Books Don't Bet, They Match

We break down how sportsbooks function as brokers that match contracts, set prices through the point spread, and earn their living through the vig. Kevin Braig joins us to explain how law, technology, and property rights shape whether sports betting markets stay clean or slide toward corruption and bad incentives.
• five reasons people gamble, from dopamine to positive skewness
• what a sports bet is as a contract and why a book exists as a broker
• how the 11-to-10 price and the vig work in practice
• why point spreads are a pricing technology and a marketing tool
• how street-level enforcement and local political capture governed bookmaking
• why Nevada legalized betting and how phones and smartphones changed everything
• the Coasean case for clearly assigned property rights between leagues and books
• how prop bets and inside information can erode trust in games
• why extreme taxes and licensing fees raise transaction costs and distort markets

Judge Kevin Braig's book, "Bookmakers vs. Ballowners"

RH Coase, "The Problem of Social Cost"

Gustavo Dudamel's opera, "Wealth of Nations"

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !

You can follow Mike Munger on Twitter at @mungowitz 

Transcript

Why Sportsbooks Spark Conflict

Michael Munger 0:04

This is Mike Munger, the knower of important things from Duke University. Today, honorable sports books and how they work. A question: why is there such antagonism between sports books and ball owners? We'll get an answer from a guy who's thought a lot about this. Kevin Braig, an author and judge in Logan County Court of Common Pleas in Ohio since 2019. A new twedge, this week's letter, and Book of the Week, and more. Straight out of Creedmore, this is Tidy C.

Speaker 3 0:39

I thought they talk about a system where there were no transaction costs. It's an imaginary system. There always are transaction costs.

Speaker 0:48

When it is costly to transact, institutions matter. And it is costly to transact.

Five Reasons People Like Gambling

Michael Munger 1:02

I think there's an interesting question why people gamble, uh, why many people like to gamble. Not everyone does. I've heard it claimed that people who like to gamble don't understand probability. I think that's wrong. Uh, it may be that they overestimate their own efficacy, but that's quite different. I tried to find some of the reasons why people might gamble, and I found five. Uh, one is neurological reward, where we find uncertainty that resolves itself stimulating. And it has been shown that variable ratio enforcement, the same mechanism behind slot machines, gives stronger behavioral spot responses than predictable rewards. So an unexpected win triggers a dopamine release. Near misses do too, which is why almost winning keeps people playing, even though almost winning is losing. Second, risk and skill assessment. For much of human prehistory, accurately evaluating uncertain outcomes was survival critical. And we have a cognitive interest in puzzles. Now, it may not be as important as it once was, but it gives us pleasure, and this may be like mayonnaise or bacon, frankly. Something that's fatty and salty once was really valuable and you should eat a lot of it. It may be an atavism. Third, social bonding. Shared risk is a powerful social experience. Betting alongside others can give us a sense of belonging and solidarity. That's why a lot of sports betting is done communally. It's done in big, if you go to a sports book in Los Angeles, uh, you can get drinks, there's a big stadium-style seating, you can look at all these games, and you have a sense of being part of a tribe. Fourth, the illusion of control. People systematically overestimate their influence over random events. So they think choosing a lottery number, maybe blowing on the dice. I know people who think they have special underwear that can affect the outcome of a basketball game. That illusion of control makes gambling feel like a skill contest, even when it isn't. It makes feel like we can claim credit for something that actually we have nothing to do with. And then, fifth, there's a rational explanation, particularly for those people who have the least resources. It's a Friedman's Avengers game. They showed the economic utility of risk. For people with limited wealth, a small wager offers an asymmetric upside. And in fact, they want to have as long odds as possible because if it pays off, then they'll get a very big change in the quality of their life. So what they want is a change to dramatically change their circumstance, a chance to dramatically change their circumstances for a modest cost. So that is the appeal of positive skewness. The slim possibility of a large gain can be rationally attractive, even when the expected value is large and negative. That is, I will almost certainly, if I play this a number of times, lose each time, but I might win. And if I do, it'll change my life. And uh Milton Friedman and James Savage have a very interesting paper about that, and I'll put up a link.

Meet Judge Kevin Braig

Michael Munger 4:24

Well, as I said, uh the guest today is Kevin Braig, who is the Logan County Court of Common Please in Ohio since 2019. After a 26-year career in private law practice, Judge Braig received a bachelor's degree in journalism from the Scripps School of Journalism at Ohio University in 1989, and a law degree from the University of Cincinnati College of Law in 1993. My tradition on this podcast is to ask the guests to introduce themselves because then they get the chance to emphasize the thing that's most important from their perspective. And what is interesting here is that Judge Braig is a polymath. He has accomplished a whole bunch of different things. I first encountered him in his role as a judge, uh, talking about economics at uh an institute put on by the Law and Economics Center at the Scalia School. Um, but he is also an author and also uh pretty soon, I guess you would say a published actor or who will. So there are many ways to go with this, but um let me ask that uh uh Judge Kevin Bragg tell us a bit about how we became interested in today's subject, which is a problem of Kosian proportions, because there's a question of how we can design institutions to make literally everyone better off, and is often the case with transaction cost studies. There's a puzzle, and the puzzle is people don't take advantage of this solution. So welcome, Kevin. It's great to have you on the show.

Speaker 2 6:07

Thanks for having me, Mike. It's great to be here. I'm a big fan of your podcast. I listen to it regularly. I became a judge in 2019 when Governor Mike DeWine appointed me to the bench. So I've been a judge for about six and a half years. Uh prior to that, I was in private law practice for 26 years and uh did a variety of content in private practice. I was an environmental attorney, I was an agricultural attorney here in Ohio. And uh towards the end of my tenure, I got involved in uh gambling law, specifically the uh expansion of state authorized bookmaking and sports betting beyond Nevada uh in the run-up to the 2018 decision by um the U.S. Supreme Court in Murphy versus NCAA, which essentially um lifted the limit, uh lifted the the confining of state authorized uh bookmaking and sports betting to Nevada. Um I had an interest in it. I was born and raised in Cincinnati, Ohio. Uh my father was a Catholic youth organization football coach there, and I grew up on the seventh and eighth grade football field and uh played football at Archbishop Moore High School in Cincinnati, which is a really well-known program in the 70s and 80s. Most people may recall that Jerry Faust went from our high school Muller to become the coach in Notre Dame, went straight to Notre Dame. So we were fairly well known in that. And um went to Ohio University where I got a Bachelor of Science in Journalism. I wanted to be a sports writer uh when I went there.

Michael Munger 7:43

Yeah, I wasn't gonna bring that up. I was the whole journalism thing, I was gonna let that slide. But since you brought it up, what the heck?

Speaker 2 7:50

Well, you know, uh I was in journalism school and I I started to look at what was happening with the newspaper industry, and my gut was telling me this is not a healthy industry in 1990. I was like, I don't like the direction this is going. And that was that was when it still wasn't quite so obvious. Well, let me finish. I got some data. You know, I I I'm sitting there in 1989, so I pivot to the law and I decide I'm gonna go to law school because I thought my economic future would be more promising there. And uh the number of jobs in uh traditional new uh newspaper newsrooms has declined every year since 1990 when I got out of Ohio University. So I have never made a better prediction in my life than uh selling short on uh being a newspaper reporter and going into law and becoming a lawyer and then a judge. And I don't I don't know how I did it. I don't I don't to this day um I'm kind of amazed that it happened, but clearly it was a a very good economic decision for me.

Michael Munger 8:45

Yeah, I that but yes. But but then um you what how did you decide what kind of law to practice?

Speaker 2 8:55

Well, uh first of all, I let it decide for me. I got the job I could get and uh tried to do it well. I've always w done that, you know, as I always believe that uh, you know, in this world that the opportunity comes to you and you have to be smart enough to seize it. I've always uh been pretty pretty good at doing that. So I just sort of evolved as a lawyer uh until I came uh into the space. The only the only area of practice that I ever really stalked was the gambling law um at the end of uh my career. And it was and really it was because I was interested in sports. I would I'm not an intrinsically interested person in gambling. It was the sports that led me there. I also liked economics. I just read economics on the side, and I read a book by David Walsh, who used to be the uh economics writer for the Boston Globe back in what I call the golden age of newspapers. He wrote a book called Knowledge and the Wealth of Nations, which was um about half about the history of economics uh as a subject matter. And then the second half of it was specifically about uh Paul Romer's uh paper, endogenous technological change. And I just really I just really was smitten by it, I guess is the way, best way to put it, because as David Walsh explained uh the theories of Paul Rohmer, he talked about um the difference between designs and human capital, and that it was Roemer's theory that economic growth and prosperity is really driven by the designs, which can be copied uh at no cost or very little marginal cost, uh, not the human capital, which is inherently unique. Being an old football guy, I thought, well, I related it to that, and I thought, well, that's like the difference between plays and players. Plays you can copy. The X is an O's, you can put on a sheet of paper. You can take Bill Walsh's best plays, uh, you can take a sprint write option, which he called to win the 1980 NFC Championship, and you can teach the fourth and fifth graders, and it will work because I've done it. It will work. It's a good play. And so you can copy it uh with that. How well it works will depend on you know how skilled your human capital is, but the play in itself is a good play and it'll work. So what I ended up doing uh mostly just for fun was taking Paul Romer's paper, and I wrote a paper called uh quantifying NFL coaching, a proof of new growth theory. And I essentially attacked what's what's known as, actually, I came to learn it was known as this as a result of peer review process, the simultaneity problem. And that is if you watch an NFL play unfold, it's impossible from just watching it to determine how much credit you should give to the play, the X's and O's that they're running, and how much you should give to the playmakers, the Joe Montanas and the Jerry Rice who are executing it. You know, in the media, they give all the credit to the players almost. But I I broke that down, and my conclusion at the end was that actually at the NFL at the highest level, I think it's different if you have more disparities of human capital, but where the cap where the human capital is as even as it can be, that actually the play design does contribute more to the sex success of NFL teams than the playmakers. And that Paul Romer was right. So, really what I was trying to do, determine what I was really doing was I was testing Paul Romer. That's really what I was interested in, and I was doing it in a in something that I enjoyed uh interacting with anyway, and then I felt like I knew something about. And that's really what got me into economics and starting to read more economics and uh pursue all this. Then when uh about 2015, when I read uh that the William Hill uh sports book uh company in London, England was uh starting to move into Nevada, I immediately thought uh they they're not moving, they're not doing that just to go to Nevada. There's something going on here. There, there's going to be an uh all-out effort to open up the United States to above-board white label, state-authorized bookmaking. And uh I think I was one of the very first people who like realized that was going to happen. And again, I was correct. So then I I focused my practice on trying to get ahead of that and trying to get in a position uh to represent clients in that field. I was a for-profit lawyer and uh was trying to create uh revenue and value for my firm. And so I went out and um and just pursued that sort of relentlessly, and and I did have some good success with that. Um ultimately uh I did not um probably get to where I really wanted to be. Uh, and then uh a confluence of events, the governor asked me to be the judge, and I accepted that. So after I became the judge and got settled in here and felt like I was competent in the uh essentials of doing this job, I thought, well, I think my experience uh in this transitional period would make for a good book. And I also thought that uh the history of the profession of bet handling, uh specifically bookmaking, which is probably the most still the most common form of bet handling when it comes to sports, would make for good material. And so I wrote uh bookmakers versus ball owners behind the demolition of the U.S. ban on honorable sports betting and bookmaking. Probably not the greatest title, pretty long.

Michael Munger 14:21

There's there's almost no point having a book that you right.

Speaker 2 14:25

So I uh so I did that and I did a really deep dive on uh the profession of bet handling and bookmaking all the way back to its origins in New Orleans, uh shortly before and after the uh civil war.

Michael Munger 14:41

Well, and so having having read that book, that was I was very excited. I you sent me the book almost two years ago and 18 months ago, and I finally got around to reading it and then immediately said, I would like to talk to him on Tidy C.

What A Sportsbook Actually Sells

Michael Munger 14:55

So can we take a step back for a second? You used a bunch of terms that you know what they mean. I might have some idea what they mean because I read your book, but bet handling what is a bet? Why does it need to be handled? And what is making book? People talk about sports books, that's a noun. What is a sports book?

Speaker 2 15:17

Okay. Well, sports book today would be a great big room in uh Las Vegas or someplace else with um dozens of widescreen TVs showing dozens of sporting events at the same time. There's a counter uh where a person can go up and make a bet, and the bet is just your money that you give to the person on the other side of the counter uh that it that you are putting at risk. It is uh speculation that a um event is going to happen in the future. So I am from uh Cincinnati. So let's say that I uh believe that the Cincinnati Bengals who are playing the Carolina Panthers, because you're down there in North Carolina, that the Bengals will win. You know, I would go up to the counter and I would bet $11 that the uh Bengals would win, and the bookmaker would give me back a ticket, and uh I would then uh have a ticket if if I were betting at a traditional price, which is what they call the 11 to 10. Uh my $11 bet if the Bengals win would return me my $11, my principal that I put into it, which is the $11, plus $10 of uh profit from making that bet. I call it interest because I think in my view, it's a loan transaction. You are I'm loaning my money to the bookmaker, who's that person on the other side of the counter. So now the bookmaker who is he is handling my money. He's that's that's what he does. He handles the money and and he is on the hook uh to pay me that $10 if the Bengals win. He doesn't want to be on the on the hook for 100% of the liability. So he is searching for a uh better who wants to bet on the Carolina Panthers. So let's say that you want to bet on the Carolina Panthers, Mike. So you go up to the counter after I did, and you take your $11 and you hand it to the bookmaker. He gives you the exact same ticket that he gave to me that says he will pay you $10 uh plus your $11 back if the Carolina Panthers win, and he puts that money in the drawer. Now, now the bookmaker has $22 that he is taking because he's taken eleven from me, he's taken eleven from you, and he is obligated to pay back twenty-one of those twenty-two dollars. So either you or I are gonna get uh our money back plus ten, the twenty-one dollars. Uh, but the other guy is going to lose his principal. He is going to forfeit his principal. Forfeiture is a heavy penalty in any kind of transaction. Uh, but that is what the transaction is. And the bookmaker is gonna keep that one dollar because he had twenty-two and he's only gonna pay back twenty-one. He's gonna keep that one dollar as his fee for handling the bets. That is traditionally called the vigorous or the VIG or the juice. If you hear the slang terms for it, you'll hear people talk about the VIG or the juice. That's what that is, and that's really the the basic transaction cost of any sports bet.

Michael Munger 18:08

Well, so let's take a step back. Um a bet is a contract, and the contract is actually with the person on the other side. The book is a broker, and what they're doing is I don't have to meet this other person. What they're doing is connecting me with someone who wants to make a bet on the other side, and they charge a fee for brokering that contract. They're substantially reduced because I could probably walk around and just yell and find someone who's willing to make a bet on the other side of a football game. That's really inconvenient. So, sports books are brokers, and all bets are contracts, and these contracts have contingencies. And um, the contingency often has an additional element you're trying to simplify, but so the it could just be a straight up bet. But in for many games, I'm not going to get equal action on both sides. If I'm a book, I don't want to take a position, I don't want a net position. What I want instead is to have no net position and just collect the VIG, which interestingly is uh it's a Ukrainian Yiddish word that actually was brought over by Jewish gamblers in the 18th century. And so though we just refer to it now as the VIG, uh it people actually I've heard it use in other contexts. So almost any brokerage fee, it will be referred to sarcastically as the VIG, but there's an additional price, and that price might take the form. The simplest version of it is a line. And so uh not only would you bet on the Bengals, which is almost always a bad bet, let me point out. But uh you not only would you take the Bengals, but let's suppose that the Bengals are favored by three. You'll take the Bengals and the points, and then three things might happen. The Bengals might win by more than three points, in which case you win. The Bengals might win by exactly three points, in which case it's a push and all the money is returned, including the VIG. I make nothing if I'm the book. Or the Bengals win by less than three, or they lose, and then the Carolina Panthers better makes the money. And the complicated thing about that is I had always wondered, and I but I learned this from reading your book, so thank you. I'd always wondered why so often the line is quoted in terms of a 0.5. It's quoted in terms of 0.5 because then there's no push. Right. I I can always collect the VIG. So this is a price, and that price adjusts. So, Kit, can you say something about the price adjustment process for the line? And let's not talk about money line. The the line is easier to understand.

Speaker 2 20:51

Right. Okay. So, first of all, you're you're very insightful in what you what you've observed there. Um, first of all, you know, back before there was uh professional bet handlings, all betting was on horse racing. That that's what the primarily almost 100% of the market was horse racing. And the people who take took bets did literally stand at the track and yell out their offers to take bets at the track. So being tall and having a big mouth was the human capital uh skills that you needed to do this. I missed my chance.

Michael Munger 21:24

I I I could have done it.

Speaker 2 21:25

Right. So, what bookmaking is, it's a classic matching market. It's what Dr. Alvin Roth, who won a Nobel Prize, would call a matching market, in that the bookmaker is looking for betters on either side of the proposition so that he can minimize his risk and maximize his riskless return. Uh so we get to the point spread. Uh, point spread is developed in um the late 1930s to the 1940s. There was kind of an old fashioned form of the point spread called a split line that was done down in Oklahoma and Texas. And that's really where it started because it was illegal. Legal in Oklahoma and Texas to bet on animal uh contests. So you couldn't bet on horses, dogs, or fighting cocks, but you could bet on humans. And of course, in the Southwest, they've always loved college football. And so they developed this uh what they called split line. I won't get into the details of that. The line, the point spread that you see now, uh, was really developed in the late 30s and the 1940s. And the person who is given credit for that is Charles McNeil in Chicago for uh creating what's the modern point spread. And the and the modern

How The Point Spread Changed Everything

Speaker 2 22:30

point spread is a pricing mechanism. It is a way that you uh convert odds into price, into points and uh weight one side or the other. And it does the same thing as in one way, it's it's simply another way to restate the odds. But what its real advantage is, is it is great for marketing. You know, it makes it makes betting on football and basketball, which are the primary point spread sports, much more attractive to both the bookmaker, who is the broker who looking to match with betters, and to the betters. And so once once the point spread uh became widespread in the 1940s and into the early 1950s, that's when betting on football and basketball just took off like a rocket ship, you know, and eventually even overtook, you know, what's bet on the horses. But up until then, up until the 60s and 70s, you know, the overwhelming amount of money bet on any sporting event in the United States was on horse racing. Uh baseball, there's a lot of stories, there's a lot of um romance about betting and uh baseball and the fixed 1919 World Series. But the reality of it is is that betting on baseball has always been a fairly low-level, uh, low, low cash uh amount of wagering. It because it doesn't, the game, the way the game is structured, does not suit itself well to a point spread. You can bet in baseball on something called the run line, which is one team will win by more uh than a rough than 1.5 runs. The run line is always 1.5. It's basically fixed. Now you can get a 2.5 or a 3.5 and you'll you'll get longer odds, so your return will be more. But uh that's not the way people bet baseball. They still bet it the old-fashioned way, which is you know, on the odds, a team is uh is a three to one favorite, you know, over another. Um but the point spread was an incredible uh development. It's really a technological development that enabled um bet handlers um working as bookmakers to handle uh large amounts of bets on football and basketball at scale and really made it uh what it is today.

Street Level Regulation And Corruption

Michael Munger 24:44

Well, so let's switch gears. You mentioned a little bit about regulation. You couldn't um bet on animals. I used to teach at the University of Texas, and having seen some of their football players, they're well, I won't say the obvious, but the the Texas and Oklahoma football players, they're not that different from animals. But technically, we I guess suppose a lot of Texan and Oklahoma people were opposed to the idea of evolution. So the no, we're not animals, we're something different. This was regulated. There's really substantial regulation of gambling in the United States, and that history is too long, although the book does a nice job. But can can you sit tell us briefly about the history of the regulation of gambling in the United States?

Speaker 2 25:28

Yes, I can. It um pretty much was done on the street corner. Uh if you wanted to take book uh back in the early part of the 20th century, certainly up until uh 1950, uh there were a lot of laws on the books that said that was illegal. But the reality of it was was that if you were a bookmaker or part of an organized crime unit that would pay the police and the prosecutors and maybe occasional judge if necessary, that your business would be permitted to operate. Whereas somebody who did not do that would have the police knocking down their door. And this would have happened in virtually every city uh in the United States, not just New York and Chicago, is probably most uh associated with Chicago. But I just did uh a paper that I do for some newsletter subscribers on Omaha, Nebraska. And Omaha, Nebraska was like a perfect example of this. Um, so the regulation was really at the street level. Uh, it was technically illegal. But the interesting thing is in the newspaper, it was treated, it was covered the same as the sports was covered. It was, it was barely mentioned that it was illegal, uh, probably because it was viewed as a victimless crime. Nobody was betting on sports or horses who didn't want to. You're not compelled to do it. You're not forced to do it. Um, but it was uh part of the transaction cost of being a bookmaker was probably the biggest part of it was that you had to pay uh the um local government entities, um, the the police on the street, uh, and perhaps the prosecutor's office, but you had to control politics locally in order to do it. This is one of the things that really um made me really interested in doing my book because a lot of this happened in Cincinnati, Ohio. Um, there was an old uh gambling house in uh Branch Hill, Ohio, which is a tiny little speck on the bank of the little Miami River, two and a half miles from where I grew up. And there was a gambling house there in the 1930s called the um Arrowhead Inn. And so I was just totally fascinated by that because it's right in my backyard. And uh they they took bets there for about two years because somebody had a connection to the Claremont County prosecutor's office. And when uh the fellow who knew who that connection was died, all of a sudden they didn't have a connection to the prosecutor's office and it was shut down. You frequently would see the most bookmaking taking place in a place like that. After Branch Hill uh closed down in Cincinnati, it happened in Elmwood Place. Elmwood Place is a little unincorporated village uh on the edge of the city of Cincinnati, practically right next door to Procter and Gamble's uh largest soap factory. And then it really got big in Newport, Kentucky, which is right across the river from Cincinnati. And in Illinois, it was Cicero because Cicero was right next to Chicago. And because if you had these little tiny municipalities with their own independent uh governmental authority and three or four police officers, it was much easier to capture that governmental unit than it would be to capture the governmental unit of the city of Chicago, or you know, it's much easier to capture the governmental unit of Newport, Kentucky than it would be the city of Cincinnati. And so that is kind of where the regulation came from. It would be uh the money coming in from this uh to pay uh the government authorities to um let you operate. And it's de your it's de Uri uh strike that it's de facto regulation. It's not de Uri regulation, it's not a it's not regulation of right, it's not white label, it's not permitted, but it is it is reality. It's it's de facto regulation that you had to pay this. And frequently it was a share of uh the handle, you know, the amount of money that came in the door, or more likely a share of what they would call the hold or the win, which is the um the amount that you retained after you paid the winning betters. So it would be a a portion of that VIG, whatever that percentage would be. Uh and that um is not a good way to run any business, you know, is to have uh the right to um operate that business decided at the street level. It's very uncertain, uh lap leads to violence and and sometimes did. So um getting um betting on sports and the bookmaking into a above board authorized by the state and recognizes legitimate activity uh took decades. And the only state, you know, that had that did it, you know, for decades in the 20th century, uh was Nevada.

Michael Munger 30:23

So the horse racing seems to have been an exception because there was this idea that it was a game of skill rather than of chance, because there was a lot of paramutual betting in horse racetracks around the country, but other forms of betting were not allowed, particularly on games of chance. That that was the thing that even that's what a lot of people wanted to do. So things like casinos. Um, why was it that Nevada did this? Was it to attract casinos? Uh, because it the gambling and prostitution is technically legal in the state. Now it's it's by local jurisdiction whether prostitution is legal. It's not legal in most of Nevada, but Nevada is not just Las Vegas is sin city, but Nevada is sin state. How did they decide to do that?

Speaker 2 31:15

Nevada did it for the money. You know, they they they did it for the money. Uh they wanted to take a share of that action, and it actually was not a fate accomplished. Most people just think that's the way it's always been, and nobody objected to it. There was uh in the in in a period where there were some laws proposed in Nevada to also um outlaw bookmaking and betting on sports, but they never um were adopted uh because the business uh model became legitimized out there, became recognized as this is uh legitimate business activity, and it's been ever since.

Michael Munger 31:58

Well, that's a little bit like Cicero. Um there wasn't much employment, and so a big part of the employment depended on the case.

Speaker 2 32:04

It was Cicero on a statewide level, right? It was scaled up Cicero, is what it was, and there was no, you know, the phone changed all this. You know, we we don't have authorized b sports bookmaking and gambling in any other state in the United States without the smartphone, it wouldn't have happened, you know, because at the time, uh, you know, Nevada was the desert, it was remote, it was hard to get to. And so uh people were pretty much like, you know, well, we have this little remote spot that if you're extremely dedicated to doing this activity, you can go out there and do it. And by having it out there and be able to be able to talk about what's going on, it drives interest in the underlying sports. So it was kind of a win-win situation for everyone. They were like, we'll tolerate it because it is helping back in uh, you know, the other states put uh people in the stadium to watch the football games and the basketball games, uh, but we don't have to have it here. So there was this geographic component to it, which of course modern digital technology and the smartphone has just destroyed.

Michael Munger 33:07

Well, even the phone phone made it of a little bit different because now bookmakers could keep track of lines and make bets by using a telephone. And so a book went from being a piece of paper now to being a guy with a telephone and writing down bets, but also registering them. So um that is the segue that I we could talk about this all day. Uh, we in the interest of time, we need to actually get to your book, although much of this is actually described in the history of you. But the point of your book is that there is a weird conflict between whom you call the ball owners, that is the people who put on the contests about which sports are made.

Nevada Plus Phones Plus Smartphones

Michael Munger 33:49

And the books, the the book needs some contest that is publicly held and that is more or less on the up and up that people think is fair enough that they're willing to put their money on both sides. And so the the job of the ball owners was to make sure that betting didn't influence the outcomes of the contests. And the books were selling these uh brokered contracts on making bets on one side and the other. Um the there were some there were some legislation and there were some court cases that started to change the foundations of this, and then there were technological changes, as you said. Uh, the internet generally, but the smartphone in particular shook the foundations of this industry in ways that we're still feeling. And you actually have a thesis, an interesting thesis, about the puzzle of why they haven't solved it better. And of course, on this podcast, the answer to every question is transaction costs. So, why is it that the ball owners have not done the obvious thing and solved the difficulties that they have? So that's a whole bunch of questions. So take as long as you need to summarize. This is the thesis of your book, and I think it is it's very striking.

Speaker 2 35:10

Right. So the thesis of my book, which really is more than just an academic thesis, it it was essentially a business strategy that I deployed as my comparative edge in attempting to attract clientele as a private practicing lawyer and influence the shape of what the 21st century bet handling market would look like. Uh as the cases, uh,

Property Rights And The Coase Puzzle

Speaker 2 35:36

the Supreme Court case, which was decided in 2018, the Murphy versus NCAA case was working its way through its court, through the courts, it never looked like it was going to go anywhere uh until late. Um, but I I kind of felt that that this was going to take over the country no matter what happened with this decision. And um my position was that the ball owners had an inherent property right in their games uh and what people use them for, including using them as what I call a settlement machine, a settlement machine to settle bets. And the reason why I believe that that is true, and I still believe that is true, is because in the transaction between the bookmaker and the better, the bookmaker doesn't own anything. The bookmaker borrows the money from all of the betters and doesn't own it until the the game is played and the result determines how much of it he gets to keep and own. And so my view of it as a lawyer is that if you are using my property, even if you are using it sort of in the abstract and intangibly and not physically coming onto my site, but you're using it to transform your interest from possession to ownership, which are different interests and ownership is better than possession, then you're using my property if authorized by the state to do that in a way in which I am entitled under the takings clause to a slice of the action. And so that is what I was uh selling. That was what I thought was the fundamental uh necessity of having a efficient market that minimized transaction costs and uh created a what would be as clean a market as you can have. You're always gonna have bad actors. Every market has bad actors, you can't get rid of them. You know, it's gonna happen. But you if you want your uh market to be uh a square market, uh you need your cornerstone to be set properly. And without a a square plum cornerstone, it's gonna be a little off, you know, all the way through. So what I've what I view myself as doing is trying to set the cornerstone in a square manner. And um it it just it never I never got there. You know, I could not convince anyone, even in my home state of Ohio, that the importance of this uh of of the incredibly important uh down the road uh consequences that would result from establishing a property right that the ball owners owned uh that would bring the bookmakers to the table to talk to them about how this market uh what it what it would look like. And the reason I believe and still believe, despite the fact it didn't happen, uh, that the ball owners have to have a property right in order for this to work as efficiently as it could and as cleanly as it could, is because of what Ronald Coe said. And Ronald Coase said is it doesn't matter who has the property right. It doesn't matter. You just allocate the property right to somebody, and then the entities who have the interest will bargain uh for an efficient outcome. And they will they will assign the transaction costs in a manner that will be as efficient as possible. And I would trust that bargaining process, that market process to do that. Uh, for instance, there's the current, one of the current uh crises and scandals that's going on involves uh the Cleveland Guardians and uh their pitchers allegedly throwing uh balls outside the strike zone on prearranged uh batters, for instance, the first batter of the seventh inning. And that is a case that is currently, you know, being litigated, and I'm not taking any position on uh anything other than to say whoever's been accused is presumed innocent because that person is entitled to that. But you know, that's the kind of bet where if you're the commissioner in Major League Baseball, you're looking at it and you're thinking, you know, I might not want that people to even be offering that, you know, to people because there's just too great of a risk that someone is going to uh with the with the colloquial with the uh slang term for that is do business on that pitch. You know, you're doing business on that, which means that it's a pre-arranged uh arraign uh outcome uh and not really a bet, that there's really very little risk. That that first pitch of the seventh inning is going to be a ball, it is gonna be outside the strike zone. So um there's really no mechanism for that right now. There's really nothing that would force those parties together. Um, you know, the bookmakers and the ball owners, they they do have some mutual interests, things that uh they probably uh benefit mutually from the existence of betting on their games. And then they also had clearly have some areas where there's tension between them. And so I thought that the best way to do that, uh, because Ronald Coast taught that to me, is assign somebody a property right and uh create a mechanism within the government which which they can negotiate and arrive at an efficient uh outcome, and uh you'll get the best market that you can get.

Michael Munger 40:57

And didn't happen. We we have to be careful. Um, Coast didn't say it doesn't matter who gets the property right. He said it doesn't matter for the sake of economic efficiency and social outcome. It matters a great deal for the litigants, because the value of the property right then either goes to one or the other party. And so, from the perspective of the judge, you know, if I assign it to one or the other, that's why there's a court case to begin with. But what Coase is saying is don't get hung up on that. Of course that matters. Yes, we all understand that. But what matters is that there is some clearly defined property right. And if you use the fact that there's a dispute over the right to block some any clear assignment, so I think sometimes people get the coast theorem wrong. And the way that you said it is right, but I just want to clarify it. What's important socially for this to make progress is to have some clear assignment.

Speaker 2 41:51

And I was using it in a purely academic sense. Yes, and you're right, and I loved it. I was I was there. Trust me, when when you're standing there talking to people, they care very much who gets I knew you knew the answer.

Michael Munger 42:03

I just wanted to make sure from the listener's perspective, there's two different senses in which that that might be meant. And because otherwise they might, what the heck is he talking about? Obviously, it matters.

Speaker 2 42:13

Well, you as an attorney let me throw something in there right now, though. And this I learned this from from being involved in this and watching how this market has developed. Um before I do that though, one thing I would add was I viewed this as a perhaps once-in-a-lifetime opportunity where you had this market activity that was black market and and not permitted to be done at all. And and you stood here in the 21st century with all the economics we know and all the tools we have, and you could purposely design the market. Because that's not how markets generally come about. They they typically are what's called emergent. You know, they're undesigned, they are just they just result from the slamming together and the competition of competing interests. You don't have, you never get that opportunity where you can sit down and sort of with third-party uh objectivity and and distance and say, well, this is what would be good for the market. Um, but what happens is in the real world, and this definitely happened in the in the in this episode, is that if if I, you know, my my first preference as a participant would be that the property right is mine for sure. But my second preference was if it's not mine, at least maybe some other private person has one is better than if nobody has one. Because what has happened when then nobody has one is there's no check on governmental power to come in and simply take all

New York Taxes And Market Blowback

Speaker 2 43:36

the benefits. And that is what has happened in New York. New York, the tax in the tax, first of all, to get a license in New York to be a sports bookmaker costs $25 million right off the top. So the the transaction costs to the bookmaker now in the authorized world are huge. First of all, you got to scratch that check for $25 million just to get in the game. And then the um the Portion of your win, of your profit that you paid in New York State is 51%. So for every dollar that the bookmaker makes, uh, taking those bets, and this is not overhead. You still have to pay all your overhead, all your employees, keep the TVs running, all of that. This is just the straight bets that come in. Say you're a bookmaker, you win a dollar, your first 51 cents goes to uh New York. Well, you know what the marginal profit rate was in Nevada at sportsbooks before this all happened? 51% 51%.

unknown 44:37

Uh-huh.

Speaker 2 44:37

It's 51%. So essentially, the state of New York is taking the entire market profit profit from the bookmakers in New York. And and then what New York doesn't realize is that's going to create problems because that is not a sustained, you cannot have your suppliers of bet handling doing that and be happy. They're going to look for different uh institutional structures in which to ply their craft. And we are seeing that now uh with what's known as the prediction markets at the federal level, which is a whole nother story.

Michael Munger 45:11

Well, and that the the we we could probably do five episodes just on this, but uh let me the when you mentioned the first pitch in the seventh inning, that's a prop bet. It's a proposition that's different from the one about lines. There's many different kinds of betting. Um, one of the things that happens when there's no clearly assigned property right might be that the government can say, well, uh no one's using this, we'll take it. But another thing happens is what's um Garrett Hardin called the commons because you get overfishing. And since no one owns the property right, everyone can overuse the property right. And prop bets may start to destroy our sense of whether this game is on the up and up. Nobody cares whether the first pitch of the seventh inning is a ball or a strike, except the smart money that knew what it was going to be that makes money with probability 0.99. But when that happens off enough, we all start to get the idea that maybe these bets aren't real. There was an article this past week, and I'll put up a link to it, that many people have the sense that these prop bets, these prediction markets, uh we can no longer rely on them because there are people that have inside information. So, the in the absence of some clearly defined property rights, you can actually get markets that self-destruct. They're not emergent, they're self-destructive. And so it is actually imperative to try to say what set of regulations would allow market participants to sustain a market. And I think that was the the insight that you had that was just passed up. And perhaps if you could just tell briefly the story of you you were called to make a presentation at a conference, and the representative from the NBA, I think I have this right, just mouthed, what? As if you know you can't possibly be serious. That's not the way we do things, boy. Right.

Speaker 2 47:13

Uh, yeah. So I was in um, I was in Washington, D.C. in the Russell Senate building two weeks before the oral argument on the Supreme Court uh case that opened up sports betting to the rest of the country. And uh, you know, I was I was in full salesman mode. I was looking for a client, and you know, I I really did, you know, because I believe that the property rights should be assigned to the to the ball owners, and the ball owners collectively are the leagues. You know, they're they're the that's what their umbrella organization is. So I was really looking for a league, and the NBA, uh, from all its uh behaviors and um op-eds in the New York Times and things, was out in front and looked like the most likely candidate to uh adopt a more flexible position, other than 100% exclusion. Uh so I was trying to um attract uh their attention and I went out into the hall and I uh I talked to uh one of their representatives and um you know it it definitely was not something that uh really it seemed like they were considering, you know, that was was on on their radar screen. Now I will say this or I will say this because I kept writing and I kept at it, I kept at it for a couple years, that I would watch uh not only the NBA but other leagues. I I would watch then in the in the newspaper and online, you know, what they were saying about it, and it it definitely came my way. It I could see their their attitude changing. And then when the Passport Wall dam blew up, I always refer to it as a dam because I I viewed it as like this is all dammed up in Nevada, and if you just simply take this away, it's gonna explode like a dam burst were would. Uh, so when um the the dam was taken away and it did explode, pretty much all the leagues then quickly, you know, adapted to that and began making deals and having partnerships with sports betting companies. And I think, and and I even heard some of the people who who are in my book on the bookmaking side say they couldn't believe how fast they did that. And I thought, well, the reason they did it so fast is because everything that I said, which was this is not only okay, but you have a right to it. You have a right to this. And so I think that uh, you know, the the work I was doing as a private practitioner uh did very much um, you know, prepare the field, you know, for what was going forward. Well, they're sure they just don't have the tools they need, you know, right now. People who blame leagues, I say they're just picking the low-hanging fruit, you know, that's all they're doing.

Michael Munger 49:56

You, though, had an insight, and I want to give you credit for it. You have modestly avoided taking credit for it, but the the bet was that the court would not decide this the way that they did, and the passperdam was going to stay in place, right? But you noticed something that only a lawyer would notice, and that is well, wait, what the law says is that the bowl owners can prevent betting, they don't have to, right? And that means that they, in effect, already have a property right if they will just, for God's sake, use it. So we can prevent this, but let's talk because you know, we've we've got this law, it says we have in effect, we have the right to exclude. What property means is the right to exclude. So you can't do this, but you know, make me an offer, maybe we can talk. That your your insight was so fundamental, but then the court blew it away by getting rid of the dam. Right.

Speaker 2 50:50

I I was rooting for the leagues to win and for the dam to remain in place, but that was also the most likely outcome, right? The leagues had won six or seven times before that, you know. Yeah, every everybody when the case was taken in in the circles that I moved in was like, oh, you know, they're gonna lose. I was like, not so fast, my friend. You know, the Supreme Court might just be trying to put an end to this endless, you know, and uh because I viewed the statute as you said, you know, that the leagues did not have to tell the states you can't do this, they had the option, they had the right to partially exclude, they they held all the leverage, and if they would have uh modified their position to uh you can do it, but only under these conditions, that is what a property right is. That they had they had all they needed. The the PASPAs, the and PASPA is the profession. I always it's such a long name, Professional and Amateur Sports Protection Act, PASPA, uh gave them the right to uh exclude. Um, but they also had the right to waive the right to exclude. That that waiver usually comes with your rights, and that and waiver is the one that's it's like it's almost like the invisible hand. You don't see it, nobody talks

PASPA Waiver And The Missed Deal

Speaker 2 52:08

about it, but it's always there. And so um they really had not given any thought at all to simply, you know, waiv their rights in a limited manner, taking their complete right to exclude and making it a partial right to exclude, and um move forward with that. And I really thought that, you know, that would have been the best way uh for this to happen, because then you would have a property right that could be traded um and in the hands of a person who really had true ownership, a true ownership interest uh moving forward. And uh, you know, but it didn't it didn't go that way.

Michael Munger 52:47

Well, but it it if counterfactual history, if the court had done what it had done many times before and had just definitively said, look, this is a statute, Congress can do this, it's all good, you'd be famous because they would have come your way. That's so obvious an argument. I read this in the book, I had to go for a walk because I dang, that's interesting. I might I might not be famous, I might be wealthy. I'm not sure I'm gonna tell them this, you know. With wealth, you can buy fame. You've you you would own the Washington Post now, not Jeff Bezos.

Speaker 2 53:20

Yeah, so I would not be judged, I can assure you of that. I would have I would have been a lawyer in that in that space, probably even to this day.

Michael Munger 53:27

Well, but uh seriously, that insight is an amazing transaction cost sort of insight. And uh I recommend the entire book. We'll put it up. Uh it's it's available on Amazon wherever fine books are sold. So I I'm I'm hoping that some people will read it. It's certainly a worthwhile read. Um, have you any final thoughts then about how people should think about what's happen, what has happened and what is still happening?

Speaker 2 53:54

Um, I do, but uh before I get to that, we probably should tell the listeners that uh the author of the book is uh a pseudonym that I use. It's called Quant Coach, Q-U-A-N-T-C-O-A-C-H. Quantcoach is a name that I developed after out of that paper that I wrote back in uh 2008. Uh and I adopted it as my name on uh social media on uh what's now known as the X platform is Twitter and was known as Twitter. And uh when I started talking about this theory of you know uh NFL coaching, play design versus playmaking, uh the bookmakers and the gamblers found me. And so uh this is the first book I've ever written. Uh, it was a lot of fun doing it. I obviously I like to write. And so uh in talking to some folks, and I don't know if it's a good decision or a bad decision, I decided that I would uh write it under my social media name and identity rather than my real name and identity.

Michael Munger 54:53

Well, you are a judge, so the having at least one degree of separation is probably of some value. I think that also helped too.

Speaker 2 54:59

I agree. Um, so you're looking for uh bookmakers versus ball owners by quant coach. That is me, that is my uh social media alias. Um I'll I'll I'll put up the link on Amazon, they'll be able to buy it in three clicks. Right. What what I would say is uh to people and sort of in closing thoughts is uh, you know, if you're if you're gonna uh participate this, or even if you're not gonna participate, you're just you just are curious about what's happening with this.

Bet Like A Banker

Speaker 2 55:28

Um and I think you should be, because I do think that this is a microcosm of our economy in the 21st digital century, you know, what is going on here that that a lot of what we're talking about here, even if you're not interested in gambling at all, uh has value um with data centers and AI and everything else that goes along with it. Um, and if you are interested in it and you do it, what I always tell people is uh is two things. First of all, remember it's called gambling for a reason. And uh second, if you're gonna bet, bet like a banker, which means that uh if you are a banker, you know what a banker wants is security. Before uh my lender lent me the money I needed to build my house, he uh required me to put 20% down and put a mortgage on that property. Now you're not gonna get anything like that when you do a sports bet. So uh my view of it is you you bet very little amounts conservatively. And if you are fortunate enough to have winnings, uh then you want to take some bigger swings at it, you know, and uh try to uh try for some windfall and some lottery-like profits, that's fine. But you know, the game is is designed for you to lose as a better. And so um, if you are uh thinking about this, you know, just envision it as you are you're a bank and you are lending your money to this person, and you would at least like that principle back. So uh that's the way I do it in $10 increments. And uh I think that's the best advice I could give to anyone.

Michael Munger 56:59

That's very useful. Um, I the the people who get in trouble are the ones who decide they're going to make a living at it, and most people just can't do that. Uh, ten dollars is plenty enough to care about the outcome, and it may very well be that uh betting makes you interested maybe in contests or events that you otherwise wouldn't have paid attention to. If so, more power to you. Uh but what what I find surprising is that so many people will bet very large amounts and then bet even more because they'll say, Well, I have to make it back. That's unlikely unless you have enough information. If you have better information, and the thing that I want to emphasize that that you have said, but that is important from a transaction cost perspective, there are really big reasons for the sports books to make sure that the prices that we have called point spreads are accurate. It's very difficult for just a quotidian everyday better to take advantage of those very accurate prices. And so over time, you're just going to lose. If you get lucky a couple of times, uh that's not enough. You have to have better information. So, in a way, it's a bit like investing in the stock market. Uh, the rule in finance is that anything that's going to happen for certain tomorrow already happened yesterday. So if you read in the newspaper that a quarterback got hurt and you say, Oh, I'm going to go bet on this information, it came out 12 hours ago. That is already incorporated in the line. You cannot use that information. And that it's very difficult for people to accept. Oh, I know something. Yeah, everybody else knew it a while ago.

Speaker 2 58:38

That's right. They have they're very savvy, the bookmakers. I became, as a result of this, uh very good friends with the bookmaker at the South Point Casino in Las Vegas, Nevada, Chris Anders. Wonderful guy. Uh, old school bookmaker. You know, he he's makes every game in the South Point and every NFL game on the outcome of the game is 11 to 10. That's the price. Uh, and then of course there's the point spread that goes along with it. But he never some some other books will change that 11 to 10, make it 12 to 10, move that around as well as the blunt as well as the point spread. But Chris, it's it's always 11 to 10. And so I've learned I learned a lot uh about what I'm talking about from him because he's just a very fundamentally sound uh old school bookmaker. But those guys, they're super sharp, they have all the information, they have incredible tools to aggregate aggregate that information. So every every better is an underdog on every bet uh that they make in the sports boom.

Michael Munger 59:40

And so do it like a banker or like someone who's buying a uh movie ticket. Uh you if if you're gonna pay ten dollars and you enjoy the the contest more as a result, that sounds great. I agree. Yes. Well, um, it has been a great pleasure to talk, and I want to thank Judge Kevin Braig for having been a guest on The Answer is Transaction Costs.

Speaker 2 1:00:04

Thanks for having me, Mike. I appreciate it.

Jokes Letters And Book Pick

Michael Munger 1:00:10

Whoa, that sound means it's time for the twedge. I have three jokes today. First, Gambler walks into a butcher shop and says to the assistant, I'll bet you a hundred dollars you can't get that meat down from the top shelf without a ladder. The assistant looks up and says, I can't cover that bet, sir. Those stakes are too high. That's a dad joke. That is such a great dad joke. Joke number two. Bookmaker opens a new line, team B, by 9.5 points on a football game. Within minutes, money comes in heavy, but it's all for the underdog team A. He immediately moves the line, giving favorite team B a new line of only 1.5 points instead of 9.5 points. A few minutes later, a regular customer bursts in and said, Hey, did you hear? Team B's quarterback fell getting on the bus and broke his arm. Aren't you glad I told you? The bookmaker looked at the changed line and said, No, man, I already knew. Joke three. Man walks into a casino, asked the security guard, look, you're an insider, you hear all the time, you see things. Which of these machines pays out the most money? And the guard immediately points right to the ATM. Well, we got some letters. One letter was from RL. Dear Professor Munger, thank you for the episode on swollen permits. The verb bike shedding has been part of the vocabulary of open source software developers for about 25 years now. It entered the lexicon after an endless mailing list debate about whether to include a trivial function in FreeBSD, a popular open source operating system. Today it describes developers' tendency to argue over trivialities while ignoring important design decisions in both open and closed source. It was interesting to learn the term's origin, although it's a bit disappointing to learn that it's apocryphal. Thanks, RL. Well, thank you, R.L. I didn't know that I had heard it uh commonly described about meetings, but I didn't realize that this was something that had actually traveled to open source software development. So thank you for that. Letter two from BR. Hi, Mike. Congratulations on your terrific series on Adam Smith. I am now going through it for the second time. There will likely be a third. In the unlikely event you haven't already seen this, Bloomberg reports today finally an opera about economics. Superstar conductor Gustavo Dudemel takes on the Wealth of Nations. Here's the link, and I'll put up the link in the show notes. Gustavo Dudemel's The Wealth of Nations melds opera and economics from Bloomberg. Keep up the great work, and I look forward to your next Tidy C, BR. Well, thanks, BR, and I did not know about that opera, and I'm gonna find out more about it. That sounds terrific. Finally, the book of the week, and it's a new kind of sports book. We already talked about it during the interview with Judge Braig. The book is Kevin Braig, Bookmakers versus Ball Owners, Behind the Demolition of the U.S. Ban on Honorable Sports Betting and Bookmaking, 2024. It's a terrific book. There's a lot of good history in it, and it's pretty personalistic. A lot of it is the description of Judge Braig's own experience, and fortunately, that experience is really cool, so it's worth reading. Well, that's it for this week. Uh, we're now firmly into summer, and I will talk to you again next Tuesday.