Generally Recognized as Gambling: Daily Fantasy Sports

Testimony Before the Hearing on Daily Fantasy Sports held by Committees of the New York State Legislature,  8 December 2015

GamblinglosspictureMy name is Stephen Shafer. I chair Coalition Against Gambling in New York, an all-volunteer organization registered in Buffalo since 2007. Our members have different philosophies about gambling. The mainstream holds that not all gambling is bad for society or the individual. A March Madness pool where 100% of entry fees are paid out to winners, a game of cards among true friends, a bet on whether it was Yogi or Casey who made a certain remark – these actions don’t bother us. What does, and deeply, is predatory gambling – gambling in which some party profits predictably over time by preying on others. That party can be “the house” or “sharks” or both.

I think Attorney General Eric Schneiderman  is entirely right that Daily Fantasy Sports of the DraftKings and FanDuel type is gambling under New York State law; payback depends on a future contingent event that the person placing the stake cannot control. That person controls the selection of his fantasy team, but not the actual performances of the component athletes from which the outcome of the contest derives. A horseplayer uses skill to decide which horses to pick at for the trifecta, but where the horses place that day is not in her control. No one denies that is gambling.

Assuming DFS is gambling, it is certainly illegal. The State Constitution bans all gambling in New York State except (by specific amendments allowing regulated parimutuel, charitable gambling, Lottery and (as of 2013) up to seven non-Indian casinos in the future. There is no exception for any kind of betting on sports, either live action or fixed odds. There is no exception for internet gambling.

The business model of i-poker and online FS is similar to that of a casino or a state lottery:

  • Recruit people through their hopes of payoffs far greater than investments.
  • Keep their loyalty with frequent small payouts and tidings of rich payoffs to others.
  • Replace them as they burn out, go broke or jump ship.

Result:  some, far from all, of the internet  “players” become problem gamblers and addicted gamblers. They damage, even wreck, not only their own lives but those of all around them, the hidden victims of predatory gambling – spouses, children, parents, in-laws, siblings, employers, employees, clients, neighbors. With  “land-based” casinos and state lotteries, half the revenue (sometimes more than half) comes from problem and addicted gamblers, maybe 12-15% of customers. Their net losses are drained from someone else by deception or bullying or crime. These gamblers need help; so, in greater measure because there are far more of them, do those they are ripping off. My organization has great respect for clinicians and peers who help problem gamblers day to day. Our focus, however, is to stop expansion of predatory gambling. That’s why we hold that DFS and all forms of so-called i-gaming are illegal and should stay that way. That’s why we support the AG’s stance.

There are differences between the model for i-poker and online DFS on the one hand and that for casinos and government-run lotteries on the other. In the first group, “players” pay real attention to the action.   Some win more consistently than others through preparation (e.g. scripts in DFS) and mental probability calculations as in i-poker. This is called skill, though it can verge on insider trading in DFS. In the second group, no decision-making is needed beyond which card to buy or slot machine to go to.

In i-poker and DFS newcomers have no idea how they will fare. They don’t know how their skills stack up to those of other players, most of whom are strangers; moreover, chance has a big role. The game board changes day to day, hour to hour. They are really less well-informed about their chances of success than slot players who know they can expect long-term about 88-93 cents back for every $ invested.

In i-poker and online DFS there are two types of predator: the house, or operator, which takes a  percentage of the pot (“the rake”) or of pooled wagers (which DFS calls “entry fees”);  and the elite stratum of well-prepared pros or near-pros who pocket most of the money laid out  by everyone. In the typical casino or state Lottery setup – a slot machine – the house is the only predator, setting its expected payout % as it sees fit under regulation.

Operations with player predators (“sharks”) need prey (“ fish”) to contribute to the betting pool or join the poker game. Heavy advertisement with upfront incentives is the way to get new fish. Fish may know a lot about their sports, but few can match the preparations of the sharks.   Some fish will fall into the cycle of chasing losses that spells problem gambling. If there are indeed 500,000 DFS participants in New York State , then it is likely there are, or will be soon, at least 20,000 problem gamblers and addicted gamblers among them.

I surmise that the distribution of players’ net losses and net wins is different from that of a casino or Lottery. In the latter, the small fraction of users who are the most “involved” – that is, invest the most time and money– provide the lion’s share of gamblers’ net losses (= house’s net win). In DFS, the biggest investors are the few sharks, who divide among themselves as their winnings nearly all the pooled bets. The investments of problem gamblers and addicted gamblers are perhaps not as over-represented in the winners’ pot as they are (> = 50%) in the gross gaming revenue of a casino or a state Lottery. In that sense the AG’s action in ordering a shutdown of DFS is consumer protection as well as an effort to prevent the cultivation of problem gamblers.

Why don’t we see many problem gamblers or members of their circles here today?  Why do most complaints voiced to the media re DFS relate to how the player was cheated or had winnings withheld, not how he was suckered into layers of debt and despair?

  • Most problem gamblers and addicted gamblers are in denial at any given moment.
  • The culture of recovery says “Don’t make the casino/game/track or whatever responsible for your gambling problem. You take responsibility.” This keeps current and recovering problem gamblers from taking a public stand against gambling.
  • The many victims of state-sponsored predatory gambling who are not gamblers themselves (collateral casualties) need not be “gambling-neutral,” but are often too ashamed or guilty to speak out against the casino or the operator.

Thus DFS and other longer-established forms of internet gambling not legal in most states, like i-poker, have great potential for harm that reaches beyond the ostensible victims, beyond the problem gamblers themselves. This is why they are illegal.

To legalize illegal activities and “regulate” them is not a solution. It gives government a conflict of interest. Tight regulation lowers profit margins and hence government’s share.

When DFS have been unequivocally recognized in NYS courts as gambling and therefore incontestably illegal, the legislature should not cure these companies by legalization and regulation. Thank you.

Post script: the operations of Fan Duel and Draft Kings in New York State have not ceased since the AG called for that to happen.  They  continue  while the case is on appeal.  A decision appears unlikely before the end of 2016.

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