Sport betting: the Donaghy File
By Reuven Brenner and Aaron
Brown
This article concludes a two-part
report on sports betting using excerpts from the
authors' 2008 book, World of
Chance. Part 1: Sport
and the fix of illegal bets
To
paraphrase Claude Raines in Casablanca, we
are then shocked, shocked to find out so many
people pretending to be shocked by the charge that
National Basketball Association referee Tim
Donaghy fixed some games. Let us make it then as
explicit as possible: the entire issue is being
analyzed backward
not only because of refusing
to see the impacts of prohibition, but also
because of the refusal to acknowledge gambling's
link to sports. [1]
Let's start with two
factual statements: People bet on sports.
(Although we could go further and show that
professional sports were originally organized by
and for professional gamblers, let us just make
the lesser claim); people's bets affect the sport.
One obvious effect is gamblers may try to
fix the sport. Remember Paulo Jose Danelon,
Marie-Reine Le Gougne, Robert Hoyzer, Edilson
Pereira de Carvalho and Eugenia Williams? (If you
don't, Google the names). These are referees
caught fixing major international sporting events.
The 2007 case of Tim Donaghy is not an
aberration. Of course, given how hard it is to
detect referee cheating, it's a safe assumption to
make that there are more referee fixes than proven
cases. In sports like boxing and skating, judges
are often assumed to be biased at best, completely
fixed at worst.
But fixing is only one
influence of betting on sports. Betting affects
fan interest and media coverage, and influences
the organization of sports, as pointed out already
a number of times. Does anyone read the daily
Racing Form out of interest in horses? Would daily
newspapers devote a third of their reporting
budgets and news pages to sports, including many
pages of data in small print, if no one bet on
games?
Given the two propositions, the
obvious goal is to harness the influence of
betting in positive ways. The usual pretended
goals are either to eliminate betting altogether
or, no less unrealistically, to eliminate any
effect of the betting on the sport. Not only are
either of these impossible, they would be wasteful
if accomplished. Properly taxed and regulated and
backed by the right institutions, bettors could
supply significant revenue to a sport, leading to
lower ticket prices, higher salaries for athletes
and more profits for owners. No one follows the
minutiae of a sport more than bettors, and their
oversight can be put to good use.
Consider
horse racing. In order to combat undesirable
gambling influences on the sport, the pari-mutuel
system was invented. All bets are placed in a
pool, the track takes its cut (say 15%), and the
rest is distributed among people who bet on the
winning horse in proportion to their bets. All
betting totals are displayed in public as bets are
being placed.
One clear advantage of this
system is that the all the parties producing this
sport get a cut of the revenue, without the
organizers having a stake in the outcome of the
race. The money from betting means tracks can be
beautiful and admission can be cheap or free,
while the people involved in the sport can make
nice livings. Bettors pay for all the
record-keeping and analysis which help define the
sport.
Another advantage is that the odds
are determined in public, in an informed way. All
bets are aggregated and paid off at the same rate,
no one gets favorable or unfavorable odds. There
have been many scandals in horse race betting, but
they took place off-track, with gamblers who
attempted to use the track odds to quote their own
bets. The pari-mutuel system removes the problem
of fixes from the sport. As a result, horse racing
can be freed from intrusive enforcement of other
anti-fixing measures.
Owners, trainers and
jockeys routinely bet, using their inside
information. It is common for owners to hold their
horses back in some races, resulting in poor
performances and better odds when the owner
decides to bet and push the horse for maximum
performance. While this might be regarded as a fix
in other sports, the pari-mutuel system means the
owner's betting (along with trainers, jockeys and
others in the know) will be distinguishable on the
pari-mutuel board.
Horse bettors know to
look for the same two things that work in all
trading markets: value (a horse with better odds
than its historical performance would suggest) and
momentum (a horse with odds getting worse as track
time approaches, indicating money with inside
information is going on it).
This system
is not a good model for the National Basketball
Association. It works because essentially all the
interest in horse racing is betting interest
(except for a few marquee events like the Triple
Crown and some major stakes). No one cares that
some of the horses aren't trying to win, as long
as everyone has an equal opportunity to exploit
that information. That's not true in competition
among humans.
The innovation of point
spread in human-sports betting in the 20th-century
solves this problem. Instead of betting on which
team will win and adjusting the pay-out odds to
make it a fair bet whether you bet on the favorite
or the underdog, the betting is on whether the
favorite will win by more than the point spread,
and get even odds. (A standard 5% commission to
the bookmaker is subtracted). Bookmakers were
coerced into a national organization that matched
off the bets. Like the pari-mutuel system, this
meant that the organization running the betting
had no stake in the outcome of the bets, and it
just took a fraction of the amount wagered.
Although organized football and basketball
did not profit directly from gambling, they gained
by having a monitoring service provided free.
Another indirect profit was from the sale of
information services to gamblers. There were
non-financial benefits as well. The point spread
created interest in all games. A midseason
one-sided contest between dull teams has the same
betting potential as an evenly matched late-season
contest between exciting teams.
Without
gamblers to monitor things, it would have been
difficult for the league to ensure teams played
hard every game. Moreover gambling interests
result in television and newspaper coverage of the
less-exciting games, and that attention in turn
attracts new non-gambling fans.
Professional football acknowledges these
realities, and works with legal and illegal
gamblers to keep the game honest for everyone's
benefit.
The NFL releases extremely
detailed data about players, teams and game
situations, so there is no inside information to
sell. While the league tries to distance itself
from gambling in public, in private it recognizes
the value of gambling to the popularity and
integrity of the game. The gambler is the sport's
conscience.
The purist sports fan cares
only that the game is well-played, and the
partisan fan cares only that his or her team wins.
It is only the gambler who cares that the outcome
is decided fairly. In the long run, unfairness
ruins the game for everyone, but only the gambler
brings single-minded intensity to monitoring
fairness of every game, early or late in the
season, even match or blowout, popular or obscure
teams.
People agree that public stock
trading provides an essential monitor on the
performance of corporations. Why is it less
obvious that point spreads are useful to monitor
performance of sports teams? One answer is that
perhaps there is too much misinformation and
prejudice about gambling and gamblers.
The
NBA's attitude may be attributed in part to this
too, in addition to the other possibilities we
suggested in Part 1 last week (see Sport
and the fix of illegal bets, Asia Times
Online, June 6, 2012). It guards basic competitive
information jealously, creating incentive for
leaking. It monitors only legal gambling, thereby
missing most of the market. As a result its games
are less appealing to gamblers. Players do not
play hard every night. Referees exercise too much
influence on the outcome, and often do poor jobs.
Obvious cases of information leakage, inconsistent
officiating and erratic play go uninvestigated.
The problems created by the NBA's
see-no-evil attitude toward gambling are getting
worse due to changes in the sports betting
industry. The Internet plus federal crackdowns on
organized crime have created a new type of
gambling entity in the last decade: bookmaking
entities that take risk.
Some are offshore
companies that take bets on the Internet, others
are telephone bookmaking firms. Rather than trying
to match bets and take commissions, they try to
predict winners, a much riskier but potentially
more profitable activity. They appeal to bettors
who shop point spreads because the company is
willing to give slightly higher or lower spreads
in order to attract action on the side it expects
will lose.
These companies, unlike
organized crime, have strong incentives to get
inside information and fix games. While they are
smaller and less powerful than organized crime,
there are many of them, making them much harder
for law enforcement to monitor.
How do you
put these people out of business and convert
gambling from a negative to a positive influence
on the game? Make the betting market more
efficient, make the official point spreads more
accurate, release more information, encourage
publication of analysis and spreads. All these
reduce the risk-adjusted profit of trying to beat
the spread. On the other side, try to increase the
appeal of the game to bettors, which increases the
total betting interest, which makes commissions
more profitable.
A still better solution
would be to legalize gambling and have an NBA
affiliate run a worldwide operation to consolidate
all betting activity. This would provide revenue
to the league, give bettors a fairer game and
discourage game fixing and other corruption while
maximizing the oversight benefit of gambling.
Unofficial betting would still take place, of
course, but the people engaging in it would do so
at their own risk. But this solution seems now out
of sight and most minds probably for some of the
same reasons that view all betting with suspicion.
In order to combine the best attributes of
pari-mutuel systems and point spreads, the league
could borrow a system from the US Treasury market.
Most bettors would simply pick the team they
wanted to bet on (or other item like the total
number of points scored or which team would have
more rebounds). They would take whatever the
consensus spread was, which would not be known
until the betting cut-off time, say 10 minutes
before tip-off. Other bettors would specify a
spread at which they were willing to bet. The
league would set the spread at the level that
equalized the amount of money bet on both teams.
All bettors, both market orders and limit orders,
would get the same spread.
We do not
expect to see anything like this in the near
future. In fact, we expect the Donaghy story will
make things worse. It will lead to more pressure
to get rid of gambling, and more strictures to
separate sport from gamblers. Both of these are
hopeless and counterproductive.
There is a
positive approach, which is proven to work, but it
requires admitting obvious facts. But it's safer
to pretend to be shocked, shocked, again and again
- for hundreds of years - than admit to having
made big mistakes. After all, admitting them would
mean giving up power and wealth. Nobody does that
voluntarily.
Note: 1. For
details of the Tim Donaghy case, see here.
Reuven Brenner holds the Repap Chair at
McGill University's Desautels Faculty of
Management. The article is an excerpt from his
World of Chance (Cambridge University
Press, 2008, co-authored with Gabrielle Brenner
and Aaron Brown).
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