.

Peko HOSOI: So, the paper we wrote is called “Luck and the Law: Quantifying Chance in Fantasy Sports and Other Contests.”

That’s Peko Hosoi.

HOSOI: I’m a professor of mechanical engineering at M.I.T.

Hosoi is also co-director of the M.I.T. Sports Lab.

HOSOI: So, we bring students and faculty together with pro teams and industry partners to look at sort of the abundance of data that’s coming out of sports today.

In 2015, Hosoi got a call from FanDuel.

HOSOI: They asked us, if they gave us their entire data set, could we tell them whether or not these contests were contests of skill or contests of chance.

Now, when you hear about a company asking academic researchers to analyze their data when the outcome of that analysis may have huge business or legal implications for that company, you may be a bit skeptical. So, here’s the first thing Hosoi says she told FanDuel when they asked her to answer the skill-versus-luck question:

HOSOI: I told them, “This is a terrific question. More than happy to look into it.” And I also told them that we were going to publish the results regardless of what the outcome was. And they said, “That’s fine.” So, I said, “Great, send us the data.”

Armed with a couple years’ worth of FanDuel data, Hosoi and her colleagues set out to analyze the roles of skill versus luck. So, how do you do that?

HOSOI: You have to think about skill and luck as a spectrum and ask, “Where do these activities fit on the spectrum?” Nothing is purely luck or purely skill. Like when you drive to work, it’s mostly skill, but you also got lucky that nobody ran into you.

She and her colleagues used a model that compared fantasy players’ win fractions during the first half of a series of competitions against their win fractions over the second half.

HOSOI: If you’re flipping coins, on average a person would win half of their games in the first half and half their games in the second half. If it’s a game of, let’s say, a grandmaster in chess playing against a novice, they’ll probably win all the games.

They applied this same thinking to the fantasy-sports data.

HOSOI: So, we split it into fantasy baseball, fantasy hockey, fantasy basketball, and fantasy football. And if you’re trying to explain to, let’s say, an attorney general where fantasy sports lie on the spectrum, you have to give them something to compare it to, right? The number that we give them doesn’t mean anything on its own. So, then we compared that to real baseball, hockey, basketball, and football.

And, just to add further context:

HOSOI: We also included bicycle-racing, coin-flipping, and the stock market. We put all of those on a spectrum to see where fantasy sports clustered.

And what’d they find?

HOSOI: So, imagine a spectrum where zero is pure luck and one is pure skill. Coin-flipping sat at zero. Which is good. So: check. The algorithm gets that right. The next point on the luck end of the spectrum was the stock market. So, that sat at about a third of the way up.

Now I’m going to move to the skill end of the spectrum. The one that is the top end of the skill spectrum is bicycle racing. Which, again, makes sense because if you’re fast, you’re fast. Right? Sometimes you have bad luck in a bicycle race. But for the most part, whoever is going to put out the most power is going to win.

So, now we come to the interesting chunk of the spectrum, which lies sort of between .6 and .9. So, basketball rewards skill the most, hockey rewards skill the least. Because basketball has a large number of scoring opportunities in each game and a large number of games in the season. So, that means that one lucky shot in basketball doesn’t matter very much. Whereas one lucky shot in hockey can matter a lot. And football and baseball are somewhere in the middle.

And what about the fantasy-sports versions of those real sports?

HOSOI: The fantasy sports are closely tied to where the real sports sit.

Meaning: yes, some luck is involved; but also, a lot of skill, which varies by sport.

HOSOI: Which is not super-surprising because the further up on the spectrum you are, the easier it is to predict the outcome. And if it is easy to predict the outcome, then it is easier to choose players in your fantasy lineup.

Hosoi submitted her analysis as a part of an affidavit to the Supreme Court of New York, one of several states where the legality of daily fantasy sports, or D.F.S., was being challenged. “My analysis of FanDuel data,” she wrote, “shows unmistakably that FanDuel’s D.F.S. contests are skill-based games. Shortly thereafter, the New York State legislature legalized daily fantasy sports. Many other states have also allowed FanDuel and DraftKings to carry on. The skill finding was obviously good news for these companies — although some critics used it against them. They argued it was unfair that people who are better at statistics are more likely to win at fantasy sports. Peko Hosoi says this problem has a pretty easy solution.

HOSOI: So, No. 1: learn some statistics. There are lots of ways to do well in fantasy sports. And my first recommendation would be to not play in the tournaments but to play in something like a 50/50. So, a 50/50, everybody pays in the same amount and the top 50 percent of the finishers double their money and the bottom 50 percent lose their money.

One fantasy-baseball study showed that more than 90 percent of the winnings went to just over 1 percent of the players.

ROBINS: Well, what people don’t like to report is that same group is also doing all the gameplay.

Jason Robins again, from DraftKings.

ROBINS: So, it’s a skill game, and people who are better-skilled compete at different levels. If I go golf, maybe I can play in my amateur tournament. I’m not competing in the Masters. But the vast majority of golf prizes are won by a small group of people, too. But it doesn’t mean you have to compete against them. So, there’s different prize pools in different areas that each player can play in. The people who are playing for large amounts are also putting up large amounts. Those people are generally playing with other players that are like them.

So, the legal battle over daily fantasy sports was clearly won by DraftKings and FanDuel. But what if fantasy-sports betting was just a stalking horse in pursuit of a much bigger victory? Remember, not long ago the U.S. Supreme Court paved the way for states to legalize regular sports betting. And DraftKings was perfectly positioned to create a sportsbook app to take these bets.

ROBINS: Right now, it’s just in [New] Jersey, online and mobile.

But New Jersey won’t be alone for long.

ROBINS: I think you’re going to see a number of laws passed this year, and I think 2020 is going to be a big year for a bunch of new states getting launched.

Indeed, since we interviewed Robins, DraftKings launched online sports betting in Colorado, Indiana, Iowa, New Hampshire, Pennsylvania, and West Virginia. How much money was already flowing through the DraftKings app in New Jersey?

ROBINS: We’ve seen hundreds and hundreds of millions of dollars’ worth of bets made since we launched, and it seems to be getting bigger every month.

DUBNER: As a revenue center for DraftKings, what’s going to be bigger in the future: straight-up sports betting or fantasy sports?

ROBINS: It will definitely be sports betting. Even in this short time and in Jersey, it’s already become a substantial portion of our business. Way more so than the same size customer fantasy revenues coming from the Jersey market.

DUBNER: Was the possibility of legalized sports gambling on your horizon from the outset? Was the long-term plan built around the possibility of that?

ROBINS: Definitely. So, we thought that there is a broad market in the U.S. of people that for years have been confined to the black market for all kinds of activities, sports betting being one of them, and the audience we felt had been validated during the online-poker boom in the early 2000s. So, we said, “Look, for the meantime — and maybe for a while — the way to serve them will be fantasy sports.” But we all absolutely believed long-term that other forms of sports betting and gaming that hadn’t been legalized at this point but were very prevalent in other countries, that those would be made legal here, and it actually happened a lot faster than we thought. But that was always part of the long-term thinking.

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The Holy Cross economist Victor Matheson, whom we met earlier, is a double threat. Not only does he study sports economics:

MATHESON: I also do gambling economics. I’ve done a lot of research on lotteries and other types of gaming. So, of course sports gambling is right up my alley.

DUBNER: So, sports go back pretty much to the beginning of human civilization. What about sports gambling?

MATHESON: Yeah. So, the oldest organized sports that we have a good date on is the Olympics. The Olympics came about in 776 B.C. We have good evidence of that. We have fairly good evidence that the first gambling on the Olympics occurred in about 775 B.C. So, as soon as they started playing games, someone started gambling on it.

The legality of sports gambling has varied greatly over time and place. In the U.S., most forms of sports gambling had been illegal in most places until last year. The push for legalization gained momentum in New Jersey in 2011, when voters there passed a non-binding referendum in favor. Soon after, the state began issuing sports-betting licenses to casinos. But the pro-sports leagues and the N.C.A.A. sued, and won, and the sportsbooks were shut down. What followed were a series of cleverly engineered lawsuits designed to make it to the Supreme Court. The case that finally did the trick was Murphy v. National Collegiate Athletic Association. The justices voted 6-3 to strike down the 1992 federal law against gambling.

MATHESON: Prior to this ruling, Congress had said that it was illegal for a state to legalize gambling.

Wait, what?

MATHESON: So, I know that’s a little goofy, but again, Congress said it was illegal for states to legalize sports gambling unless those states were already engaging in it. What the Supreme Court ruling said is it didn’t legalize sports gambling, but it made it illegal for the federal government to prohibit states from legalizing. That’s a little bit harder to get the mind around here, but it doesn’t all of a sudden mean that everything is legal everywhere. But it does mean that states are now allowed to legalize it if they want.

As of today, sports betting is fully legal and operational in several states, with others having already passed legislation. Only a handful of states say they are not considering some form of legalization — which means most states will likely legalize. So, what is incentivizing all these states to embrace sports gambling? Keep in mind that governments throughout history have argued that a given activity is morally or otherwise reprehensible until they decide that perhaps it isn’t, or at least not so reprehensible that a new revenue stream can’t make it feel better.

MATHESON: States are happy to argue against gambling when it’s in their best interest, and they’re happy to argue for gambling when they can get a big cut of the money.

DUBNER: As some states legalize gambling before others, each on their own timetable depending on a number of factors and negotiations having to do with state legislators and gambling people and so on, what sort of opportunities does this staggered introduction create for economists like you to study the knock-on effects of legalized gambling?

MATHESON: This is a dream for economists. We need something to turn on one place and then turn off another place, and compare the two. So, this will really be interesting. And it will be interesting in a lot of ways, like: does the introduction of sports gambling actually increase the total amount of gambling in a state? Or does it just cause people to stop going to the casino and stop buying lottery tickets, and start betting on the N.F.L. instead? And that’s a real question. If you’re trying to raise revenue for the state, does it actually help you if people are gambling on the N.B.A., but not buying lottery tickets?

ROBINS: The taxes are always figured out as part of the legislation, because in a lot of cases, the primary reason that they’re passing it is the taxes.

Jason Robins again, the C.E.O. of DraftKings.

ROBINS: Most of them have been in either the high single digits or low double digits.

In New Jersey, the state takes an 8.5 percent cut for sports gambling in casinos, and 13 percent for online bets.

ROBINS: But the states do need to be careful they don’t tax it too much.

He may be saying this out of self-interest, of course, but also keeping in mind competition from existing black-market gambling outlets.

ROBINS: Because if you have to pass — and you will, if you’re going to exist and survive as a business — if you have to pass some of that off to the consumer, well, those are taxes that aren’t being paid by the offshores, and they’re just going to create a better value proposition, better pricing.

What is the optimal level of sports-gambling taxation? How is widespread gambling going to affect sports leagues, athletes, the average bettor — and society as a whole? Because legalized sports betting in the U.S. is so new, and moving so fast, there are all sorts of questions like these that will be hard to answer for a while. So, economists like Victor Matheson have been looking at data from other places, like the U.K.

MATHESON: If we’re anything like the Brits, the average American in the course of a year would end up making over $1,000 worth of bets on sports. And we know that’s true because we actually have the receipts. These are all legal bets being made through a huge network of local betting shops. Plus they’re doing much more online nowadays.

DUBNER: How would you describe gambling as a force on society? And I’m not asking you to turn into a philosopher all of a sudden or a legal scholar, but let’s concentrate on the economics of it. Anything from productivity to bankruptcy levels and so on. What does gambling tend to do?

MATHESON: So, there’s definitely some winners and losers from gambling. The winners tend to be the sports leagues themselves, because when people get interested in the sport, more people watch. I mean there’s a reason that the March Madness T.V. contract gets sold for almost a billion dollars.

Ironically, the big losers can also be the sports leagues because again, as soon as you have gambling, you have the potential for corruption, and we’ve seen this historically. The first major gambling scandal in Major League Baseball happened within a year of Major League Baseball forming — that was the Louisville Grays scandal. The precursor of the N.F.L. collapsed in 1908 in large part because of gambling scandals. And of course we know of things like the Black Sox in 1919 throwing the World Series. And if people think sports are fixed, then they don’t want to watch. And so it’s this real balancing act for the leagues. They want people to be interested, but they also want people to think that there’s real fair competition.

DUBNER: I understand you, Victor, used to be an M.L.S. — Major League Soccer — referee for some number of years, yes?

MATHESON: Yes, that is correct.

DUBNER: And were you ever approached by gamblers or the representatives about altering the outcome of a match?

MATHESON: So, I was not. Although very specifically we were encouraged to not even go into a casino. And we were also encouraged to obviously report anything immediately and we were prohibited by contract from engaging in any type of sports gambling. And that would include filling out a March Madness bracket.

Historically, U.S. sports leagues have been opposed to gambling, at least officially. Today it’s a different story. DraftKings became what’s called an “authorized gaming partner” of Major League Baseball. In the old days, sports leagues stayed as far as they could from Las Vegas, fearful of any association with even legal sports betting. But three years ago, Vegas landed a National Hockey League team, the Golden Knights; and this year, the N.F.L.’s Oakland Raiders became the Las Vegas Raiders. The N.F.L. itself has a partnership with the Caesars Entertainment Corporation; the N.B.A. has a partnership with M.G.M. Resorts.

MATHESON: So, it looks like most of the major sports in the United States have pretty much taken at least a moderately positive stand towards sports gambling. Again, knowing that people will be more interested in their sport if they can gamble on it, and knowing that they don’t have to worry about their athletes being on the take. Because all of our big sports, the average salaries are in the millions of dollars. Not the sort of thing that most athletes are willing to sacrifice in order to earn $10,000 under the table from some black-market bookie. On the other hand, the big loser in this whole thing is for sure the N.C.A.A. Because the N.C.A.A. is absolutely ripe for corruption here.

The N.C.A.A. is, again, the National Collegiate Athletic Association, whose athletes are, essentially, unpaid.

MATHESON: Which means players are a massive target for corruption.

DUBNER: Here’s what the N.C.A.A.’s web page says. “The N.C.A.A. opposes all forms of legal and illegal sports wagering, which has the potential to undermine the integrity of sports contests and jeopardizes the welfare of student athletes and the intercollegiate athletics community.” What is the N.C.A.A. going to do now that sports gambling is legal in many states? They can’t prevent, let’s say, a DraftKings or a casino from allowing betting on their sport, can they?

MATHESON: They cannot.

DUBNER: So, what happens?

MATHESON: This is a real conflict, and I actually agree with everything the N.C.A.A. says there. Gambling certainly does have the possibility to undermine the integrity of sports. And it has particularly the worry to undermine college sports — again, because college athletes are generating huge amounts of money for the N.C.A.A. while not getting paid. The obvious solution is: pay the athletes what they’re worth. But we’re not going to see that anytime soon, so they’re going to maintain their integrity by policing their athletes rather than by actually giving them a living wage.

DUBNER: Right. Meaning the more you’re paid, the less incentive you have to throw a game. Or to participate at all, collaborate with gamblers.

MATHESON: Historically, one of the most corrupt sports is cricket. And that’s because until about 20 years ago, the only cricket out there were national team games. So, India playing Pakistan or England playing Australia. The problem is, you didn’t have any free agency, because it’s very hard for an Australian to become an Indian. And so players were stuck on their teams. And because players were stuck on their teams, they didn’t make much money. Even though cricket was wildly popular in places like India. So, here you have a sport where there are literally hundreds of millions of people watching. But the athletes themselves weren’t making any money. That is pretty much the prime recipe for corruption. And again, massive corruption in cricket, both known and suspected.

But guess what — about 10 years ago, they started actually playing some professional club cricket called the I.P.L., the Indian Premier League. And now you actually have cricket players making some decent money. There’s evidence that suggests that the number of suspicious matches in cricket has gone down since cricketers started actually making some real money and have something to lose if they get caught.

ROBINS: So, I mean, this is another area where we’re completely aligned with everyone else.

That, again, is Jason Robins from DraftKings, talking about corruption in sports.

ROBINS: We don’t want to get defrauded either. It costs us money, costs us reputation. It potentially sours people’s views towards the sport’s integrity. It makes them less likely to want to see regulated sports betting in more markets, so we’re 100 percent aligned there. You know, being able to tell right away if there’s irregular activity and report it to the proper authorities, that’s really an important part of the role that we play.

DUBNER: So, let’s say that I bribe the 154th-ranked world men’s tennis player, and all I get him to do is to intentionally double fault on the fourth serve of the sixth game of the third set. And I put 20 grand on that.

ROBINS: So, I mean, that’s an easy one, because you’d be a huge outlier betting 20 grand on a single point that also wasn’t betting that kind of volume on any other points anywhere else in the match, so it would stick out like a sore thumb. And whether we were a black market or a legal regulated book, we would immediately flag that and say we’re not taking that bet. The difference is, we would report it to the authorities.

As sports betting becomes more and more reliant on technology, you have to wonder what sort of an edge there is to be gained by bettors who are more analytically adept. That, you’ll remember, was the case with fantasy-sports bettors. I asked Victor Matheson if sports gambling will be dominated by the team of quants that builds the best algorithm.

MATHESON: There’s no doubt that big data allows you to engage in all sorts of gambling strategies that look like they have an advantage for you. The problem is most of that turns out to be data mining. It works great looking backwards, but going forwards it doesn’t work. So, that’s No. 1.

No. 2 is that even when you find a strategy that works, you got to keep it under wraps, which is hard. You can’t have these anomalies persist very long before someone figures it out. And then all of a sudden, they get priced in.

DUBNER: Related question then: is the stock market, in your view, a form of gambling?

MATHESON: Absolutely, there’s no question about it. The difference is this: is that historically, yeah, there’s no doubt that betting on the stock market is purely gambling. That being said, it’s a gamble that in the long run pays a positive net return. Gambling on sports has a negative expected return.

DUBNER: Right, but let’s also talk about where the money is going. When I buy a stock, the company indirectly is getting money to fund their operations and research and so on, right?

MATHESON: Correct.

DUBNER: When I make a bet, let’s say, on a sports team, the athletes are not getting any of that. So, that money is being directed to a different set of winners. If you could orchestrate the way the handle was divvied, would you do it differently than it exists now?

MATHESON: Ah, that’s a good question. I hadn’t thought about that before. Yeah. The place that the money goes now is — the casino takes what’s called the vig, takes a piece of that money, for facilitating the bet. And the rest goes out as winnings to the side that wins. Anything that the N.C.A.A. or the N.F.L. makes right now is all incidental. The way they benefit is maybe the person who takes out that bet is more likely to tune in to the game or go to the game and therefore that’s how the N.C.A.A. gets the money. Mind you, the N.B.A. and N.F.L. and other pro leagues in the United States have been trying to negotiate with states saying, “Hey, we’re the ones whose product is being bet on. We should get a piece of that bet.” As of this point, I don’t think the leagues have been successful in negotiating any of those yet. But there’s no reason to think they can’t be.

DUBNER: I do like what it’s been called in some cases — they call it an integrity tax.

MATHESON: To be fair, if the N.C.A.A. or other sports have to engage in a lot more compliance and a lot more investigation to keep their athletes honest, redirecting some portion of the gambling to those extra expenses might be fair.

DUBNER: On the other hand, Mark Cuban told us that he estimates that legalized sports gambling will basically double the valuation of franchises, which has nothing to do with the money flowing directly from the gamblers themselves, right?

MATHESON: That’s exactly right. If you’re going to say that pro-sports leagues should get money from the casinos for the extra costs, then it would also be exactly fair that the N.B.A. should have to pay casinos for the extra benefits. And I don’t think the leagues have been saying that.

DUBNER: So, in your view, does the oncoming legalization of sports gambling in states across the U.S. — especially very accessible gambling via, let’s say, a phone app — does that spike demand for sports gambling, and to what degree?

MATHESON: There is reason to believe that sports gamblers are different than all gamblers. In that legalizing sports gambling actually brings new people into the gambling realm who wouldn’t otherwise be buying lottery tickets or playing craps or playing the one-armed bandit in the casinos.

DUBNER: Is spending on sports gambling regressive?

MATHESON: I don’t think we have nearly enough data to answer that question. We certainly know that gambling on, for example, lottery tickets — highly regressive, especially scratch-off tickets. Super regressive. We do know that gambling is associated with lots of bad social effects. We know that introduction of state lotteries and casinos into neighborhoods increases crime. It increases bankruptcy. A huge portion of consumer bankruptcies involve at least some amount of gambling that occurs.

And there’s reason to believe that sports gambling puts a particular group at specific risk. Think of all those sports fans who say, ‘“You know, I would never buy a lottery ticket. That’s just luck. But I know everything about sports. I should be able to win this.” And guess what? You can’t beat the casino. These amateurs who think they’re experts don’t stand a chance, but do stand a chance of really getting sucked in. And the question is how quickly can they extricate themselves and realize that, “Yeah, I’m actually not any good at this.”

DUBNER: So, that sounds potentially pretty bad, at least for the subset of people who are potential problem gamblers. Again, I realize you’re an economist, not a political scientist, not a politician, not a theologian. But are you concerned that the fairly rapid legalization of sports gambling in the U.S. is going to lead to pretty significant downsides, at least for a certain portion of the population?

MATHESON: Yes. So, I’m a college professor, so I’m concerned about my students. And the data looks like this: about 75 percent of all college students report having gambled in the previous year. About 6 percent of college students report having a severe gambling disorder resulting in psychological difficulties, unmanageable debt, failing grades, all these bad things. Male students are even more likely to have gambled and they report more problems with gambling more money and having gambling problems. And compared to students without gambling problems, these students are also more likely to use tobacco, to drink heavily, to binge-drink, smoke marijuana, use other illegal drugs, drive under the influence, have a low G.P.A. We shouldn’t at all pretend that gambling is completely victimless.

According to the National Council on Problem Gambling, the rate of problem gambling in the U.S. is about 1 percent. How does this compare to other countries?

MATHESON: There is not a uniform reporting of gambling across places. For example, at least officially, the numbers in the United States are something like 10 times higher than the numbers in Germany. Now the question is, is that because all Germans are very rational people who would never get themselves involved in this? Or do the Germans just have a much different definition of what you mean by problem gambling?

DUBNER: How much would you say that the median sports gambler operates on logic and all its manifestations versus emotion?

MATHESON: We know that they operate a ton on emotion. We talk about casinos balancing the books so that they make money either way. But casinos also do a pretty good job of following the dumb money.

DUBNER: So, Victor, you’ve told us about all the ways in which sports bettors are illogical and emotional and overconfident. So, let’s say I’m all of those, but I still want to bet, and I want to increase my chances a little bit. Do you have any advice for how to be a less terrible gambler?

MATHESON: Yeah, actually the one sports gamble that we know has a long-run payoff is actually betting on the horse races and betting heavy favorites to show. So, what that means is you’re taking a horse that everyone thinks is going to win the race, and you bet on them to at least come in no worse than third. It turns out that is a winning bet, dollar-wise.

DUBNER: That is so boring.

MATHESON: It is literally the most boring way to watch a horse race in the history of horse racing. But it makes money. It’s a gambling strategy only an economist could love.

One obvious place to look for parallel insights into the legalization of sports gambling is the recent legalization or decriminalization of marijuana in many states. Some people argue that as marijuana is made more widely legal, that a firm like Pfizer will move in and dominate the medicinal market, while a firm like Anheuser-Busch might dominate the recreational market. I asked Jason Robins of DraftKings if he anticipates that sort of top-down power play as sports betting becomes more common.

ROBINS: You know, that’s not something we want — we’d like to build a big independent company. And what’s interesting about our space is that because of the regulatory aspects of it and because it’s state by state, it’s not going to be, all at once, this huge opportunity. The opportunity could take several years to get bigger and bigger. But I think you might see where some of the bigger companies are, like, “There’s a lot of regulatory stuff we’ve got to deal with.” So, that gives us a window, but that window is not open forever.

When we interviewed Jason Robins last year, DraftKings was still a privately held company, with a likely valuation in the single-digit billions. Robins didn’t sound like he was in any hurry to cash out.

ROBINS: I mean, we are growing really quickly now, and I think the opportunity we’re going after is one that has the potential to build a — people may not believe me now, but we’ll see in a few years — I think there could be a $100-billion-plus company built in this space. So, we’re going after that kind of size opportunity.

But in April of this year, DraftKings went public, at a market capitalization of around $6 billion. Since then? It has nearly doubled. Like a variety of other companies and sectors that have benefited from the pandemic shutdown, DraftKings and sports betting generally are flourishing even more than you would have predicted just a year ago. The first game in this year’s truncated Major League Baseball season, between the New York Yankees and the Washington Nationals, attracted the most bets for a baseball game in DraftKings’ sportsbook history.

GETHERS: I’m glad you already interviewed somebody else who’s made money off this thing.

That, again, is Peter Gethers, who helped get the fantasy-sports juggernaut rolling, back in the 1980s, with the Rotisserie Baseball League. For this, he told me, he’d love to get his own billions of dollars someday. I asked where he expected those billions to come from. 

GETHERS: Yeah, I don’t. That’s the problem.

DUBNER: Yeah.

GETHERS: Unless he wants to give me some.

DUBNER: What do you think would be an appropriate dowry?

GETHERS: A hundred bucks.

DUBNER: How many members were there of the original Rotisserie League?

GETHERS: Originally 12.

DUBNER: So, you’re saying for $1,200, Jason Robins could basically make all of you happy?

GETHERS: Well, it’s more than we’ve made up until now.

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Freakonomics Radio is produced by Stitcher and Dubner Productions. This episode was produced by Zack Lapinski. Our staff also includes Alison Craiglow, Matt Hickey, Greg Rippin, Corinne Wallace, Mary Diduch, and Daphne Chen. Our intern is Emma Tyrrell. Our theme song is “Mr. Fortune,” by the Hitchhikers; all the other music was composed by Luis Guerra. You can subscribe to Freakonomics Radio on Apple Podcasts, Stitcher, or wherever you get your podcasts.