Study says skill, strategies exist in daily fantasy sports games

It’s a safe bet to say Jeremy Losak is an avid pro football fan who enjoys picking winners on any given Sunday.

But if you ask the third-year Clemson University Ph.D. student in the John E. Walker Department of Economics if his, and millions of others’ interests, in daily fantasy sports competitions constitute gambling, odds are he would say no.

Jeremy’s view of daily fantasy sports is driven in large part by research he’s conducted in the last year on the rapidly growing industry. More than 60 million people from the U.S. and Canada have or are currently participating in fantasy sports contests administered by such online entities as DraftKings and FanDuel.

“There’s a huge legal debate swirling in many states as to whether these daily fantasy sports contests are games of chance or skill, and therefore whether or not they constitute gambling,” the Bronx, N.Y., native and lifelong New York Giants fan said. “One of the things my research examines is whether a skill element exists in these competitions that allows for strategies to beat the market, enabling competitors to win more than lose in the long run.”

Daily fantasy sports are similar to season-long sports pools or contests, except they are boiled down to a single week, or day, of competition. Instead of drafting a professional team for an entire season, a participant picks a team of individual players for a single contest and pays to compete against others for cash prizes. “Winning’’ in daily fantasy sports is based on players’ performances and not whether their teams win or lose.

Jeremy said if daily fantasy sports are games of skill, some strategy must exist to beat the “market,” allowing one to win more than lose in the long term.  Games lacking strategies to beat the market, and where the outcome is solely based on chance, constitutes gambling.

Jeremy’s research centered on DraftKings’ NFL contests, which assign a value or price to each player in a given week. Participants draft skill position players for a given game subject to a salary cap. Better players cost a participant more and take up more of the salary cap.

“One of the things this study examined was whether the values DraftKings placed on players were assigned ‘efficiently,’ ‘’ Jeremy said. “Each player is assigned a price. The better the player, the more it costs to draft them, and there is a salary cap each player must stay within when drafting players for their team.”

What Jeremy’s research, “Daily Fantasy Sports: Chance or Skill, Applying the Efficient Market Hypothesis,” found is that certain aspects of DraftKings’ player pricing mechanism aren’t efficient. So, if two players are similarly priced, one would expect they would perform equally. But, such is not the case because the DraftKings model lacks pertinent information and conditions, making their pricing mechanism inefficient, he said.

“As an example, DraftKings tends to overvalue opposing run defenses, which subsequently over penalizes running backs,” he said. “But there are other issues with the pricing mechanism as well. For example, DraftKings does not adjust prices if a player is injured or a suspension occurs. Nor does it factor in injuries to the opposing team. A skillful fantasy sports participant will respond to those variables by adjusting their selections, thus giving them an opportunity to beat the market.”

Though Jeremy’s research does not specify to what extent player prices should be adjusted by DraftKings to improve the pricing mechanism, it does attempt to illustrate that mispricing does exist.

“There are components of luck involved in anything, including the stock market, which we don’t make illegal. What this research shows is that there are strategies, like making lineup adjustments based on playing time, injuries and many other factors,” he said. “That is not to say there isn’t some chance involved in these games. But, enough evidence exists that strategies are available in these games, that skillful participants can employ, to enhance their chances of beating the market and winning long-term.”

Jeremy’s daily fantasy sports research paper was recently recognized by the Center for Research in Sports Recreation as the winner of the organization’s Junior Research Award. It was presented at the Sports, Data and Journalism Conference at the University of Zurich in Switzerland. He also recently presented the paper at the Southern Economic Association Conference in Washington, D.C.

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