บทถอดความฉบับเต็มของ Bookmakers Set Odds To Maximize Profit Not Balance Bets

I mean, economics. 00:02:30.080 --> 00:02:38.400 I grew up in Ireland in the 1980s, and the economy was terrible, and it was just everywhere. 00:02:38.479 --> 00:02:43.599 It was, I I there's just I I couldn't understand people who weren't interested in it. 00:02:43.919 --> 00:02:48.560 So I went to university, studied economics, studied mathematics. 00:02:48.879 --> 00:02:50.240 There were no jobs. 00:02:50.560 --> 00:02:54.719 So I was like, okay, I'll go do a PhD in economics. 00:02:55.360 --> 00:03:01.120 And and I was always interested in macroeconomics, that kind of big picture kind of thing. 00:03:01.439 --> 00:03:06.960 So for me to go work at the Fed, that was the center of the macro universe, you know. 00:03:07.199 --> 00:03:10.719 So I spent six years there, greatly enjoyed it. 00:03:11.280 --> 00:03:13.840 And then I moved back to Ireland. 00:03:14.000 --> 00:03:35.199 I worked in the Central Bank of Ireland for about five years, and I left there in 2007, which was a in retrospect a very well-timed exit, because Ireland had an enormous banking crisis, which I was able to observe and discuss and comment on as an independent academic as opposed to somebody inside the central bank. 00:03:35.759 --> 00:03:37.919 Instead of having to be a piano player at a brothel. 00:03:39.759 --> 00:03:46.319 You know, it was maybe not as uncomfortable as that, but but but but you know, I still had friends that worked there. 00:03:46.400 --> 00:03:47.520 It was not a fun time. 00:03:47.680 --> 00:03:49.439 It was not it was not a fun era. 00:03:49.840 --> 00:03:56.159 So I've largely been a macro person, but in terms of my interest, I've always been interested in finance. 00:03:56.319 --> 00:03:59.919 When I went to graduate school at MIT, I I studied finance as well. 00:04:00.159 --> 00:04:04.159 And so and I'm a sports guy, so I've always been interested in sports. 00:04:04.240 --> 00:04:09.599 So I had a friend of mine who works in our department, he's a micro guy, I'm a macro guy, but we're both interested in sports. 00:04:09.680 --> 00:04:12.400 And he said we should write a paper about sports together. 00:04:12.719 --> 00:04:16.720 So I thought of an idea that was sports related, and I brought it to him. 00:04:16.800 --> 00:04:20.639 And he said, you know, I have a graduate student that's already working on this idea. 00:04:20.720 --> 00:04:22.399 So you you know, you go talk to him. 00:04:22.639 --> 00:04:30.800 And this wasn't just any old graduate student, it was it was a PhD student who had also had a degree in physics, and he was a professional bookmaker. 00:04:32.079 --> 00:04:33.839 And he was a professional bookmaker. 00:04:34.160 --> 00:04:36.879 He was many, he is, he is many things to many people. 00:04:36.959 --> 00:04:38.240 He's a guy called Ty Kegerty. 00:04:38.319 --> 00:04:40.240 He still works as a bookmaker here in Dublin. 00:04:40.639 --> 00:04:55.920 And my idea was about what happened when you had the COVID era sports, and you

had in particular soccer games all around the world with no home crowd present, nobody present to watch. 00:04:56.079 --> 00:04:59.439 So it's well known there's a home advantage effect in the statistics. 00:04:59.600 --> 00:05:02.160 What determines it is almost kind of over-explained. 00:05:02.319 --> 00:05:03.360 There's so many different factors. 00:05:03.519 --> 00:05:14.079 Yes, there's people supporting you, maybe they influence the referee, but also, you know, you get to wake up in your own bed that morning, you play on a pitch that's the, you know, that's a stadium that you're used to. 00:05:14.160 --> 00:05:15.600 There's all sorts of things it could be. 00:05:15.759 --> 00:05:21.680 And so I said, look, it'll be interesting to see how the bookmakers price this when the markets open up again. 00:05:21.839 --> 00:05:25.199 And, you know, there'll be I thought there'd be some kind of Bayesian learning kind of thing. 00:05:25.279 --> 00:05:29.680 They'd learn what the size of the effect was once they there was no crowd. 00:05:29.920 --> 00:05:43.519 And actually the results were were both striking but also more boring, which is we found that that when the markets opened, they said about 50% of the pre-existing home effect was due to due to the presence of crowds. 00:05:43.680 --> 00:05:57.920 And then we got lots of data, and after thousands of matches, you could end up with an estimate that was statistically precise enough, and it was exactly what the bookmakers had factored in the day the games opened up. 00:05:58.079 --> 00:06:00.720 Based on what, I still have no idea. 00:06:00.959 --> 00:06:02.399 So that got me interested. 00:06:02.480 --> 00:06:06.800 And I started asking my my friend Tig, I started asking him, well, how does it all work? 00:06:06.879 --> 00:06:08.319 And how do they set the odds? 00:06:08.480 --> 00:06:13.360 And you know, how what's a what's an extra what's a betting exchange as opposed to bookmakers? 00:06:13.680 --> 00:06:16.720 And I just found this was a fascinating subject as an economist. 00:06:16.879 --> 00:06:20.000 There's so many different types of markets, so so much data. 00:06:20.079 --> 00:06:21.439 There's millions and millions. 00:06:21.680 --> 00:06:32.000 The book that I've written, uh Fine Margins at How Economics Explains Sports Betting, you analyzes millions of quotes for bookmakers that are all freely available. 00:06:32.959 --> 00:06:44.800 There are many of interesting questions that I'm sure we're going to discuss about you know morality and regulation, about taxation of this kind of thing. 00:06:45.120 --> 00:06:53.360 And while economists have worked on this issue, I I found most of the questions I was asking didn't seem to be in existing papers. 00:06:53.439 --> 00:07:00.639 So I just kept writing papers, and then my university head, I approached him and said, I'd like to write a I'd like to teach a class about this. 00:07:00.800 --> 00:07:05.279 And then after I taught the class for a

couple of years, I was like, I think I should write a book about this. 00:07:05.360 --> 00:07:07.120 And and and here and here we are. 00:07:07.199 --> 00:07:10.079 And I've never had so much fun in my economics career. 00:07:10.160 --> 00:07:15.120 It's it's writing about gambling is 20 times the fun of writing about central banking. 00:07:15.839 --> 00:07:17.680 That that's quite journey. 00:07:17.759 --> 00:07:20.319 Let me make sure that you went through it pretty quickly. 00:07:20.399 --> 00:07:21.759 Let me make sure people understand. 00:07:22.000 --> 00:07:31.199 There was an amazing natural experiment to test the components of the let's call it home pitch advantage in this case. 00:07:31.519 --> 00:07:36.480 And that is that normally there are many factors that might determine it. 00:07:36.639 --> 00:07:42.720 One that people often mention is that crowds give the players energy and intimidate the referees. 00:07:43.120 --> 00:07:44.879 Well, that was taken out of it. 00:07:45.040 --> 00:07:49.279 And so the question is how to set the odds for a home pitch match. 00:07:49.519 --> 00:07:53.120 And the estimate was something about it had been reduced by half. 00:07:53.279 --> 00:07:56.399 For whatever reason, it had been reduced by about half. 00:07:56.639 --> 00:08:08.959 And it turned out that when you looked at ex post, because that's ex ante, when you looked at it ex post, it turned out that that was a pretty good estimate, which is an interesting question about how one might come to that. 00:08:09.120 --> 00:08:16.160 I guess you could there could be a kind of wisdom of crowds where you look at at each other for like three or four minutes. 00:08:16.319 --> 00:08:20.720 So it'd be interesting to see if there were very short-term movements at the very beginning. 00:08:20.879 --> 00:08:25.120 But since it was half, probably what I would have done was say, what the hell? 00:08:25.279 --> 00:08:27.199 I'm gonna say it's about half. 00:08:27.439 --> 00:08:29.680 And if I have some reason to change it, I won't. 00:08:29.759 --> 00:08:32.000 So a luck may have been a little bit. 00:08:33.039 --> 00:08:41.440 It may have been, but but the more I know about the bookmakers and sports books and their pricing, they're they're they're pretty scientific. 00:08:42.320 --> 00:08:43.919 Scientific is an interesting word. 00:08:44.080 --> 00:08:48.960 They have incentives to be accurate and they are very smart. 00:08:49.200 --> 00:08:57.759 So I I have a paper coming out in the Journal of Private Enterprise Education about using betting markets as a mechanism for teaching. 00:08:58.000 --> 00:09:00.960 And so let's move to that. 00:09:04.159 --> 00:09:12.399 Teaching in a class, and some of it is about economics, but some of it is is about this problem of information. 00:09:12.559 --> 00:09:14.799 Let's start one step before that. 00:09:15.120 --> 00:09:18.960 What is gambling and is it morally wrong? 00:09:20.639 --> 00:09:24.559 So I I am fascinated by

the economics around this area. 00:09:24.799 --> 00:09:28.720 On the morality side, I I think I'm a pretty boring centrist. 00:09:29.440 --> 00:09:36.480 My instinct as an economist is people should largely have the freedom to spend their money as they as they wish. 00:09:37.039 --> 00:09:43.120 But there is no doubt that gambling addiction is is a problem, is an issue. 00:09:43.440 --> 00:10:00.240 And if one looks at the sort of you know adjacent types of problems that people have with alcohol addiction, with drug addiction, nicotine addiction, and so on, society has largely decided to have some form of regulation around those things. 00:10:00.480 --> 00:10:04.240 And and that's probably appropriate for gambling as well. 00:10:04.879 --> 00:10:12.080 So but I I think for most people, I think the moral moral panic about it is is not particularly appropriate. 00:10:12.240 --> 00:10:15.919 For most people, it is something they enjoy doing. 00:10:17.039 --> 00:10:31.279 Most people that lose money, they kind of know that the game is rigged largely against them, and they still do it because they get some level of excitement or or or or fun out of it. 00:10:31.600 --> 00:10:43.120 But but there is that small percentage of people for whom this becomes something that ruins their lives financially and in all sorts of ways. 00:10:43.279 --> 00:11:12.799 Um, we can talk about about the best approach approaches towards regulation of it, but I I think overall trying to focus on identifying and intercepting that relatively small amount of people is probably the you know, at least the biggest bang for the book in terms of regulation, rather than trying to stop everybody do it or to ban it, which doesn't work anyway because people have been gambling on sports since ancient times. 00:11:13.039 --> 00:11:15.919 So so you'll uh a ban will never stop it. 00:11:16.000 --> 00:11:17.840 And and and it didn't. 00:11:19.200 --> 00:11:21.440 I I I have three quick observations. 00:11:21.600 --> 00:11:37.279 One is one of the things that I think is interesting about the your response is that you've said in a number of places that you thought the more appropriate response was not to ban it, but to use, and this warms my heart, transaction cost as a way of making it a little more difficult, putting some friction in the system. 00:11:37.360 --> 00:11:39.840 And so people might at least slow down, think about it. 00:11:40.159 --> 00:11:49.120 Maybe I'm not so sure I want to do this, something akin to freezing your credit card in ice and putting it in the freezer and it makes it a little hard. 00:11:49.360 --> 00:11:58.720 Now, of course, our credit cards are stored on our phones, but that that sort of that it takes me an extra 10 minutes to do this thing, and I think, uh, okay, no, I shouldn't do that. 00:11:58.960 --> 00:12:13.759 The the second thing that this raised to me is that the category of otherwise voluntary transactions that we usually want to regulate in a society are those that violate second-order preference consistency. 00:12:13.840 --> 00:12:18.399 That is, I want a thing, but do I want to want the thing? 00:12:18.720 --> 00:12:24.879 So it a heroin addict really wants heroin, but she doesn't want to want heroin. 00:12:24.960 --> 00:12:27.679 In fact, she really wants not to want heroin. 00:12:27.840 --> 00:12:32.720 And so that's the time when you might try to put the societal thumb on the scale. 00:12:32.960 --> 00:12:40.960 And so a gam a gambler, someone who enjoys gambling and bets small amounts sensibly, wants to gamble. 00:12:41.279 --> 00:12:42.639 And it's fine. 00:12:42.879 --> 00:12:47.759 The gambling addict wants to gamble, but does not want to want to gamble. 00:12:47.919 --> 00:12:55.600 And so there's a there's a big problem about how can we distinguish that, and you can't tell by looking, and you may not even be able to tell by the amounts bet. 00:12:55.840 --> 00:12:57.679 And so it is really a problem. 00:12:57.840 --> 00:13:05.759 But that leads to my third point, which is a question, and that is my first thing that I had asked was what is gambling? 00:13:05.919 --> 00:13:07.279 So, what is gambling? 00:13:07.519 --> 00:13:11.519 How do I tell if something is gambling or just a normal parlor activity? 00:13:11.679 --> 00:13:18.559 Because I, if I buy a ticket to a match and I go to the match, I've spent maybe a hundred pounds. 00:13:19.600 --> 00:13:24.879 If my team loses, I lost a hundred pounds on this stupid soccer game. 00:13:25.279 --> 00:13:32.240 So isn't any fan inherently a gambler because they're putting their emotions and their money hoping a team will win? 00:13:33.840 --> 00:13:34.159 Sure. 00:13:34.320 --> 00:13:49.279 I'm I mean, I think the category issue that a lot of people try to address is perhaps how do I distinguish gambling from financial investment? 00:13:50.000 --> 00:13:57.120 So when I talk to my students about this, I make the point that if you invest in the stock market, the stock market historically has gone up. 00:13:57.519 --> 00:14:03.759 You own a share in a company, if the company makes profits, you will get dividend payments back. 00:14:04.559 --> 00:14:08.080 And and you know, everybody be can can be a winner. 00:14:08.159 --> 00:14:10.399 Some people are more winner win more than others. 00:14:11.120 --> 00:14:17.600 Whereas in in in sports betting and in all sorts of gambling, it's just zero sum. 00:14:18.559 --> 00:14:27.039 You're just shuffling money around and the operators, whether it's you know sportsbooks or casinos, they're taking some of their cut. 00:14:27.120 --> 00:14:30.639 So for so for the people involved in it, it's negative, it's negative sum. 00:14:31.600 --> 00:14:34.080 So I think that's what makes it gambling. 00:14:34.240 --> 00:14:39.519 Now, what's interesting is there are financial products that bear resemblance to this, right? 00:14:39.679 --> 00:14:51.120 So if you bet on will the dollar go up or will the

dollar go down, that that by the definition I've just given, that that that that's that that's that's gambling. 00:14:51.440 --> 00:15:12.639 But you know, what one could say is is that if you look at the the the sports betting industry and the kind of regulations that are often proposed and that they object to, you will find that selling people financial products that look like this around the world tends to come with pretty serious custom consumer protection and provide information. 00:15:12.960 --> 00:15:19.840 Whereas you can sell somebody a 10-leg parlay that has an average return of you know minus 70%. 00:15:20.720 --> 00:15:28.559 And you don't have to say this is our return on parlays, and if you choose to take this investment, you know, this is what the historical record is, and so on. 00:15:28.799 --> 00:15:41.120 So I would say it's a slope going from you might say the stock market is gambling, I would probably say investing to sports betting is more pure and obviously gambling. 00:15:41.279 --> 00:15:54.399 And then there's a whole bunch of activities in the middle, and this is why I think we're gonna end up with a very interesting Supreme Court case in the United States at some point in the next 18 months where they're gonna think about these issues long and hard. 00:15:54.799 --> 00:16:00.639 And it's it's clearly a legislative issue, but the Congress is not defining it, and so the court is going to be obliged to. 00:16:00.720 --> 00:16:11.120 So, again, to make sure that people understand, um, one thing I might do is buy an asset, and then I am at risk in the sense that the capital value of that asset might rise or fall. 00:16:11.279 --> 00:16:17.759 And so I'm taking a risk, but there's an underlying asset whose value still I have and I can't lose everything. 00:16:18.000 --> 00:16:31.279 But if we take a derivative on that asset and we sell some derivative that has only to do with increases or decreases, like an option, for example, then an option is it is is almost purely a gamble. 00:16:31.440 --> 00:16:37.039 One of the reasons to have options is so that people can diversify risk, but another is that they can load up on risk. 00:16:37.120 --> 00:16:44.320 So they they can take only risk by buying options rather than trying to lay off risk against the position. 00:16:44.480 --> 00:16:49.200 But in that case, at least there is a legitimate financial activity that you might have. 00:16:49.519 --> 00:17:03.440 Is gambling on sports legitimate in the sense that it is a socially something that socially we should encourage, or is it something that is inherently immoral? 00:17:03.519 --> 00:17:07.599 And I recognize you have said you're kind of a centrist on this and you're not going to judge it. 00:17:07.839 --> 00:17:11.359 What do you think is the reason that so many people have this moral reaction? 00:17:11.440 --> 00:17:15.200 It's not that they don't want addicts, they don't want anybody to gamble. 00:17:16.480 --> 00:17:16.960

Sure. 00:17:18.480 --> 00:17:28.640 I mean, I I stories of people who have ruined themselves via gambling, you know, are are pretty legendary over the years. 00:17:28.880 --> 00:17:36.079 They get a lot more attention than stories of people who like to bet$50 on the NFL every weekend. 00:17:36.480 --> 00:17:41.440 Or have a basketball pool, the NCAA uh March Madness basketball pool. 00:17:41.599 --> 00:17:42.400 You put in ten dollars. 00:17:43.359 --> 00:17:53.440 So, so so uh, you know, and and and and moral crusaders tend to just always be louder than than than other people. 00:17:53.519 --> 00:18:06.000 And I think one of the problems with this as an area is quite a bit of my focus in in my research and in the book is on you know what determines the odds that people are offered. 00:18:06.079 --> 00:18:08.000 I mean, that's that's the price, right? 00:18:08.480 --> 00:18:23.839 And you find there's a uh a lot of vested interest, the betting company side, that's very interested in offering consumers bad value, and there's a lot of interests, the moral side, trying to get it banned or restricted. 00:18:24.160 --> 00:18:37.839 And the millions of people who bet every week typically don't have don't have a lot of people standing up for them saying, let's allow this, but let's allow it to be fairer, let's allow it to be done at a better price. 00:18:38.160 --> 00:18:57.920 And part of what I'm doing in the book is trying to walk people through the economics of what these transactions are and how the the prices are being set in different betting market structures so that they can kind of see, you know, open their eyes to you know the the strategies that are being adopted to part them with their money. 00:18:58.000 --> 00:19:00.079 And not all bets are are made equally. 00:19:00.160 --> 00:19:04.160 So so I I think trying to ban it is pointless anyway. 00:19:04.480 --> 00:19:22.000 And you know, if we look at at the modern era when we s when it starts to be legal, what you see is it's it's it's 1961 in the UK that you see the first modern, formal, legalized betting sector. 00:19:22.240 --> 00:19:45.119 And I think the reason they did that was if you if it's if it's not allowed, but it's still happening, then typically yes, you will get some things like pools and friends and so on, but you know, the the the transaction cost of running a book has to fall to somebody that's quasi-professional about it, and so and so it's it's criminals. 00:19:45.759 --> 00:19:48.480 And so this was a boost to the criminal world. 00:19:49.359 --> 00:20:01.920 The UK did not have organized crime with quite the you know massive capabilities of the mafia, but it was still, I think, an uncomfortable thing for the UK government. 00:20:02.000 --> 00:20:10.079 So their approach was legalize it as soon as it's legalized, and they did so with all sorts of restrictions. 00:20:10.400 --> 00:20:12.960 You know, we could go into, but all sorts of restrictions. 00:20:13.440 --> 00:20:16.960 There were 3,000 betting shops in the UK within within one year. 00:20:17.200 --> 00:20:30.079 So for a lot of people, they they wanted to be able to gamble, but they were much more comfortable with being able to do it going into something on the high street than having to go find it. 00:20:31.359 --> 00:20:38.480 It wasn't like you go to a bar, you know, and you and and and say, psst, you know, who's taking money on the game? 00:20:38.720 --> 00:20:47.920 Well, it wouldn't generally, but it's a but it's a transaction cost, and there are other elements of it that are unsatisfactory in the sense that you've no consumer protection. 00:20:48.160 --> 00:20:54.160 So if your underground bookie does a runner, you can you can't call the police. 00:20:54.400 --> 00:20:58.720 So people are just more comfortable with it once once it once it's legal. 00:20:58.960 --> 00:21:19.680 And that approach could have been adopted in in the US, but instead the Kennedy, Johnson, Nixon administration's approach to it was to view sports betting as part of the mafia's portfolio of businesses, and just to try to cut cut down on organized crime. 00:21:20.240 --> 00:21:25.440 Now, the the interesting thing is all the acts that got passed during this period, the WIRE Act and all of that stuff. 00:21:26.400 --> 00:21:35.759 The FBI throughout this period always said, at least in private, but I think increasingly over time in public, that they could not enforce these laws. 00:21:36.079 --> 00:21:40.400 You know, it was unenforceable to try to prevent people gambling on sports. 00:21:40.640 --> 00:21:59.759 But that was the approach the US took, and you know, it it it it held sway until you know, pretty strongly, apart from Nevada, until the the late 80s, early 90s, and then it looked like other states were going to follow Nevada, and then you had Senator Bill Bradley. 00:22:00.559 --> 00:22:02.079 And Bradley's a great man. 00:22:02.720 --> 00:22:04.640 But he there's no doubt he's a moralist. 00:22:05.200 --> 00:22:09.279 He views everything through these sort of moral uh frameworks. 00:22:09.519 --> 00:22:19.519 And and I think it was Bradley's moralizing ability that got the US Congress and Senate to pass this protection of Professional Sports Act, PASPA. 00:22:20.000 --> 00:22:37.359 And and that that's how when the rest of the world is having this incredible revolution around sports betting because of the internet, because of smartphones, the US is just like stuck, frozen in time, until you get this extraordinary Supreme Court decision in 2018. 00:22:37.599 --> 00:22:52.480 And a lot of the crazy things that have happened in the US have reflected this enormous market that grew gradually over time in the rest of the world, coming on full bore in 40 states over a small amount of time. 00:22:52.799 --> 00:22:59.920 So even issues about policy issues and regulatory issues, the the state governments haven't and federal government, they haven't had the time to

think about them. 00:23:00.000 --> 00:23:05.440 They're just it's everyone's head is still spinning, and it keeps changing with prediction markets and all of that. 00:23:06.960 --> 00:23:08.400 Well, you said a bunch there. 00:23:08.480 --> 00:23:11.119 Let's go back to a little bit of it. 00:23:11.359 --> 00:23:19.039 One of the public choice insights about origins of regulation is the Baptist and bootleggers model. 00:23:19.119 --> 00:23:23.359 And of course, the Baptists were the moralizers saying that drinking was wrong. 00:23:23.440 --> 00:23:29.920 And the bootleggers were the criminals who were saying, please don't legalize this because you're protecting our monopoly. 00:23:30.160 --> 00:23:39.440 And so there's a number of reasons why, and it's hard to know just how many payments were made under the table for people who might have said, you know, what the hell? 00:23:39.680 --> 00:24:01.039 But then the organized crime, which is in the US, when the US was very organized, particularly in some states, at the margin, there may have been a Baptist and bootleggers coalition there because clearly it was a great benefit to organized crime not to have this legalized in the northeastern cities where many, many people gambled. 00:24:01.200 --> 00:24:08.960 So the it was a major, it was a nice source of income for police, for state attorney generals, lawyers. 00:24:09.039 --> 00:24:15.599 There was there was a whole rake of people that were on the payroll to turn a blind eye. 00:24:16.160 --> 00:24:30.400 And if if if I am a policeman, and I know there's a law against gambling, but I think that's sort of silly, and I get an extra couple hundred a week, not only to look the other way, but to protect the transactions. 00:24:30.559 --> 00:24:35.279 That is, I'm sitting at the bar also, and no one's going to come in and rob the book. 00:24:35.359 --> 00:24:37.839 He's got this big stack of cash. 00:24:38.160 --> 00:24:44.240 I'm literally providing protection, which is something that police do, but this might be disproportionate. 00:24:44.480 --> 00:25:06.079 So the argument that you make, which I think is clearly true, but people might lose track of, is that if this is going to happen anyway, the state might very well be better off legalizing and taxing it and then imposing perhaps some regulations, but those regulations are going to have some of the same impacts of reducing competition. 00:25:06.160 --> 00:25:08.319 In this case, it's reducing legalized competition. 00:25:08.400 --> 00:25:22.000 So one of the one of the arguments that you make, I think that's important, is that all of these regulations have they prevent competition among books in a way that makes the legal books also very happy. 00:25:22.400 --> 00:25:22.799 Yeah. 00:25:23.039 --> 00:25:23.359 Yeah. 00:25:24.079 --> 00:25:26.000 And that's true globally. 00:25:27.119 --> 00:25:31.119 You might imagine that this is an easy business to set up in, right? 00:25:31.200 --> 00:25:41.359 I I, you know, I set up a site and I scrape a website from somebody else that has the odds, and I start taking taking take them taking bets. 00:25:41.519 --> 00:25:45.039 Um like you'll be arrested inside hours, you know. 00:25:45.279 --> 00:25:48.240 It's an incredibly heavily regulated industry. 00:25:48.480 --> 00:25:55.839 And to be able to operate, you have to show that you have the capability of handling all these financial transactions. 00:25:55.920 --> 00:26:00.400 It's like a it's like running a mid-sized bank with all the money that comes in, all the money that goes out. 00:26:00.480 --> 00:26:08.720 You have to have it's a technology business, you have to have the website, and it has to work at all times and be able to take big flows of big flows of money at a time. 00:26:08.880 --> 00:26:18.000 You have to make sure that you're not being used for money laundering, so there's anti-money laundering legislation, and then there's all sorts of know-your-customer legislation as well. 00:26:18.319 --> 00:26:26.000 On top of that, the responsible gambling rules that are enforced in different ways in different in different places. 00:26:26.720 --> 00:26:42.799 In the United States, once it was legal for states to to allow sports betting after PASPA was repealed, you also had a couple of other extra elements that made that have made the markets particularly uncompetitive. 00:26:43.279 --> 00:26:52.640 So one was that in many states there was legal gambling, but it was tribal casinos. 00:26:53.039 --> 00:26:59.680 And so the tribal casinos, when they saw this thing coming down the line, they they they they wanted a piece of it. 00:27:00.000 --> 00:27:08.880 So in many cases, they lobbied to have a very restricted number of books within each state and to be involved with it as partnership. 00:27:08.960 --> 00:27:17.039 So for instance, Florida has one sports book, legal sports book, a hard rock bet, which is owned and operated by the Seminole tribe. 00:27:17.519 --> 00:27:24.720 So there were there were interests in this being a non-competitive cash cow anyway from the start. 00:27:25.039 --> 00:27:33.599 And then you had these two companies that had been doing fantasy sports, daily fantasy sports, and people were taking money and picking their fantasy teams every day. 00:27:33.759 --> 00:27:42.720 And so they had the databases for who it was was interested in spending money on gambling on sporting outcomes effectively. 00:27:42.880 --> 00:27:57.759 And it was a gray area as to whether it was legal or not, but it's an interesting transaction cost story again because a lot of people thought that the winners after passport repeal would be the famous names from Vegas, you know, Caesar's Palace and so on. 00:27:58.160 --> 00:28:05.680 But they had customers, but they had customers that would fly to Nevada to gamble at the sports book there. 00:28:05.920 --> 00:28:12.400 Whereas FanDuel and DraftKings had people who were already betting on their phone

and on the internet. 00:28:14.559 --> 00:28:23.440 The initial transaction costs of setting up the business and getting customers, they they were already clearly going to be the winners. 00:28:23.839 --> 00:28:31.519 The state by state legislative process then was was pretty uh unseemly. 00:28:31.680 --> 00:28:39.200 Uh there's a there was a great New York Times article from a few years ago, and they went to Kansas and watched the process. 00:28:39.359 --> 00:28:54.000 And you know, you've got all these little state, you know, these states state senators and congressmen, and the the books are while they're lobbying to get legalized, the books are bringing to the track and plying them with liquor and campaign contributions and all that sort of stuff. 00:28:54.319 --> 00:29:10.160 And you know, I'll be careful with my words, but I'll just say those two books, those two sports books spent very, very heavily on the legislative process to help get an outcome that was hap, that they were happy with. 00:29:10.480 --> 00:29:11.839 So it's not true in every state. 00:29:11.920 --> 00:29:23.039 There's some states have more competition than others, but it has largely been designed to be, I think, a bad market for consumers in terms of price competition. 00:29:25.200 --> 00:29:30.559 So you've used a phrase a number of times that people may not know what it is. 00:29:30.799 --> 00:29:32.240 What is a sports book? 00:29:32.400 --> 00:29:33.519 What does a book do? 00:29:34.000 --> 00:29:36.559 So so in my part of the world we just call them bookmakers. 00:29:37.039 --> 00:29:42.319 But but the and and and and in fact that that that was the traditional name in the United States as well. 00:29:42.640 --> 00:29:44.079 Making book, yeah, we're making book. 00:29:45.680 --> 00:29:59.519 But I I I think what happened is when the Vegas hotels started to go big into sports, they they would call the room where you would do the bets, they would call it the sports book. 00:29:59.759 --> 00:30:07.279 And I think a bookmaker sounds like some some guy called Sal who hangs out down the back of the bar or something, you know. 00:30:07.440 --> 00:30:10.400 The sports book just does, I don't know, it had more of a ring to it. 00:30:10.480 --> 00:30:18.400 So everybody wants to call themselves sports book now, which you know, for I have a I have I have an international edition of my book and I have a US edition of my book. 00:30:18.559 --> 00:30:22.240 So there's a lot of control C, control V going on around sports books. 00:30:22.319 --> 00:30:27.200 So I'm comfortable with saying the term, but if it was just me and my friends here, I would say I would say bookmaker. 00:30:27.359 --> 00:30:38.240 But yeah, their company, they they post odds, and you you you accept the odds, and and and if you if your pick wins, they they they pay back them, they pay back the money to you, you make a profit. 00:30:38.400 --> 00:30:41.680 But but on on average, the sports book wins. 00:30:41.839 --> 00:30:46.480 Now, there's quite a bit of confusion about the pricing process there. 00:30:46.640 --> 00:30:58.160 There is this sort of a I'll call it an urban legend, that the way the books work is suppose it's a toss-up between two teams, right? 00:30:58.240 --> 00:31:01.519 So, you know, it's Lakers, Celtics, and and they're equally likely to win. 00:31:01.759 --> 00:31:10.640 And so the the book takes, you know,$11 from one guy on the Celtics, it takes$11 from somebody else on the Lakers. 00:31:10.720 --> 00:31:20.640 They're sitting on these$22, and then whoever wins, they pay them 21 of that, so that they've got a 10 euro profit, they fed 11 to win 10, and the book gets one. 00:31:20.799 --> 00:31:22.559 And whatever happens, the book gets one. 00:31:23.519 --> 00:31:29.920 And that could be how it works, but that is definitively not how it works. 00:31:30.079 --> 00:31:34.160 And we know this both from bookmakers tell us this. 00:31:34.319 --> 00:31:38.880 It was one of the first questions I asked of my friend Ty Hegerty, the PhD student. 00:31:39.119 --> 00:31:44.799 But I found, you know, Jay Corneget, the most famous Las Vegas bookmaker, has said that's not how it works. 00:31:44.880 --> 00:31:49.200 And actually, now books like DraftKings actually release their volume splits. 00:31:49.359 --> 00:31:57.920 So they'll you can literally look up any game of of the week, and DraftKings will tell you it's 70% on one side, 30% on the other side, and so on. 00:31:58.079 --> 00:32:06.559 And the interesting thing is as an economist, what when I asked that question about is that how they do it, I thought, well, wait a minute, the odds are a price. 00:32:06.799 --> 00:32:08.880 And the book is a firm. 00:32:09.039 --> 00:32:10.720 We actually have the broker. 00:32:11.119 --> 00:32:12.079 It's a broker, in fact. 00:32:12.160 --> 00:32:14.720 They're they're matching the two sides, and what they'd like to do. 00:32:15.119 --> 00:32:16.400 I don't, I don't, I don't agree with that. 00:32:16.480 --> 00:32:16.880 I don't agree with that. 00:32:17.119 --> 00:32:18.079 Right, it's not true. 00:32:18.640 --> 00:32:22.720 It isn't true, but the the standard, the urban legend, I just want to make sure the urban legend is clear. 00:32:22.799 --> 00:32:29.039 Yeah, I'm a broker, I take bets from both sides, and I change the odds so that people are indifferent between betting. 00:32:29.119 --> 00:32:33.119 I want to take equal bets on both sides, and then I make money for sure on the VIG. 00:32:33.359 --> 00:32:34.880 That's the that's the urban legend. 00:32:35.119 --> 00:32:36.720 That's the urban legend, and that could be true. 00:32:36.799 --> 00:32:39.279 It could be that that's how how it's not a bad model. 00:32:39.680 --> 00:32:42.799 Well, it it it it kind of actually it depends. 00:32:42.880 --> 00:32:45.759 I I I discuss this in the book, and I actually discussed it. 00:32:46.000 --> 00:32:50.400 It's not a bad economic model for

me to put on the board, it's as good as many economic models. 00:32:50.640 --> 00:32:56.960 Yeah, I I describe in the book that that actually it it is a bad model in the following sense. 00:32:57.599 --> 00:33:00.000 These sportsbook are just they're firms, right? 00:33:00.240 --> 00:33:02.559 So they they they they're there to make profits. 00:33:02.720 --> 00:33:10.400 Now, to understand, you know, what what their model is, we have to have some sort of notion of what the demand for their product is. 00:33:10.559 --> 00:33:10.799 Okay. 00:33:11.119 --> 00:33:24.640 And so, you know, they would like to set the odds to be terrible odds that, but but at so at a certain point, even customers that aren't that price sensitive, and the evidence shows, and we can talk more about it, most betters are not that price sensitive. 00:33:24.799 --> 00:33:29.119 But but you can you can't, you know, offer insulting odds to people, you know. 00:33:29.279 --> 00:33:34.799 So there is a demand curve in terms of the better you offer the odds, the more people are likely to take it. 00:33:35.039 --> 00:33:36.000 I go through this in my book. 00:33:36.240 --> 00:33:42.720 I I describe this in terms of like people differ in their probabilities of what they how likely a team is to win. 00:33:42.799 --> 00:33:46.640 And the better the odds you offer, the more likely I am to say I think I think that's a winner. 00:33:46.799 --> 00:33:54.079 Now, with a demand curve like that, we can use simple intermediate microeconomics to predict what you should do. 00:33:54.160 --> 00:34:02.240 And what you should do if you're a monopolist, and we've described why the market isn't very competitive, is you should price based on elasticity of demand. 00:34:02.559 --> 00:34:06.960 And that does not predict now that you will always be balancing the books. 00:34:07.039 --> 00:34:10.880 You will be balancing to maximize profit, not to minimize risk. 00:34:11.440 --> 00:34:24.800 And based on parameterizations of those models that fit the data pretty well, that book balancing approach, you would lose you would make profits, but you would make a lot less profit. 00:34:25.519 --> 00:34:32.079 So the reality of of what these books do is they try to maximize their profit. 00:34:32.239 --> 00:34:44.639 They are willing to take a position on a particular game and be exposed to it, knowing that over many, many, many, many games, the law of large numbers is their friend. 00:34:45.440 --> 00:34:58.800 So, you know, if they say we think 70% of the time we're gonna win this bet and we're gonna win it with profit, they're happy to take as much money as comes in on it as long as it's a positive expected value. 00:34:58.960 --> 00:35:13.360 I I even I saw a thing that yesterday that that people were asking the guy that runs the circa sports book in in Vegas why he had a two and a half point line on one team versus three, and he was building up a lot of exposure on on this team. 00:35:13.440 --> 00:35:15.119

And he was just like, we just like the line. 00:35:15.280 --> 00:35:16.159 We just like the line. 00:35:16.239 --> 00:35:35.679 You know, we did we think that that's they they were happy to get lots of money coming on of this uh in and this because from their point of view, they still think this is a positive EV transaction for them, and over many, many, many positive EV transactions, the business isn't nearly as risky as it as it looks in terms of individual. 00:35:35.840 --> 00:35:38.480 No, so you you you stop for a second. 00:35:38.639 --> 00:35:43.920 EV is expected value, which means that we're looking at the probability times the result. 00:35:44.079 --> 00:35:46.639 And line, there's two kinds in betting. 00:35:46.800 --> 00:35:56.639 One is the spread, the number of points, which is only appropriate for some sports, and then the line is the amount that you would have to bet on a favorite to win$100. 00:35:57.280 --> 00:36:00.000 And so that is more directly like a price. 00:36:00.079 --> 00:36:01.760 So I just want to make sure that was understood. 00:36:01.920 --> 00:36:02.559 Please go ahead. 00:36:02.800 --> 00:36:03.360 Yeah, yeah. 00:36:03.440 --> 00:36:13.679 The spread has the spread also has a price of the famous minus 110 is is is a price, but uh you will find the modern sports books are not that keen. 00:36:14.159 --> 00:36:19.199 Look, American betters were trained to bet with point spreads, right? 00:36:19.280 --> 00:36:22.480 The point spread is an American invention, it was invented in Chicago. 00:36:22.800 --> 00:36:25.039 And for basketball and football, it's not implausible. 00:36:25.119 --> 00:36:29.760 There, there's quite a few points for for uh for football, for soccer, it's just dumb. 00:36:29.920 --> 00:36:32.960 There you couldn't possibly have a market like that exists. 00:36:33.039 --> 00:36:37.760 In fact, in fact, the the there's a market called the Asian handicap, which which is funnily enough, big in Asia. 00:36:37.840 --> 00:36:40.719 Uh Asians don't like betting on on draws. 00:36:40.960 --> 00:36:43.440 And so that market exists, and it's very strange. 00:36:43.599 --> 00:36:45.679 I discuss it in the international version of my book. 00:36:45.760 --> 00:36:53.599 It's got half goals and quarter goals, and you're like, wait a minute, whoever scored a quarter has any ever seen, I've never seen a team score a quarter goal, but leave that aside. 00:36:53.840 --> 00:36:56.000 It this is the traditional American way to bet. 00:36:56.079 --> 00:37:08.480 It was invented in Chicago by a guy called Charles Mc Charles McNeil, and it was wildly successful, and there's great stories around it that he got became really successful and he paid his dues to the mob for a while, but eventually they kind of showed up. 00:37:08.559 --> 00:37:12.639 And as as McNeil put it, he said they wanted to go into business with my brain. 00:37:12.880 --> 00:37:22.159 Um and he left Chicago under cover of night and was never was never

seen again, but made a career as a successful, a successful better living in Florida. 00:37:22.239 --> 00:37:24.480 So that's the traditional the traditional way to bet. 00:37:24.559 --> 00:37:28.239 But the modern sports books would prefer you did other kinds of bets. 00:37:28.559 --> 00:37:35.199 And one reason for that is that that pricing model of minus 110 that comes from Vegas. 00:37:35.360 --> 00:37:48.000 Now you can do the mathematics on it, and you can work out for my exam earlier example with the 21, uh the$22 and the and the$1 profit, you can work out that that gets the book about a four and a half percent profit rate, which is fine. 00:37:48.880 --> 00:37:53.599 Because the sum of the implied probabilities exceeds one, and so they they make money for sure. 00:37:53.840 --> 00:37:57.679 Yeah, no, I mean we've got if you go back to my example, they took in 22 and they kept it. 00:37:57.760 --> 00:37:58.880 So so that's that's the that's four. 00:37:59.360 --> 00:38:02.400 Your example was clever because it it's actually one ten and one ten. 00:38:02.639 --> 00:38:06.079 So you you you were careful to to use the the usual formula, thank you. 00:38:06.400 --> 00:38:06.639 Exactly. 00:38:06.719 --> 00:38:13.199 And so so and so it's not people I I describe in the book how to use the odds to back that number out. 00:38:13.440 --> 00:38:24.320 And the the odds, the way they're quoted in the US with the minus one tens and the plus four hundreds, so are it's such a convoluted system that actually a lot of American betters are not are not good at that. 00:38:24.480 --> 00:38:29.119 And so it's one of the first things I teach in the book is try to teach a man how to fish, right? 00:38:29.280 --> 00:38:33.440 How to take the odds, convert them to probabilities, figure out roughly what the bookmakers take is. 00:38:33.599 --> 00:38:39.519 But everybody knows minus 110 is four and a half just from you know living in the world. 00:38:39.840 --> 00:38:42.480 And sportsbooks would like to make more than that. 00:38:42.639 --> 00:38:51.920 So typically the the money line bets on teams to win are more what you see them push, more what you see if they're giving you incentives to bet, it's more of that kind of thing. 00:38:52.079 --> 00:39:10.320 And then in particular, they want you to do these parlays where you parlay multiple different things, and you know, they they can include all sorts of things, you know, Nick's to win by 10, you know, somebody, you know, Jalen to score 35 points and you know, somebody to get 12 defensive rebounds, you know. 00:39:10.719 --> 00:39:12.639 Those are very prop bets. 00:39:13.280 --> 00:39:14.960 So those things are called prop bets. 00:39:15.039 --> 00:39:17.840 And so it's a it's a particular proposition, not the outcome. 00:39:18.159 --> 00:39:22.880 Yeah, they're they're prop bets, and then and those prop bets are are profitable for the books. 00:39:22.960 --> 00:39:35.280 And the way you can find out they're profitable in the books is is you can go and scan and find the historical odds that they've offered on those, but you can also find the data from official MBA sources and NFL and so on. 00:39:35.440 --> 00:39:47.760 So I document in the book that the profit rates for the sports books on those bets are much higher than for than for regular bets and in particular for point spread bets. 00:39:48.000 --> 00:40:02.079 And, you know, again, if you want to push the transaction cost angle on it a little bit, part of the issue is that it's pretty easy for gamblers to do their research and figure out you know, is that four and a half point line in tonight's game about right? 00:40:02.480 --> 00:40:07.599 It's quite a bit harder to figure out how many defensive rebounds you know Wemby's gonna have. 00:40:07.679 --> 00:40:09.760 And then it's even just fun. 00:40:10.960 --> 00:40:18.800 It's even harder to stick them all together and have three of them and they're all correlated, or five of them and they're all correlated. 00:40:19.119 --> 00:40:22.320 And yeah, it is apparently. 00:40:22.800 --> 00:40:34.960 I I don't find it I I I am not susceptible, but apparently it's fun because 10 or 20 percent of the people are having half or more of the total bets, and a lot of them are on pop. 00:40:35.199 --> 00:40:38.800 They're just sitting uh at on the couch hammering their phone. 00:40:39.199 --> 00:40:43.760 Yeah, I mean, there's different there's different schools of of betters, right? 00:40:43.840 --> 00:40:50.800 So somebody whose attitude is just I don't care, I'm just gonna take whatever fun bets I want, they probably shouldn't buy my book. 00:40:51.119 --> 00:40:52.239 I'm an economist. 00:40:52.800 --> 00:40:54.159 I I think they won't. 00:40:54.239 --> 00:40:55.280 I think you're safe. 00:40:55.519 --> 00:40:56.880 I think we're safe, right? 00:40:57.119 --> 00:41:07.199 So, but but there's a universe of people out there who enjoy betting, but they would also like to combine that with with not losing money, or at least by losing less. 00:41:07.519 --> 00:41:24.960 So one of the things that we can do is is look at the is is look at the different kinds of bets and and document, and I think my research is the first to do this in this sort of depth, document which kind of bets you you will lose a bit of money on versus which kinds you will lose a lot of money on. 00:41:25.280 --> 00:41:42.800 And and so and and and what's what's nice is most most of the principles of it come just from saying the bookmakers act act, the sportsbook act acts as firms and people, you know, some way rational, they enjoy the betting and they want to win. 00:41:43.039 --> 00:41:58.400 But you do end up creeping into, and I'm less comfortable with this as an area, but you do end up creeping into behavioral economics and you know, all of the various different you know, Thalerisms. 00:41:59.199 --> 00:42:05.599 As the book goes on, you start to read more about people like Thaler and

uh and their ideas about people, you know. 00:42:05.760 --> 00:42:11.199 So one example is one reason the minus 110 spread survives is fairness. 00:42:11.440 --> 00:42:16.639 Richard often writes about fairness, people lock in on a certain price and they think that price is fair. 00:42:16.800 --> 00:42:30.559 The books don't want to offer minus 110, they're annoyed every time somebody takes a minus, they'll take it because they make money, but they prefer to show you off all these more exciting other complicated moneyline things and parallels and and all of that. 00:42:30.880 --> 00:42:45.119 But there's also just a question about you know, some of I write about in-play betting and how the longer the game goes on, you start to see some bets that are getting worse and worse, in particular if you think the team that's losing is gonna come back. 00:42:45.280 --> 00:42:48.400 That bet gets worse and worse as the game goes on. 00:42:48.639 --> 00:42:51.760 And you know, I I liken it to you know, Danny Kahneman's. 00:42:52.159 --> 00:42:55.920 Better and better from the book's perspective to worse and worse from the gambler's perspective. 00:42:56.320 --> 00:42:58.000 Better and better from the book's perspective. 00:42:58.159 --> 00:43:02.000 So I kind of liken it to you know, like Danny Kahneman's ideas about thinking fast and slow, you know. 00:43:02.320 --> 00:43:02.960 What's the job? 00:43:03.119 --> 00:43:07.920 The job at hand here is judging probabilities, and it requires you to be careful and scientific. 00:43:08.000 --> 00:43:15.599 And you've got this phone and its app is you know changing colors, and you're watching the game and you're worried that the odds are going to move against you. 00:43:15.679 --> 00:43:20.000 And so people people make these decisions with with with their with their gut. 00:43:20.239 --> 00:43:37.360 So I I I I think you can almost see the full universe of behaviors from betters coming from people who are pretty rational, want to win, careful about the odds, and you know, use their sporting knowledge and and maybe don't don't lose so much, or in the odd case, win. 00:43:37.440 --> 00:43:39.760 I mean, those professional betters exist. 00:43:40.559 --> 00:43:49.119 To people who are just using their gut and and their favorite bets turn out to be the ones that the bookmakers you know want them to place. 00:43:49.519 --> 00:43:53.760 So I trying to give people a bit of education surrounding that. 00:43:54.400 --> 00:44:00.719 Well, there's a there's a type of better called the the sharp, that is someone who is in in effect taking Advantage. 00:44:00.880 --> 00:44:08.639 I don't want to stereotype, but my father-in-law, the father of my wife, is from southern Italy several generations back. 00:44:08.719 --> 00:44:14.079 And so there probably were some members of the family that were in the larger family. 00:44:14.480 --> 00:44:16.159 He would sometimes gamble. 00:44:16.320 --> 00:44:24.480 And I was dramatically increased in his estimation when I pointed out to him one night, maybe 20 years ago. 00:44:24.719 --> 00:44:27.920 You know, University of North Carolina never covers. 00:44:28.800 --> 00:44:37.599 And what that means is that there are so many people who are big fans of the University of North Carolina, they will almost always take the bet, regardless of what the line is. 00:44:37.840 --> 00:44:40.480 And so often there's a bias. 00:44:40.639 --> 00:44:45.679 And if there's a bias in the system, the question is, why aren't there enough sharps but betting on the other side? 00:44:45.840 --> 00:44:48.079 And the answer is the price discrimination story. 00:44:48.320 --> 00:44:50.000 I just wanted to give an example of that. 00:44:50.239 --> 00:45:02.079 But the next morning, apparently, he had made a rather sizable bet based on my not very deep insight, and was was much warmer towards me for several days because UNC did not, in fact, cover it. 00:45:02.400 --> 00:45:05.199 Do you know the the the the Justin Wolfers paper about this? 00:45:05.360 --> 00:45:10.559 I mean, and this is it's been documented that heavy favorites tend not tend not to cover. 00:45:10.880 --> 00:45:19.840 And I think Justin put it out there in the world as a sort of a smoking gun for potential max fit ma match fixing. 00:45:20.000 --> 00:45:26.639 Um but the personality there's something wrong with this market, but you've given the explanation. 00:45:26.880 --> 00:45:31.440 Yeah, no, they so the explanation is not, it's not because like it's also in the NFL. 00:45:31.519 --> 00:45:43.679 Now it maybe you can rig a college basketball game, but NFL teams have 53 guys and all the coaches, and if you manage to get them to win by, you know, less than seven but more than three, well, well done, you know. 00:45:44.239 --> 00:46:02.000 So it it it's it's it's that people make the mistake of thinking that the price always somehow is a cor is a is a statistically correct probability, and it's not, it's a price set by a firm in a market with customers, and the customers on one side want to buy this, yeah. 00:46:02.159 --> 00:46:04.400 So so so so I discussed this in the book. 00:46:04.639 --> 00:46:11.519 Betting overs on anything, but particularly big favorites and emotional favorites that people love. 00:46:11.840 --> 00:46:20.719 Um the worst prop bets are to bet that the most famous players, the worst prop bet is to bet that LeBron James will score over 30 points and and and that kind of thing. 00:46:21.039 --> 00:46:27.199 Unders, on the other hand, that doesn't mean that the under bet makes you money, right? 00:46:27.360 --> 00:46:35.920 Because they didn't why would the bookmaker offer so they offer bad prices on the over and the under slightly, you know, or they're definitely less bad. 00:46:36.239 --> 00:46:49.519 The other thing with with betting unders is if you show up online with your new sports book account and you know a bunch of your first few bets that you're taking

the under, you'll get profiled. 00:46:50.000 --> 00:46:54.079 And you act like that long enough, and they'll just they'll limit you. 00:46:54.239 --> 00:46:55.920 If you start winning, they'll cut you out. 00:46:56.000 --> 00:47:02.400 So the big issue with sharp betters and legal sportsbooks is that the legal sportsbooks it's it's a consenting transaction. 00:47:02.480 --> 00:47:03.679 They don't have to take their money. 00:47:04.000 --> 00:47:06.000 They will decline to take your business. 00:47:06.320 --> 00:47:07.679 Yeah, they just don't take their business. 00:47:07.760 --> 00:47:15.440 So if you if you hear professional betters that discuss their business, most of them don't want to discuss their business, but there's always some. 00:47:15.760 --> 00:47:29.440 So like Rufus Peabody is the famous American sports better, and Rufus talks about how he uh you know has a a series of uh uh mules that go and place bets for him and they try to use other people's accounts. 00:47:29.519 --> 00:47:34.719 Maybe if you've had accounts that's been losing for a long time, that it'll take a while before they identify. 00:47:34.880 --> 00:47:37.599 But of course, what does that mean for Rufus? 00:47:37.920 --> 00:47:40.000 It means loads of transaction costs. 00:47:40.800 --> 00:47:49.440 So so he's gotta be so he doesn't just have to be able to win, he has to be able to win and pay off all the team as well. 00:47:49.599 --> 00:47:53.119 And the winning logic requires a lot of quantitative modeling. 00:47:53.679 --> 00:48:06.400 So typically those guys are struggled to get enough down with with legal sports books to make a living, which you know this might be a good transaction point. 00:48:06.559 --> 00:48:08.960 You know what these guys are really excited about today? 00:48:09.199 --> 00:48:12.639 It's not betting with sports books, it's prediction markets. 00:48:12.960 --> 00:48:18.880 And we moved, you are a segue meister because it is time for us to move to prediction markets. 00:48:19.039 --> 00:48:22.800 What are prediction markets and why isn't this just gambling? 00:48:23.679 --> 00:48:29.280 I'm pretty happy to say that prediction markets are just gambling because they meet the definition that I that I raised earlier. 00:48:29.360 --> 00:48:32.480 There's there they're they're they're zero sum, including the market itself. 00:48:32.719 --> 00:48:36.480 If the market takes a fee, then then they're negative sum for the participants. 00:48:36.719 --> 00:48:38.159 So I think it is gambling. 00:48:38.400 --> 00:48:42.480 I think but on the Venn diagram, prediction markets are a subset of gambling. 00:48:42.559 --> 00:48:45.199 There's a lot of gambling that's not prediction markets. 00:48:47.119 --> 00:48:52.239 You know, most of sports is about predict predicting things. 00:48:52.400 --> 00:49:05.440 I I but the the the the the defining feature of the prediction markets relative to most betting is prediction markets are bilateral exchanges. 00:49:06.000 --> 00:49:08.719 It's not there isn't a single central book. 00:49:09.039 --> 00:49:16.880 It's you come onto the site and there's an offer there from somebody, and you can choose to accept that offer or decline that offer. 00:49:16.960 --> 00:49:20.400 And you can be the person that makes the offer or you could be the person that takes the offer. 00:49:20.559 --> 00:49:27.440 So all the site is doing is they're taking a transactions fee for so they they sort of are a broker. 00:49:27.519 --> 00:49:28.480 It is if they are a broker. 00:49:28.719 --> 00:49:31.519 They are a broker, yes, they are a broker, exactly. 00:49:31.599 --> 00:49:32.880 And that's that's the difference. 00:49:33.039 --> 00:49:47.760 Now that that type of market dates back originally to the Iowa electronic markets uh that were run at the University of Iowa in the early late 1980s. 00:49:48.000 --> 00:50:08.079 And I think a lot of the positive buzz around prediction markets reflects that academic origin, which is the academics at the University of Iowa showed that this very limited thing, and again, transaction costs are a big issue. 00:50:08.400 --> 00:50:10.800 You you you couldn't gamble more than$500. 00:50:11.119 --> 00:50:15.360 So this wasn't worth anyone in Wall Street or whatever, this wasn't worth their time. 00:50:15.519 --> 00:50:21.920 And you had to, at least the early versions of it, you had to like go to a room in the University of Iowa and log on the computer and so on. 00:50:22.000 --> 00:50:24.000 So it was loads and loads of transaction costs. 00:50:24.159 --> 00:50:30.800 Most of the participants were University of Iowa staff and students, but it turned out they were very good predicting elections. 00:50:31.199 --> 00:50:35.039 In the sense of being accurate, that they were at least as accurate as polls. 00:50:35.360 --> 00:50:37.199 They were at least as accurate as polls. 00:50:37.360 --> 00:50:44.400 And so a sort of a legend grew up around these prediction markets that that there was this great wisdom of crowds out there. 00:50:44.559 --> 00:50:48.880 And and you know, sports was sometimes used as an example, right? 00:50:49.039 --> 00:50:51.840 Because the odds they're not perfect. 00:50:51.920 --> 00:51:10.400 We've already discussed examples in which they're not perfect, but because the betting odds are good predictors of outcomes, even for you know quite complex things like what the line should be in a baseball game and so on, people say, well, we we can we there must be all sorts of other things out there where we can tap into the public's useful knowledge. 00:51:10.639 --> 00:51:16.239 So you had books, uh Suraweki's book, The Wisdom of Crowds, Cass Sunstein had a book. 00:51:16.320 --> 00:51:30.800 There was a letter in science asking that these things be have regulations lifted on them, because they they they were and are deemed to be futures contracts and therefore under the purview of the of the CFTC. 00:51:32.719 -->

00:51:39.840 We can come to Calci and the CFTC's, you know, CF CFTC is the Commodities Futures Trading Commission. 00:51:40.239 --> 00:51:55.119 It is, and so so it's it it it has been deemed that if I and you agree that if event X happens next month, you will pay me money, and if it doesn't happen, I will pay you money. 00:51:55.280 --> 00:52:06.000 That the the the the law in the United States views that as akin to the old contracts for bushels of wheat or pigs' bellies and all that sort of stuff. 00:52:06.159 --> 00:52:08.320 That's the way it's been it's been viewed. 00:52:08.639 --> 00:52:14.639 And so there's a lot of excitement around about prediction markets and the wisdom of crowds and all of that. 00:52:14.960 --> 00:52:29.679 I'm a little less less excited about that in the sense that I've done a lot of research on basically the same type of market, it is the same type of market, only in the UK and in the rest of the world they call them exchanges. 00:52:29.760 --> 00:52:31.360 They're betting exchanges. 00:52:32.320 --> 00:52:35.920 And a couple of things about betting betting exchanges. 00:52:36.159 --> 00:52:39.840 One is what do people want to bet on? 00:52:40.079 --> 00:52:42.079 It's sports, right? 00:52:42.880 --> 00:52:52.079 If it was politics or the weather, then I mean the company that runs that owns Betfair Exchange, the biggest exchange, is Flutter, Inc. 00:52:52.320 --> 00:52:55.519 They're actually based here in Dublin and they own FanDuel. 00:52:56.159 --> 00:53:10.079 So if they thought that people were wild for betting on politics or corporate CEO appointments or the Oscars, trust me, they would be running those markets in Europe. 00:53:10.960 --> 00:53:16.880 But as it is, it turns out most people aren't interested in in betting on those markets. 00:53:17.119 --> 00:53:26.400 And actually, if you look at the exchange model, I personally think the exchange model is better for customers than the bookmaker model. 00:53:26.639 --> 00:53:55.360 There isn't a centralized book looking to you know screw you over essentially by offering you bad odds, by taking out the middleman and the fact that there have typically in the UK been multiple such exchanges, that has managed to compete the fees in the UK and parts of the rest of the world down to a pretty low number so that they're taking less out of the pot than the typical bookmaker's margin. 00:53:55.760 --> 00:53:56.079 Okay. 00:53:56.559 --> 00:54:06.159 So I I think those exchanges are better, but in practice they only have about 10% of the market in Europe. 00:54:07.280 --> 00:54:12.079 And again, transaction costs turn out to be a big reason. 00:54:12.639 --> 00:54:17.039 If you fire them up and you take a look at the web page, it looks complicated. 00:54:17.519 --> 00:54:22.000 You look at a bookmaker, sportsbook app, you say, I want to bend the Knicks. 00:54:22.480 --> 00:54:23.760 That's how much it is for the Knicks. 00:54:24.000 --> 00:54:24.559 What's the line? 00:54:24.639 --> 00:54:25.599 It's this, it's that. 00:54:25.760 --> 00:54:27.360 You click press and you're done. 00:54:27.840 --> 00:54:38.079 The apps, the other the exchanges, you go on, there's multiple different prices, and under those prices, there's there's like dollar amounts or pound amounts in the UK. 00:54:38.320 --> 00:54:48.000 And so it's like, okay, I can get five to one in Liverpool, but the number under says 20 pounds at that price. 00:54:48.239 --> 00:54:54.159 So I want to bet 50 pounds, I get 20 pounds at that price, and then something else happens with the with the rest. 00:54:54.880 --> 00:54:56.719 That's if you're taking, right? 00:54:56.800 --> 00:54:59.199 So it's a little bit more complicated than with a bookmaker. 00:54:59.280 --> 00:55:01.920 But the other way to do is to go on and make an offer. 00:55:02.159 --> 00:55:10.880 And then, so if you do that, you know, let's say you're making that offer of the five, five to one on Liverpool, you make a 20 euro offer. 00:55:10.960 --> 00:55:17.360 Then there's not 20 on offer anymore, there's 40 on offer, but you're behind the first guy in the queue, right? 00:55:17.440 --> 00:55:19.519 So there's a there's a queuing system. 00:55:19.760 --> 00:55:24.400 So that might that offer might get accepted, or it might not. 00:55:24.880 --> 00:55:30.880 So because the prices could have somebody else could offer 5.1, and then the five is the five is gone. 00:55:31.199 --> 00:55:37.280 So for all those reasons, retail betters just don't really like this. 00:55:37.679 --> 00:55:50.639 They don't like that it's more complicated, they don't like that they might be restricted on how much money they can get down, they don't like placing a bet and not even knowing if your bet actually happened and how to check. 00:55:51.199 --> 00:55:52.719 It is more like it's like eBay. 00:55:52.800 --> 00:55:55.599 It it is it is like the eBay sort of exchange. 00:55:56.000 --> 00:55:58.320 It it is it was it it's it was like eBay. 00:55:58.400 --> 00:56:02.960 The the big difference is that somebody could post like a thousand pounds, right? 00:56:03.039 --> 00:56:07.760 So you you you you get these big professional betters on bedfair, and they'll come in and say, I'll offer a thousand pounds on that. 00:56:07.920 --> 00:56:21.280 That can a bookmaker, but uh a BetFair exchange, that thousand can sit there, and then one person can take twenty of it, and another person can take a hundred, and another person can take fifteen, and so on. 00:56:21.440 --> 00:56:24.079 So, so they're providing liquidity into the market. 00:56:24.320 --> 00:56:34.239 In fact, interesting, this is the the difference between Bet Betfair and the original company that it was competitive with, which weirdly enough was called Flutter. 00:56:34.719 --> 00:56:38.880 And Flutter had lots of venture capital backing, and they got to the market first. 00:56:38.960 --> 00:56:42.239 They were the first with this product of two people can

agree to bet. 00:56:42.719 --> 00:56:44.480 But their model was eBay. 00:56:44.639 --> 00:56:54.000 I would come on and say, I'm willing to offer three to one on Liverpool to win, and I'm I'm I'm I'm willing to take a bet for£150. 00:56:54.800 --> 00:57:07.599 But literally, somebody on the other side had to come in and offer precisely the£150 to take that up, and so there wasn't a book with the liquidity being gradually filled, and it was clunky. 00:57:08.320 --> 00:57:21.280 And they the it was totally decentralized in terms of who could make the offers, who could whereas Betfair came in and said we're running markets on these events, and you can only offer certain prices. 00:57:21.360 --> 00:57:30.000 There's a you can't offer like like when I said five was an offer, you can't offer 5.001 because they don't allow that, right? 00:57:30.079 --> 00:57:31.920 Yeah, because the market becomes too thin. 00:57:32.159 --> 00:57:38.559 So you can you there's there's a there's a little thing you can notch it up and you can say I'll offer 5.1, let's say. 00:57:38.800 --> 00:57:48.960 So that was all done to get there to be lots of liquidity, which meant people who are serious about transacting could put down serious money. 00:57:49.280 --> 00:57:59.920 And also those that came in and just wanted to be takers rather than makers would would would find lots of offers rather than have to go looking for lots of different guys with different uh different obscure offers. 00:58:00.079 --> 00:58:02.719 So that was so Bedfair became a huge success. 00:58:02.800 --> 00:58:13.599 They merged with Flutter, and Bedfair were later bought by Patty Power, Inc., which is an Irish bookmaker, and and they they took the name Flutter and branded it across the whole the whole company. 00:58:13.679 --> 00:58:20.480 So Flutter was reborn again, but it's a great example of transaction costs and market design. 00:58:20.960 --> 00:58:24.320 Getting that right is is the important thing. 00:58:24.559 --> 00:58:31.760 And so when people are all excited about modern prediction markets, I'm like, look, we've had these for 20 years. 00:58:32.079 --> 00:58:35.920 The only thing people want to bet on, by and large, is sports. 00:58:36.800 --> 00:58:47.199 And the interface is and the complexity of the market puts most people off, and most people prefer to bet at sports books. 00:58:47.519 --> 00:58:51.360 But look, everything is a little bit different in the United States, right? 00:58:51.679 --> 00:58:58.480 But once Calci got I I again, you are a Segway Meister that in the interest of time we'd better wrap up soon. 00:58:58.559 --> 00:59:01.440 But Calci is the thing that I wanted to ask about. 00:59:01.840 --> 00:59:02.079 Yeah. 00:59:02.239 --> 00:59:07.519 So Calci decided to to go to the CFTC to get regulated, right? 00:59:07.679 --> 00:59:16.880 The the legal framework is that this is a futures contract, and they were the first people to go and lobby and fill out the forms and get the paperwork approved. 00:59:16.960 --> 00:59:24.320 That yes, you're a futures contract market, and there aren't restrictions like the$500 restriction in terms of the University of Iowa. 00:59:24.559 --> 00:59:27.760 It's federally mandated across all of the US. 00:59:28.000 --> 00:59:33.920 Of course, at the start, Cashey said, Well, we won't do politics and we won't do sport because we think that that's not legal. 00:59:34.079 --> 00:59:37.199 We think that those those are those are outside the framework. 00:59:37.679 --> 00:59:45.360 And so they were a modestly successful business until then they started offering politics contracts. 00:59:45.599 --> 00:59:53.519 They won a case to be allowed to do so in court, and that seemed to loosen them up a bit. 00:59:53.760 --> 00:59:57.599 And then two things happened pretty much simultaneously. 00:59:57.840 --> 01:00:03.760 One was they started offering sports contracts, and the other was Donald Trump Jr. 01:00:03.920 --> 01:00:07.760 joined the board of both Calci and their competitor Polymarket. 01:00:08.239 --> 01:00:14.159 The CFTC had heavily opposed the politics markets being offered. 01:00:14.559 --> 01:00:16.159 So what what year was that? 01:00:18.079 --> 01:00:19.760 2020 2024. 01:00:20.000 --> 01:00:20.960 So 2024. 01:00:21.360 --> 01:00:22.320 Early last year, early last year. 01:00:22.960 --> 01:00:23.440 Quite recent. 01:00:23.599 --> 01:00:24.239 Quite recent. 01:00:24.639 --> 01:00:25.440 Recent, yeah. 01:00:25.519 --> 01:00:26.000 Yeah. 01:00:26.239 --> 01:00:29.519 So so the so the so the first year of the of the of the Trump presidency. 01:00:29.599 --> 01:00:41.360 Because the market they wanted to run, the market they wanted to run was was the presidential market, but poly market was this illegal, offshore, unlicensed market, and they were getting loads of money. 01:00:41.599 --> 01:00:45.519 So they wanted to run that market, and and then were successfully able to do so. 01:00:45.599 --> 01:00:51.039 And then they're like, well, we know we said we wouldn't do sports, but we're happy we want to do sports now. 01:00:51.280 --> 01:00:55.679 And as I'm sure you're aware, all hell broke loose, right? 01:00:55.840 --> 01:01:03.199 Because we've just talked about passport repeal and how it's a state, it was a passport was repealed on states' rights. 01:01:03.360 --> 01:01:06.880 So the states have the rights to offer these markets. 01:01:07.039 --> 01:01:11.599 And the states have set them all up with their own state-level tax regime. 01:01:11.760 --> 01:01:19.119 In most cases, for the states, the appeal was it's happening anyway, and we might as well tax it to make money. 01:01:19.440 --> 01:01:39.840 So you've got the states earning, you know, non-significant amounts of money from this, and suddenly there's this business offering event contracts on sports that allow people to bet on sports, and they're in 50 states, including most importantly, Texas and California, which have not

legalized. 01:01:40.000 --> 01:01:42.880 So there's no legalized sports books in Texas and California. 01:01:43.280 --> 01:01:58.400 So there's a lot of vested interests against Calci, versus on the other hand, Calci clearly have the support of the Calci and prediction markets more generally, clearly have the support of the Trump administration. 01:01:58.559 --> 01:02:06.639 So if this goes to the Supreme Court, you're going to see two sort of you know conservative themes run right into each other, right? 01:02:06.800 --> 01:02:14.159 One theme is that it's states' rights and states should have the right to regulate sports gambling, and the other is the Trump administration wants this. 01:02:14.880 --> 01:02:20.480 I I don't know where those two where those two things are are going to end up. 01:02:20.880 --> 01:02:28.719 But you my my my concern, just in terms of when I look at the market valuations for all these prediction market firms, it's like it's almost like they're all being priced. 01:02:28.880 --> 01:02:34.000 Like A, the Supreme Court's going to say it's all okay, and B, they're all going to be winners. 01:02:34.719 --> 01:02:38.960 Whereas the evidence from the UK was basically there was one winner. 01:02:39.199 --> 01:02:44.320 The guys that had the best market design and the best interface and the most liquidity were able to win. 01:02:44.400 --> 01:02:52.000 So I don't anticipate all these sports books now, all these prediction markets that people see advertising all over the place, Sydney Sweeney and Novig and all that sort of stuff like that. 01:02:52.159 --> 01:02:57.599 Most of those guys are going to go to the wall and there'll be a smaller prediction market business. 01:02:58.000 --> 01:03:01.280 With I think most of its business mainly focused on sports. 01:03:02.719 --> 01:03:06.559 The stuff you've you've probably seen, because you alluded earlier to to hedging. 01:03:06.719 --> 01:03:13.920 So, you know, Cal She talk about, they give examples of oh, you know, Rizzo's bar outside Wrigley Field. 01:03:14.000 --> 01:03:18.320 And if the Cubs don't win in the playoffs, then Rizzos will lose out on income. 01:03:18.480 --> 01:03:23.760 And so we've got a bespoke contract with Rizzo's that pays out if the Cubs don't win. 01:03:23.920 --> 01:03:29.119 I'm like, well, Rizzo could have gotten his own bespoke contract called Betting Against the Cubbies on FanDuel. 01:03:29.440 --> 01:03:29.840 Yeah. 01:03:30.559 --> 01:03:37.679 You know, only I think the fans that would show up at Rizzo's bar would say, Hey Rizzo, is it true you're betting against the cubbies? 01:03:38.159 --> 01:03:40.480 We're gonna take our business to some other guy. 01:03:40.719 --> 01:03:47.599 So there are very, very few real hedging needs related to sports. 01:03:48.400 --> 01:03:51.840 And these are these are really just gambling contracts. 01:03:51.920 --> 01:03:55.599 There's no reason to to to to to say otherwise. 01:03:57.280 --> 01:04:17.679 Well, I I appreciate your insights about this because this, like a lot of institutional economics, there's first it just seems mysterious, then you have a rather simple story, and then if you look at the actual institutions that smart people have come up with over time, it's much more complicated and interesting than that. 01:04:18.000 --> 01:04:23.519 Where could people find your book and how can we learn more about you? 01:04:24.000 --> 01:04:24.320 Sure. 01:04:24.400 --> 01:04:29.119 I learn more about me by typing my name into Google, and there's a www.carlwheeland.com. 01:04:29.360 --> 01:04:30.159 The book's on Amazon. 01:04:30.400 --> 01:04:33.199 And Wheeland is W-H-E-L-A-N. 01:04:33.760 --> 01:04:35.039 W-H-E-L-A-N. 01:04:35.280 --> 01:04:39.440 The book's on Amazon, but it can also be ordered from other booksellers. 01:04:39.519 --> 01:04:40.320 It's available. 01:04:40.480 --> 01:04:46.320 You you give your bookstore the ISBN number that you'll find in my website, and they'll they'll get it for you. 01:04:47.039 --> 01:04:55.119 Carl, I really appreciate you having appeared on the answer is transactions cost today, and I wish you good luck playing that piano. 01:04:55.760 --> 01:04:56.960 Thanks, Mike. 01:04:58.800 --> 01:05:06.079 All right, we are out, and I will I I'm always terrified about getting this, so I have stopped recording. 01:05:06.159 --> 01:05:07.360 It did, in fact, the recording.