Sports Gambling Stock Market

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Realistic rating: 8.0

Today marks the one-year anniversary of one of my favorite websites, Intrade, closing all American accounts thanks to the friendly folks at the Commodity Futures Trading Commission, so what better occasion than to take a page from their brilliant idea and apply it to my favorite professional sport: gambling.

Futures (i.e. odds on something like a team winning its division, conference, championship, etc.) are becoming a more and more popular bet at Vegas sportsbooks, so popular that the books usually release the odds for next season within 24 hours of the current season’s champion being crowned. As futures currently work, the books open odds on a team winning a division/conference/championship, and gamblers can place bets they can later cash if their speculative outcome comes true.

Futures are typically a bad investment that only get worse the longer you down the road you speculate. Take a look at the NFL odds going into Week 16. Totaled are the sums of the win percentages Vegas estimates for all the potential outcomes of each event.

Type

Total Win Probability

Number of events

WP per event

Individual Games

1659.89%

16

103.74%

Division Futures

743.72%

7

106.26%

Conference Futures

250.94%

2

125.47%

Super Bowl Futures

127.69%

1

127.69%

As you can see, in each individual game, the average sum of the two teams’ winning percentage is only 3.74% over 100%, so the house edge is relatively minor. This edge grows a bit when looking at the seven division futures still on the board (the Colts already clinched the AFC South) but takes takes a massive leap once you start looking at conference and Super Bowl odds, with the sum of all the teams’ winning percentages each coming out to over 125%.*

*This also doesn’t include the fact that with futures bets, the sportsbooks get to hold your money for a long period of time and gain interest on it, so there’s also an added opportunity cost to bettors.

Ignoring the house edge, there are are two slight inconveniences to bettors under the current futures betting marketplace:

1. There’s no way to buy and sell futures after purchase. There are only two available exchange times: Initially purchasing a ticket and cashing it out should it win.

For example, about six weeks ago, I purchased a futures ticket on the Texas Rangers to win the World Series at 25-1. (For the gambling unaffiliated, this means $25 payout for each $1, so 1-in-26 total odds. These odds can also be expressed as +2500.) Since that purchase, the Rangers have traded for Prince Fielder and signed Shin-Soo Choo, bringing their odds down to 12-1 and effectively doubling the value of my initial investment. While I thought the Rangers were better than 25-1 odds six weeks ago, I think 12-1 might be a bit low today. If this were a stock market, I could sell my “shares” of Rangers stock for double my initial investment, but I don’t have that opportunity with current sportsbooks.

2. There are no opportunities to “short” teams if you think its odds are too low.

For example, I think the Denver Broncos’ current odds of 5-2 to win the Super Bowl are far much too low, but there’s no way to invest in belief other than betting on every other team’s Super Bowl odds, which as shown above, is not a very good investment.

There’s an easy way to fix these issues: The Intrade model.

Intrade is—I mean, “was”— a betting site that that allowed users to purchase shares of the an event occurring with the price of those shares constantly fluctuating based on the market’s estimation of the event’s probability of occurring. The payout for each share was $10 if the event occurred and $0 if it did not. So for example, if the market said that Mitt Romney had a 35% chance of winning the presidency in 2012, then his shares would sell at $3.50, and if he won, their price would rise to $10.00 per share. Not only does this model allow for investors to sell their shares if they’re currently bearish on a previous investment, it also allows investors to short outcomes they think the marketplace is trading at too high a price.

Now, here’s the big question: Why would the sportsbooks want to change their current futures market models to an Intrade-style marketplace? The books already make huge profits on futures, and the last thing they want is betters taking money off the table and cashing out.

To answer this question, let’s look at two ways the Intrade model could be applied to Vegas sportsbooks:

1. The sportsbook could sell a set number of shares at an opening price, and then after they are all bought up by bettors, simply serve as an exchange marketplace charging a small commission or broker’s fee for every transaction.

This is is pretty much exactly how Intrade worked, but the books would likely eschew this kind of model due to the fact that they would never want to create a self-imposed limit on the number of bets they can take in. However, this could be solved by…

2. The books would have an unlimited number of shares available to sell and could have two prices on the board: the bettor buying price and the bettor selling price.

The bettor selling price (i.e. what bettors can sell their shares back to the books at) would be slightly lower than the buying price, which would allow the books to make a slight profit.

For example, with the Broncos’ current 5-2 Super Bowl odds, they would be selling at $2.86 on a $10 scale or $28.57 on a $100 scale. (It’s probably more appropriate to make this a $100 since Super Bowls futures markets aren’t binary and have a multiplicity of outcomes that require a more granular scale.) Sportsbooks could make the selling price, say, 95% of the buying price, so if you wanted to sell your $28.57 Broncos shares, the book would buy them from you at $27.14.

(This also opens up the opportunity for a secondary marketplace that will by and sell these shares at different rates from the books, further mirroring the stock market.)

These methods would still allow the books to make huge profits, albeit likely a bit less than they currently make with their aforementioned 25%+ house edge. (However, the vast majority of bettors likely wouldn’t even exercise their right to sell back their futures ticket, as the public is usually just looking for a thrill and not interested in using sports betting as an investment.)

But still, is that enough for the books to want to revert to this model? They might not have a choice.

This marketplace improves the customer experience, and at a microeconomic level, market forces say that at some point, a firm will take a risk at reduced profit margins if they can appeal to more customers and thus take a bigger market share. While this book’s profits margin per bet may not be as high as under the previous system, that will likely be offset by the higher total number of bets they receive. This would create a domino effect on the other books.

At a macroeconomic level, this new model could also benefit the the entire sportsbook industry, as the “stock” price of futures could be an easily circulated figure. Now, not only could ballparks and sports networks flash scores on a video screen or bottom line, they could also have a live stock ticker listing all the current teams’ prices and net changes they made after games. The stock figures would become ubiquitous, thus raising public interest in the sports gambling industry and bringing in more bets.

Bottom line: This really wouldn’t be too drastic an overhaul of the sportsbook industry and wouldn’t take very look for bettors to get used to the new pricing method (especially if the old odds format was printed right next to the new stock price format). Market forces say that one day, a struggling sportsbook will break from the norm, try the Intrade model (or another more customer friendly model), and reap the benefits of a larger customer base. It’s really only a matter of time.

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Can the best college team really challenge the worst NFL team? Let’s find out!

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 Realistic rating: 2.5

Every year, the question always comes up from talking sports heads, writers, and fans: “Could the [best college football team] beat the [worst NFL team]”? All the questioning is mostly facetious, but it’s become so prevalent, and such a matter of intrigue, that it begs the question… Why not actually do it and once and for all find out?

The biggest reason it wouldn’t happen (or be worthwhile) under current circumstances? The NFL team would have no incentive to play. Why risk injury? Plus, there’s no upside. If they win, they only do what they’re expected in crushing a bunch of college kids. If they lose, they’re eternally humiliated.

These aren’t unfixable problems.

Let’s say the NFL were to propose a rule in the next CBA that the worst team in the league must play the BCS National Champion in a game held the Saturday between the conference championship games and Super Bowl (i.e. the day before the Pro Bowl.)

The game would be held at the recently crowed BCS championship team’s home stadium. This location would be because the college team’s fans would be the ones most willing to come out and cheer for a team to win in such a game (don’t think many Texans fans would be pumped to cheer on their team to avoid a humiliating loss), and it would also give the college fans a kind of de facto homecoming celebration for the returning conquerors, as the BCS National Championship Game could easily have taken place across the country.

Here’s the kicker to incentivize the pro team to win*, though: If the NFL team loses, its No. 1 overall pick in the upcoming draft moves back five slots and becomes the No. 6. It’s a penalty significant enough for the team to prepare for the game and play hard while really not being draconian, especially considering the somewhat crapshoot nature of the NFL draft and the a recent quantification of draft pick value by the Harvard Sports Analysis Collective.

*Players on the NFL team will be paid a pro-rated stipend based on their salary that season for their extra week of work. (Players on the NCAA team will continue to be “paid” with, well, more textbooks and knowledge.)

The NFL and NCAA could split the ticket, merchandising, sponsorship, and TV revenue 50/50. (A bulk of each league’s half would go to each representative in the game.) One could imagine such a game generating quite a lot of viewership, especially compared to the Pro Bowl audience the next day. Given the event-ization and unique nature of such a contest, it’s quite reasonable to suggest its ratings being on par with a typical NBC Sunday Night Football game, which sells ads at a rate of $500,000 per 30 seconds. One of the NFL’s many broadcast partners would probably pony up quite a bit for those kinds of figures.

The other wrinkle in this idea is that, due to the humiliation of playing in such a game and also the risk of downgrading a draft pick, it de-incentivizes NFL teams from tanking to get the No. 1 pick. (Although it should be noted that this side bonus is pretty minimal, as tanking in is nowhere near as prevalent in the NFL as it is in the NBA due to the fact that so many more NFL players are on shorter non-guaranteed contracts, and playing for that next paycheck.)

The thing to remember here is that the NFL team is going to win the vast majority of the time, so the draft pick penalty will come into play only once every couple of decades. (Although we can’t know that for sure since, you know, this game doesn’t exist yet.) Plus, if the NFL team is leading by a few scores early (a very likely possibility), they can just sub out their highly paid starters and minimize their injury potential.

**Addendum: This idea might work better for basketball, where the relative injury risk each game isn’t very high compared to football. All the principles are still in play, though. (Although since high draft picks are much more valuable in the NBA, the penalty for losing would have to be more along the lines of only 2-3 draft spots back.)

Bottom line: This idea will almost certainly never happen due to complaints from the NFL player’s union as well as some hypocritical NCAA stance on having “amateurs” be tainted by playing on the same field as “professionals.” That doesn’t mean this idea wouldn’t work in theory (and also be a profitable investment for the NFL and NCAA), though.

NFL Injury Time Outs

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Realistic rating: 8.5

Throughout the 2013 NFL season, we’ve seen numerous instances of defensive players faking injuries in attempts to give their defense a breather. However, it appears we’ve seen far more instances of injuries that fans mistakenly believe to be fake, provoking a torrential downpour of boos for a guy who’s actually writhing on the ground in 100% legitimate pain. The NFL has literally done the least they could in an attempt to fix this, but sending out a mere memo asking coaches and fans to stop questioning injuries isn’t likely to do much.

Faking injuries is nothing new, but with the growth of no-huddle offenses, it seems to be a growing (and more rewarding) trend. However, this trend has also increased the number of fraudulent booing incidents, which are especially damning for a league trying to emphasize safety.

The NFL already has a rule in place for the officials to call injury time outs. According to Rule 4, Section 5, Article 3 in the rulebook:

When an injury timeout is called, the injured player must leave the game for the completion of one down. The player will be permitted to remain in the game if:

(a) either team calls a charged team timeout;

(b) the injury is the result of a foul by an opponent; or

(c) the period ends or the two-minute warning occurs before the next snap.

However, a single player missing only one down does not seem like enough of a penalty to dissuade teams from the reward of stopping the clock and giving their defense a much-needed breather. I feel like there are a few very simple unobtrusive solutions to this issue:

1. Don’t stop the clock when a player is injured.

Why do the refs stop the clock when a player is injured in the NFL? This doesn’t happen in the NBA or NHL. Teams have to call timeout If one of their players is injured. I don’t see why the NFL should be any different. (And teams wouldn’t necessarily have to use a TO. Unlike basketball and hockey, football is not a free-flowing game, and there is ample time to sub players in and out between plays.)

2. Give each team a certain number of “injury timeouts.”

These can be used any point during the game, allowing the medical staff to stop the clock and aid an injured player. However, during these injury TOs, the coach is not allowed to talk with anyone but the injured player, and the players on the field must remain there and not go to the sidelines to talk with coaches (thus preventing “injury TOs” from being abused as a standard TO.) Also, one facet of these injury TOs could be that if they are used in the final five minutes of the fourth quarter, then there is an automatic 10-second run-off (also to prevent abuse of injury TOs as standard TOs.)

3. If teams need to stop the clock to investigate an injured player, then that player must sit out five plays or the rest of the drive.

Here you get the best of both worlds in both dissuading a team from faking injuries and also, in the case of real injury, making the game safer by mandating they have proper time to get checked out and recuperate before re-entering the game.

—-

The problem with the first three proposals is that they put the judgement for injuries into the hands of a biased party—the team itself. However, there are already independent neurological consultants on the sidelines of every NFL game—removed from the incentive to win games—to determine if players have been concussed and need to be taken out. It seems as though an independent general medical practitioner could also be present to make these same assessments on injuries of all types. (However, they would have to make snap medical judgements from the sidelines, which may be impossible.) This goes back to the current rule, which seems that the best solution may be:

4. (A hybrid of the current rule and #3) The referees (or an independent “game doctor”) determine if a player is injured, and he must sit out five plays or the rest of the drive.

Of course, the counter to all of these proposals is that if there is any (however small) “penalty” or opportunity cost to a team needing to sub out an injured player, then injured players will ignore pain rather than seeking medical help, thus adding more danger to an already very dangerous game. However, these minor “injury penalty” policies have always been in existence in just about every sport, as players have to determine if they’re healthy enough to start or re-enter games. I feel like after a year or so of these kinds of policies in football, it wouldn’t be viewed as un-macho or shameful for an injured player to jog off for a sub, ask his team to use one of their “injury time outs,” or volunteer to sit out the rest of a drive to seek proper medical attention. Perhaps I’m putting too much faith in the amenability of modern NFL warrior culture.

Bottom line: The NFL already has this rule 95% of the way implemented. Only a minor tweaking is needed.

Welcome to Lower The Mound

Anyone in my fantasy football league will readily tell you that I’m never satisfied with the status quo. Every summer at our annual owners meeting (we take our league rather seriously), I present a point-by-point list of twenty or so league changes I’d like to see implemented for the coming season. Because we use a website that allows us to customize just about every facet of the game, I often view our league as my own personal laboratory to tinker with things to create the best possible game experience.

This fascination with game design naturally spilled over into real sports, and I’m not alone. I find more and more frequently that when people talk sports, they talk about everything but the sport itself. Almost no casual (or even relatively serious) fans have substantial discussions on Justin Verlander’s devastating curveball against lefties or Andrew Luck’s recognition of zone blitz schemes, but you’ll hear hours of conversation (and endless columns) on the Redskins’ nickname controversy, the addition of a second MLB wild card, or the NFL overtime rules. Like it or not, the modern sports discussion is shifting from what happens on the field during games to virtually everything around it, and that’s what this site is trying to capture.

The Premise

Lower The Mound will be my platform to present changes I’d like to see in modern sports. The topics will have a sharp statistical focus (bell curve alert!) and mostly focus on the four major North American sports (NFL, NBA, NHL, and MLB), but the coverage range will likely expand with time. Anything and everything is up for discussion, ranging from basic rules of the game (such as MLB lowering the pitcher’s mound in 1969), to standings procedures, schedule design, and league financial structure.

First I want to set a few guidelines: These ideas all have to be somewhat realistic, and by “somewhat realistic,” I mostly mean, “won’t cost the leagues millions of dollars” and “won’t cause massive class-action lawsuits.” So no, there can’t be any “eliminate TV timeouts” or “allow broadcasters to curse on air” ideas—wait, actually hold that thought on that last one. Every Tuesday, there will be a new original idea post, and throughout the rest of the week, there might be occasional shorter posts responding to new ideas proposed by other writers. Other fun related sections such as “how to cheat at sports” (one of my favorite topics to mull over) could likely appear.

A big model for everything will be the NFL. Over the last decade, it’s hard not to notice how the NFL has revolutionized the sports-watching culture of America, taking numerous slots for the annual highest rated shows and completely monopolizing viewership for three nights a week in the fall. Like most other Americans, I’ve also been swept up in the national NFL hysteria, so while it’s certainly my favorite major sport, there won’t be as many posts about it here, as I personally think that compared to other leagues, there are very few major errors with what I’m inclined to say is a relatively flawless league (other than the whole widespread debilitating brain trauma thing.)

The most finely crafted “game” setups in American culture today are not found in massive stadiums or nationally televised broadcasts, but rather in your living room in the form of board games. The principles that make great board games—a good balance of parity while still ensuring the best players succeed a high percentage of the time (what I call the fairness-excitement spectrum—more on that later), a length of time that doesn’t drag on too long, and an even starting playing field for all competitors—are all-too-often missing from the realm of sports.

Why Change?

Of course, bringing about change in professional sports isn’t as easy as shifting Madden from “pro” to “all-pro.” Leagues are run by dozens of owners and hundreds of corporate bureaucrats, and if history has told us anything, they are extremely adverse to taking risks or trying anything new. In fact, the boldest move any pro sport has made over the last decade might be… NASCAR implementing a playoff? (If NASCAR is your most progressive sports league, it might be time for some more changes.)

And in their defense, it’s a fair question to ask why should they change? Pro sports are a multi-trillion—yes, trillion with a “T”—dollar industry. Why shouldn’t they be happy? Because as Don Draper told the dominant Dow Chemical, happiness is simply “a moment before you need more happiness.” Just look at how unsatisfied NFL owners are with only taking in a paltry (tax-exempt) $10 billion in annual revenue. There’s always room for growth, and it doesn’t have to just be in the form of financial gains in the owners’ wallets. There’s certainly a lot of room for improvement that benefit the players, fans, and game itself.

Fans themselves usually aren’t particularly open to change either. I’ve found that a lot of the things that suck about sports are simply in place due to the hallowed grandeur of “tradition.” “Oh, we can’t change that. We’ve always done it that way,” is a common refrain from fans when new ideas are suggested.

This isn’t to say that tradition is entirely meaningless. It certainly has some (somewhat) quantifiable value for the sake of historical records, familiarity, and branding. But it’s certainly not an end-all, be-all dealbreaker, and many leagues have made great strides since “breaking tradition” with their past m.o. (Anyone still wish there were no three-point line or free agency? Ok, Dan Gilbert probably wishes there weren’t free agency.)

My Perspective

While the media likes to paint pro sports owners as greedy fat cats with no care for the fans, in the grand scheme of things, this narrative is mostly false. Sure, in some instances owners certainly do slight the fans for some extra dough, but in the big picture, fan experience and owner profits are highly positively correlated. It’s simply bad business to produce a product your customers don’t enjoy (or in the NFL’s case, are scarily addicted to). So in proposing these ideas for how to improve sports, I try to take the perspective of a McKinsey consultant, primarily having the sports’ best (i.e. financial) interests in mind, with a better fan experience simply being a side effect.

Anyways, thanks for being a part of this early stage, and I hope you stick around. Exciting things are on the way!