You see a lot of articles about DraftKings and Fanduel these days. You see even more of them in Boston, since DraftKings is headquartered here in Bean Town. The other day, a couple of commentators on the radio talked about the scandal and the latest legal ramifications, including efforts to regulate the industry. One reporter asked, “Why didn’t the industry self-regulate.” The other replied, with that knowing, I-don’t-even-have-to-say-this tone, “Have you ever heard of a business that regulates itself where profit is involved?”
Well yes, that’s the big question, isn’t it? Does government regulation make an industry more trustworthy, reliable, and honest, or does it lead to behavior that is even worse than it would be under a hands-off regime? We saw that question come up in the bank panic of 2007-2009. Some people said the panic would not have occurred if the industry were better regulated. Other people said that government regulations, in the perverse way they often work, operated to make the panic and its effects much worse than it would have been. Still others pointed to the panics we had before 1929, and the panics we had after 1929, and suggested that regulation does not make much difference, as we have these episodes with some regularity whether or not government agencies regulate banks.
Back to gambling. People like to place bets. It’s exciting, fun, and it occasionally pays off. One of my relations was a bookmaker, and he served his customers well. Not one of them would have said that the service he provided was unfair, or that he was untrustworthy. Like any business man, he wanted to keep his customers happy.
Another thing we can say is that people are endlessly creative about the kinds of things they bet on. Sports competitions are a big favorite, as are games of chance. No matter where you look, new forms of betting crop up, like corn seedlings in an Illinois field. One reason that happens is that gambling is such a social activity, whether you place bets on a football game or enjoy a night of poker with your friends. Even bingo in the church basement is gambling. People go out for bingo night to see their friends, and see if they might come home with a little extra change. The household atmosphere in the film Silver Linings Playbook shows how central sports betting can be for a good social life among family and friends.
Along comes a government agency to say you can’t gamble. The regulators have two reasons up their sleeve: 1) gambling is addictive, so we have to protect you from yourself; 2) gambling is dangerous, because the industry is infested with criminals. The first reason about out-of-control behavior is surprising: imagine if a police officer showed up at your door with a warrant for your arrest because you bought too many things at Ebay, Amazon, or the Shopping Network. No one needs a person with a badge to stipulate where you may or may not spend your money. The second reason is doubly galling, because gamblers are criminals only because regulators made them so! You tell someone he has to have your permission to engage in some harmless activity, then declare him a criminal when he doesn’t ask your permission! If you want to know what a racket looks like, that’s one.
Now let’s go back to incentives for self-regulation. The bookmaker in my family obviously has a lot of reasons to treat customers honestly. If a bettor wants to gamble on baseball, the same person likely wants to bet on football as well. If you want to bet on footballl, you make like hockey or basketball. The more knowledge you have about the game, the more confident you feel about winning some cash. You know each bet carries a healthy element of chance, no matter how much you know about the game. That’s actually one of the attractions of betting: the combination of skill and chance. The introduction of odds, spreads, handicaps, stakes, pools, pots, and other standbyes in the bettor’s toolbox only add to this attraction.
The one thing you do _not_ want to have in the bettor’s toolbox is insider information. You do not want to fix a fight, or the World Series, so some bettors fleece others, and book makers make out above all. The game loses its legitimacy, bettors lose faith, and the whole enterprise starts to look like professional wrestling. That’s a sport a lot of people find entertaining, but the only people who would bet on it are people who play the slots or buy lottery tickets – that is, people who want to gamble with no element of skill involved.
The biggest taboo on inside information applies to the stock market, of course. The stock market is the biggest gambler’s paradise by far. I’m kind of curious whether value investors outnumber quants and day traders in the market, but in the end the proportions don’t matter. People like to bet on stocks. You can make a lot of money if you have inside information, and you don’t get caught using it to place your bets. People take the stock market seriously. They become angry if they perceive they’ve been beat out by someone more clever about inside information than they were. So we have the Securities and Exchange Commission, referees in striped shirts to impose penalties if you break the rules.
So the last thing a gambling outfit wants even of whiff of – especially if it’s making a lot of money – is inside information. That will crack open the golden egg and spread the yolk everywhere, to use a cleaner metaphor than something more smelly hitting the fan. DraftKings and Fanduel know the industry they operate in. They know that if they are caught using inside information, the men with badges will break down the doors and blow their whistles. We’ll let you gamble because, after all, we all like to place a bet every so often, but by God, if you cheat, we’ll come down on you hard.
So what do the fantasy sports firms do? _They let their employees place bets!_ Moreover, they did not seem to have any enforcement mechanism in place to prevent employees from doing so, or any public relations procedures in place to handle inquries if their employees were caught doing so. That is, they did not even give an appearance of regulating themselves. Employees just placed bets, and they did not even appear to care much if other people knew about it.
If you’re in the gambling industry, that’s about the most stupid business move you can imagine. That’s not just a failure to self-regulate because you can make more money if you don’t have any rules. That’s a failure to make money, at least in the longer term, because you don’t have or enforce any rules. Nothing shuts down or reduces your income stream faster, when you run a large book making operation, than a sudden apprehension by your customers that you run your game to benefit yourself at the expense of your customers.
What can explain stupidity like that? One explanation is stupidity. People do make stupid mistakes. Another explanation is the sense of invulnerability you may develop when you do something a little risky for a long time, and nothing bad happens as a result. A third explanation is that the firms had a blind spot on this matter, which is kind of like making a stupid mistake, but perhaps more psychologically interesting. Blind spots are difficult to explain, especially in a social setting like a business firm.
The last reason might be the one suggested by the radio commentator mentioned above: when a business firm sees a chance to make a lot of money, it is willing to engage in unethical behavior to keep money coming in. That appears to have been the case with VW’s fixing of its software to pass emissions tests. The difference for fantasy sports, of course, is that DraftKings and Fanduel did not benefit from having their employees place bets. The employees just took advantage of the inside information they had, placed bets, didn’t conceal what they were doing, and succeeded in brining the heavy hand of regulators down on their enterprise. So the stupidity is twofold: the employees acting as if they can get away with anything they want, and their employers letting them get away with it.
I’m not going to draw any lessons from the fantasy sports debacle, other than the ones implicit in the argument above: 1) self-regulation is always better than government regulation; 2) government referees would be great if they could prevent cheating, but they rarely have the ability to do that; 3) if you cheat when you run a gambling operation, you have truly placed short-term winnings over long-term profits; and 4) gambling is no more harmful than other businesses.
If we were to treat gambling like other businesses, we would apply the same legal framework we ought to apply to all business relationships. We look to the law to enforce contracts. If any business firms, including gambling operations, commit fraud when they execute a business contract, they are subject to sanction. That is a different model of enforcement than creation of regulatory agencies to prevent fraud in advance of the crime. When the Massachusetts attorney general says she wants to keep fantasy sports off college campuses, that’s an effort to protect young people from the supposed attractions of wasting your money gambling on sports. It doesn’t actually have anything to do with fraud.
If you want businesses to regulate themselves effectively, you impose a penalty when they commit fraud. Fraud is easy to recognize. We all know it when we see it. For most purposes, you do not need carefully drawn, industry specific rules to define fraud. The definition of fraud in each business relationship is written into the contract. If both parties meet the terms of the contract, government enforcement does not come into play. If one or both parties do not meet the contract’s terms, we have a lot of different ways to adjudicate the resulting disputes. Gambling and other money centered businesses, like banking and the stock market, are no different from other activities in that respect.