Jimmy (not his real name) bets tens of millions of dollars each year on sports. But he’s not a gambler.
See, gamblers gamble. Jimmy invests.
A math major in college — with a minor in Chinese — Jimmy started his fund six years ago with a partner and a bankroll of several million dollars, courtesy of two “angel investors” from Eastern Europe. He’s what would be described as a “quant” in finance circles, and today he earns the same 2-and-20 he would on Wall Street, only his counterparts are of a slightly different ilk than the PhDs at Renaissance Technologies.
“You’re not dealing with guys with doctorates in statistical modeling,” he says. “You’re dealing with some guy from Staten Island named Joey who’s threatening to break your legs — though the ones who act like tough guys are usually full of s–t.”
So, why isn’t Jimmy working for a James Simons or a Stephen Schwarzman? To begin with, it “is self-evident who is easier to outthink, the full-time stock market player or the average sports bettor,” in the words of legendary gambler JR Miller.
“In the stock market you’re pitting your expertise against world-class experts and corporate insiders who get most news a long time before you do,” Miller wrote. “On the other hand, with this weekend’s sports games, you’re pitting your expertise against the average sports bettor. The average sports bettor is amazingly uninformed. He bets from intuition and emotion. He does very little actual research.”
Unlike the stock market, acting on non-public information is perfectly acceptable in sports betting.
“There’s no such thing as insider trading in my business,” Jimmy says. “Or, there is, but it’s not against the rules.” In Jimmy’s world, no one is required to determine the source of a client’s funds — unlike HSBC, which is under fire for accepting $7 billion in dirty money from Mexican drug cartels, or Wells Fargo unit Wachovia, which paid a $160 million fine in 2010 for similar activity.
Accordingly, Jimmy begins each day with a Skype session from his Manhattan duplex.
“It’s a relatively small community,” Jimmy says. “We know all the important players. So, if the five biggest bettors in the world all tell us they’re on the same side of a game, we know the market’s going to move in a certain direction and position ourselves accordingly.”
Still, Miller contends that “no more than one in a hundred bettors can make sports betting their sole vocation.”
One of those bettors is Jimmy. And it is truly a vocation, not an avocation. Jimmy never watches games — professional, college, or otherwise (his outfit once laid down a sizeable wager on a spelling bee). To him, they’re a bore — while the everyday fan may believe he is witnessing an extraordinary alignment of the planets when his team executes a last-second Hail Mary pass, Jimmy expects it “x number of times during the course of a season.”
“People love watching, say, football for the ‘once-in-a-lifetime’ plays,” he says. “To me, there’s no such thing as a fluke — everything always reverts to the mean.”
As Bradley Efron, chairman of the Mathematics and Computational Science department at Stanford University, told Minyanville in 2010, coincidence is a major factor at play in statistical analysis and what may seem “amazing” isn’t necessarily so.
Efron recalled a baseball fan who, during the 2005 NLDS, caught two home-run balls in one game at Houston’s Minute Maid Park.
“There was a tremendous to-do about how improbable that was,” Efron said. “Everyone wanted to know, ‘What are the odds?!? One in a million? One in a trillion?!?’”
Based on the number of seats in the stadium’s home-run territory, Efron capped the odds at 1 in 5,000.
“Somebody had to catch the first ball,” he explained, “but it wasn’t until the second ball was caught that anyone noticed something interesting was occurring.”
Perhaps scientific psychologist David Myers put it best when he wrote in Intuition: Its Powers and Perils (Yale University Press, 2002), “That a particular specified event or coincidence will occur is very unlikely. That some astonishing unspecified events will occur is certain.”
Hunches Mean Squat
While numbers have always been an integral element of sport, the advent of complex statistical analysis, as pioneered by the Society for American Baseball Research — described by late Detroit Tigers announcer Ernie Harwell as “the Phi Beta Kappa of baseball”), has rendered the gut feelings and hunches of the past obsolete.
Intuition is anathema to Jimmy — and anyone who successfully makes betting their business. Jimmy could earn a risk-free living simply by locking in profits: making separate bets at different odds to exploit the difference. But he shies away from arbitrage because it forces him to bet on the wrong side of the game. There’s simply more money in pure risk, and Jimmy’s mathematical models and algorithms – and those that he buys from consultants — are good enough to bank on. For now.
“One system will never work forever,” he says. “Rules change, the market gets more efficient; we change models as other things do.”
If change is constant, maintaining consistency within the pandemonium is crucial. No matter the situation, Jimmy always, always stays faithful to the numbers. Like Nicholas Nassim Taleb said of casino gambling in The Black Swan, “you never have days in which number 36 black is designed to pop up ninety-five percent of the time,” and so it goes with sports.
“There are good trades, bad trades; there will be times when you come out on the wrong end, but if you have the right process, you’re going to be right more times than you’re wrong,” says Farhan Zaidi, director of baseball operations for the A’s (and an MIT graduate with a PhD in behavioral economics from Berkeley).
Leaving Las Vegas…Off the Itinerary
In 2011, over $3 billion was legally bet on sports in Nevada. The “illegal” market, which includes both bookies and offshore gambling websites (Americans are prohibited from betting on sports online by the Interstate Wire Act of 1961), has been pegged at $380 billion. Yes, it is easier to bet from one’s living room. However, for someone like Jimmy, the decision to forgo Vegas is not merely a matter of convenience. Since Jimmy and his partners deal in substantially larger dollar amounts than Vegas will accept, much of his business is conducted online.
“There’s just not enough liquidity in Vegas,” Jimmy says. “Their limits are too low.”
“You used to be able to bet so much in Las Vegas that it was a joke; now you can’t bet anything,” professional gambler Billy Baxter told Cigar Aficionado several years back, “sounding nostalgic for the days when a $100,000 wager at Binion’s Horseshoe failed to raise a single eyebrow.”
Why don’t Vegas casinos accept large bets? Simple — they’re not in the business of losing. Especially when an outfit like Caesars Entertainment is weighed down by $22.5 billion in debt — about twice as much as Apple’s Q1 2012 revenue, and MGM Resorts is struggling under $13.36 billion worth of debt with interest payments as high as 13%.
“The nature of this business is that we only want people to bet if they have less information than us,” one Las Vegas sportsbook manager said. “We want the money.”
Jimmy tends to bet where other pros bring their action — Curaçao-based Pinnacle Sports.
“Pinnacle is the biggest and best operation out there,” Jimmy says. “They’re smart bookies; they know the best gamblers in the world are doing business with them and they watch those accounts very carefully.”
Meaning, if you get tagged as a sharpie, Pinnacle may “move the market on your bets, once they figure out you know what you’re doing.”
In turn, Pinnacle is closely watched by the industry. According to SportsbookReview.com, the fact that Pinnacle allows to “shape its line” is why “it is impossible to find an online bookmaker or a Las Vegas sportsbook that doesn’t pay attention to Pinnacle’s numbers.”
Here’s how Pinnacle says they do it:
The most accurate way we have found, to distinguish winning and losing players is to look at the odds a player received when they made their bet, and compare it with the Pinnacle Sports closing line on the game. If a player consistently beats our closing price, they are likely to be a long-term winner – period. Interestingly, we have found that this test is more reflective of a player’s future winning potential, than their historical win/loss record with the company.
For example, if our closing price on say the Steelers at -3 on the spread was -104 (1.96 in decimals), and a customer played -3 +105 (2.05) earlier in the week, that was a sharp bet. When a player can anticipate the line movement, and does this consistently over a series of 100 bets or more, that player is conclusively sharp, and will be up substantially in profit over the long run.
What’s the quickest way to identify a player that needs to adjust their style of betting? One who plays a bad price. If other bookmakers offer Pittsburgh at -3 -120, and a player wagers there instead, when a better price was available elsewhere, such as -3 -104 at Pinnacle Sports, he is almost certainly not sharp. Even if he has been winning to date, in the long run, the laws of statistics will catch up with them, and they will almost certainly lose over time.
Not Jimmy. He’s returned an average of 200% – 300% to his investors since he began six years ago.
Even the Losers Get Lucky Sometimes…Or Do They?
“It is unfathomable, the things some people do,” Jimmy says. “You see people betting in ways where you shake your head and just can’t believe what they’re doing. A dog would be a better sports bettor; anything totally random would be infinitely better than what they’re doing. Some people I deal with, I’m like, ‘How are you not dead broke by now?’”
And these are experienced bettors. The everyday fan, says Jerry, overwhelmingly bets on “his” team — which, to Jimmy, is as good as burning your bankroll.
Naturally, the gambling business will eventually expose one to the grayer areas of legality. While he takes great pains to stay out of the bookie business, Jimmy will occasionally make direct bets against other gamblers. “Opportunities to function as a bookmaker for very, very stupid individuals are hard to pass up.”
However, even the least successful bettor wants to win. And the frustration of constant losses can present the occasional issue for Jimmy and his crew.
“Everyone has a limit to how much they can lose,” Jimmy says. “No one will lose to you for a lifetime,” which is why he builds a “stiff rate” into his business model.
“We expect people to stiff us,” he says. “We have a P&L on everyone we deal with; we know we’re not going to get every penny we’re owed.”
In such situations, bringing a lawsuit is not feasible. This is a business in which fuzzy memories abound. What to do? Well, Jimmy’s not in the knee-cracking business. Instead, he relies on arbitration.
“We’re not talking about the kind of arbitration the public knows,” Jimmy says. “This involves getting a respected professional gambler that both sides agree on, someone experienced in the etiquette and rules of gambling, where we’ll say, ‘Look, we’re gonna do whatever you say we should do,’ and we work it out like that.”
The Fix Is Not In
Fixed games, according to Jimmy, are “exceedingly rare.”
“There’s more fixing in college sports,” Jimmy says. “It really doesn’t happen anymore in the pros; college athletes need the money.”
Even so, it doesn’t happen in college all that often, either. And, as a practical matter, fixed games aren’t as valuable as one might imagine.
“We once considered going to college parties and getting to know some of the players, but you’re risking prison to make like, 30 grand,” Jimmy says. “Not worth it.”
In fact, Jimmy is thinking that none of it may be worth his time anymore. He’s lost his taste for supporting an economy that supports nothing else.
“It may be my living, but gambling is a net-negative for society.” Jimmy says. “People don’t pay us. We have to win it off of them.”
Then again, doesn’t everyone? As stock operators like to remind us, there are two sides to every trade — meaning for every winner on Wall Street, there’s a loser.
Just like Vegas, no?