Daily Fantasy Sports (DFS) operators FanDuel and DraftKings have been in the news non-stop lately about particular states calling them illegal gambling and attempting to shut them down. The Attorney General of New York has already called them illegal and is battling the sites in court in order to shut them down. Just yesterday, the two companies asked California to regulate them rather than shut them down. Investors in these two companies have to be very concerned that the companies may be ultimately put out of business or forced offshore in the same manner that the US Department of Justice targeted on PokerStars, Full Tilt Poker, and Absolute Poker in 2011’s Black Friday crack down. FanDuel and DraftKings will probably have a very difficult time attracting new investors until some of the lawsuits and uncertainties are settled.
This does not change the economics of DFS as a player. For DFS players who actually know what they are doing (sharks), playing DFS is a fantastic investment. Think about the economics of DFS:
- DFS is not gambling in the classical sense of the word. It is extremely reliant on skill. The good players consistently win money and novices consistently lose.
- You are up against a lot of competitors who use virtually no analytical tools and rely on gut instinct and name recognition in picking their rosters. Some of them play for stupid non-economic reasons like increasing their interest level and enjoyment of watching the games.
- The DFS companies are constantly advertising and promoting a fantasy land in order to attract new players. Even if players realize that they are losing all of their money to sharks, there will be a new supply of victims to replace them.
- There are new contests every day or every week. Thus you can constantly turn your money over. Think about a grocery store that sells on a thin margin, but turns its inventory over and over again.
- If you are concerned about the DFS sites failing or not being able to return your money, you can invest a tolerable amount of money. Its not like buying a property or buying some other illiquid asset where you make most or all of your profit might be realized in one large sale a year or more down the road.
- Presumably you would not employ anyone else and could manage this investment from your home computer. This would eliminate the myriad levels of fixed costs inherent in most businesses and the headache of managing other people.
Now this all sounds great, where do I sign up? The reason I don’t play DFS is that I realize just how difficult it is to be a shark. You need to employ a variety of tools, and most importantly, develop a proprietary algorithm and other rules to automate most of your roster-picking. Rather than rely on gut feeling, you have to have:
- Develop your own price estimate for players in order to determine if a DFS site’s pricing is accurate.
- Track trends and ensure your algorithm accounts for changes over time. One NFL Projection tool includes adjustments for: Vegas line, Vegas projected points, defense adjusted stats, stadium type, temperature, wind speed, and humidity.
- Use advanced statistical tools and methods (correlation, regression, Chi-square, standard deviation, kurtosis, skewness, etc.)
- Focus on players that produce extreme outcomes (good and bad); you don’t want to just use consistently great players, you want to find the player that is valued less but might have a great result in one particular game.
- Enter as many contests as possible to ensure you aren’t just facing other sharks, but competing with as many suckers as possible. This can’t be an enjoyable activity that you can casually follow on your cell phone. It needs to be a massive undertaking.
- Employ scripts that make last minute changes to 100’s of entries in the event that news comes out just prior to games starting (player injuries, etc.)
- Utilize a variety of other strategies specific to each sport.
I think that at a minimum, it would take hundreds of hours of experimentation and a few thousand dollars before you could even begin to invest in DFS. Until then, you would not be investing. You would be lighting money on fire.