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Can Your Neighborhood Bookie Compete With the Internet?

In the olden days, people who wanted to bet on the local sports team had few options other than their neighborhood bookie, who could usually be found ensconced in a local bar. With the right introduction, he would gladly allow a gambler to place a bet on nearly any event he wished, and would even extend credit.

Today, however, things are different. The mob, which was the primary sponsor of major sports gambling for most of the past century, is quiescent and the humble neighborhood bookie faces new competition from sports books in Las Vegas and on the internet. With the Supreme Court having recently invalidated the 1992 Professional and Amateur Sports Protection Act, which outlawed sports gambling in most states, more states are likely to get in the game. Legal internet wagering that does not involve overseas bookies will probably become possible in the near future as well.

In a world awash in legal betting and more on the way, how are bookies faring in the 21st century? Quite nicely, it appears. Despite some practices that seem almost antiquated, the economics of gambling tilts toward the local, illegal betting syndicate in many places. Against the odds, the local bookmaker has prospered against the legal competition.

Special odds, special customers / The first advantage that bookies have over Vegas and much of the internet is the ability to price discriminate, or offer different odds to different customers. They do this in two different ways. First, bookies usually increase the point spread for the hometown team to take advantage of those people who bet with their hearts instead of their heads. For instance, while the Chicago Bears may have to win by 5 points over the Lions to pay off for betters in Las Vegas, in Chicago they may have to win by 8.

Aha, a clever person might say, why don't I bet on Chicago in Las Vegas, where I get a better point spread, and bet against Chicago in Chicago, where the odds now favor their opponent? This way, if Chicago wins by more than 8 points I win in Vegas alone, if they win by less than 5 points I win in Chicago alone, but if they win by a margin between 5 and 8 points I win in both places.

While this may appear to be a no--lose situation, it fails to account for the bookie's fee for taking the bet. This cost--also known as "vigorish" (after the Russian word for "winnings") or "juice"--amounts to 10% of the bet in most places, an extremely durable and consistent percentage.

Koleman Strumpf, a Wake Forest University economist, has researched the economics of gambling using private data from several bookies. He argues that the constancy of the "vig" was partly the product of mob-coordinated collusion. Its existence means that unless the arbitraging bettor can expect to have the final point margin fall between the two point spreads more than 10% of the time, then the transactions costs of the bets will eat up any profitable arbitrage opportunities. Strumpf found those arbitrage possibilities were invariably wiped out by the vigorish.

The local neighborhood bookie can also price discriminate based on the idiosyncrasies of individual bettors. If, for instance, a particular bettor always wagers on his beloved team, the point spread given to him by the bookie will start to slide up above what is given to other bettors. Indeed, one of Stumpf's sources of information is a transcript of an audiotape where two bookies mock a regular customer for failing to recognize the relatively poor point spreads that they give him, spoken in language reminiscent of The Sopranos.

Letting it ride / One myth that Strumpf debunks with his research is the notion that bookies go to great lengths to avoid putting themselves at risk from game outcomes. The point spread ideally is set so that an equal number of bets is placed on both teams, leaving the bookie off the hook. However, prognosticating how people are going to bet is difficult, and having a game with uneven bets is not unusual. However, should a bookie find himself with a lot more money riding on one side, he often doesn't do anything about it.

What could he do? For starters, he could change the point spread to attract commensurately more bets on the low-money team, but this exposes the bookie to a possible disaster. Suppose a point spread that favored Oakland by 10 points over San Francisco drew $20,000 more in bets on San Francisco on the first day. The bookie could lower the spread to new bettors to 8 points in the hope that this would balance the bets on both teams. However, consider what would happen should Oakland win by exactly 9 points. He now has to pay the early San Francisco bets and the late Oakland bets, and he's out $40,000. To avoid such possibilities, many bookies refrain from setting the point spread until a day or two before the actual game, giving them time to see how the point spread in Las Vegas has settled.

Bookies do not often lay off bets with another book to insulate them from risk. With sufficient liquidity, an occasional imbalance in bets ought to be something a bookie can withstand. Despite what Strumpf regards as relatively low earnings for such a service (he estimates average bookie income of around $200,000, mostly tax-free of course), he suggests that they usually do not face liquidity constraints.

The competition / The biggest threat to the neighborhood bookie is the rise of offshore betting houses that can be reached via the internet. Such venues remain far from the long arm of the law (and the mob, so far) and have several advantages. First, the internet gambling sites generate enough volume to compete on the vigorish, offering rates as low as 2% to high-volume betters. Second, the internet bookies can exploit their vast data to exercise much more sophisticated price discrimination than bookies.

One curiosity that Strumpf discovered was that neighborhood bookies are very reluctant to store their data on computer, and almost to a man they continue to use the same sorts of books used for the past 100 years. They may find it easy to remember that Neil from Carroll Gardens always bets on the Knicks, but there probably are other gambling patterns they could exploit if they used computerized tools. The internet bookmakers are doing precisely that.

However, bookies are ahead of the internet in offering credit to bettors. This service is a way to develop loyalty among customers, who are more likely to try to bet their way out of a losing streak. Of course, collecting on a debt can be tricky. One way that bookies deal with this is through surrogates, who bring new bettors to the bookie. In exchange for providing the bookies with fresh bets, the surrogates receive a proportion of the losses of their bettor. The beauty of the arrangement, at least for the bookie, is that the surrogates are also on the hook should the bettor attempt to renege on a debt. With such motivation, it's clear why bettors fear the consequences of unpaid gambling debts. Such a system seems ill-suited to the faraway headquarters of the internet gambling sites.

Congress appears unlikely to pass new legislation that restricts gambling at the federal level, although various stakeholders--mainly casinos--have begun to lobby for restrictions to be placed on sports gambling in some way to limit their competition from the internet or non-Vegas locales.

The practice of placing bets with local bookies is neither inherently more nor less virtuous than betting in Las Vegas. Journalist Alan Erhenhalt noted in his 1995 book The Lost City that the local betting syndicate in Bronzeville, an African-American neighborhood in Chicago, was a central ingredient of the close-knit community of the 1940s and 1950s. To be sure, some of the less salutary aspects of local bookmakers offend our sensibilities. But just as the mob was purged from Las Vegas, could such heavy-handed tactics be purged locally? The answer may depend on whether bookmaking is legalized; the fact that sports gambling has long been largely illegal explains why the mob is the greatest purveyor of sports bookmaking.

Peoria tale / In the interest of full disclosure, I should note that my great-grandfather and namesake operated a gambling establishment in Peoria, IL in the years before and during World War II, and the money earned from this business paid for my college education and my siblings'. Gambling was then legal in the city, but the mob provided and maintained the slots for the saloon and ran the constant poker game, splitting the profits evenly with my great-grandfather--net of the payoffs for government officials, of course.

After the war, Peoria cracked down on gambling for a very good reason: it was inexorably connected to the organized crime and corrupt government that plagued the city. There appeared to be no way to combat the latter problem without getting rid of gambling as well.

In the 1990s, legal gambling returned to Peoria in the form of a riverboat casino, which thus far appears to be free of organized crime and has not appreciably increased the corrupt behavior by government officials in the area. Peoria has its share of citizens with gambling problems, of course, but the riverboat casino has provided entertainment for area residents as well, without the need to travel to an Indian reservation or Las Vegas. The influx of tourists to Peoria (not typically considered a tourist destination) has provided numerous well-paying jobs for the community.

Peoria still has its share of neighborhood bookies, ubiquitous enough that even I, a non-gambler who is now only an occasional visitor to my hometown, know more than one person there who takes action on college football games. My friends in Peoria who take part in the weekly betting pools at our neighborhood bar rarely go to the riverboat casino, and I doubt they would do so even if the police broke up their betting pools instead of participating in them.

Just because something is impossible to stop does not mean it should be legal, of course. At the same time, determining the legality of an activity based on the size (and political acumen) of the seller makes little sense. If gambling is fine for large casinos and the government, it is difficult to see why a prohibition should exist for bookies or internet sites. Explicit legality (and not the tacit legality that exists in most places) would quickly give recourse to gamblers worried about a kneecapping from Skinny Pete, being forced to pay usurious interest rates, or other unsavory practices commonly associated with shady bookies.

IKE BRANNON is president of Capitol Policy Analytics, a consulting firm in Washington, DC.
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Title Annotation:BRIEFLY NOTED
Author:Brannon, Ike
Geographic Code:1USA
Date:Jun 22, 2018
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