FYI Research:
Bookies practice economics by the book

If you bet a few dollars on the Super Bowl this month, you weren't alone. Americans place billions of dollars in bets on sports each year, according to the American Gaming Association.

Only 1 to 3 percent of those bets were legal. Those numbers qualify illegal bookmakers as big business, and these underground operations act like real corporations in many other ways, according to a study conducted by Koleman Strumpf, associate professor of economics.

Strumpf studied detailed records from six bookmakers who were arrested from 1995 to 2000 in Kings County, New York. The records included such information as what prices were set, where bettors lived and how much they owed.

Summing up his results, Strumpf said, "Standard economic principles that you would learn in a principles course govern what these guys do." That finding goes against some common assumptions about bookmakers, he said.

"Most people claim that bookmakers always try to balance books on a game," he said. "For example, the assumption is that on the Super Bowl, bookmakers would try to get the same amount of bets on the Panthers as on the Patriots, so they would pay out the same amount of money regardless of who wins." Then the bookmakers would simply make their profits from commissions.

But the bookmakers that Strumpf studied didn't operate that way. Instead, they would take huge losses on some games and make big profits on others. "Sometimes they win a lot, sometimes they lose a lot. But on average it works out well for them," Strumpf said.

He also found that these bookmakers use a practice that economists call "price discrimination." If certain bettors always bet for the same team, regardless of the price, the bookmakers tended to charge them higher prices. "The only way a bookmaker can consistently charge someone a high price is by knowing how the bettor will behave," Strumpf said.

Strumpf was surprised by the volume of business these operations handled. One of the bookmakers took about $250 million a year in bets. "That's as big as a legal Las Vegas Strip bookmaking operation," Strumpf said. To handle the potential payouts, the bookmaker had to keep as much as a million dollars in cash lying around. "When the guy was arrested, they found $600,000 in cash in the room," Strumpf said.

Do these operations make a lot of money? Strumpf found that the average profit was about $2 million a year. That sounds like a lot. But Strumpf points out that it's lower than what the bookmakers could have made if they invested a similar amount of capital in legitimate markets. "But these people do not have an extensive formal education," he said. "I don't know how they would have made this kind of money anywhere else."

Strumpf has submitted his study to a peer-reviewed journal. For more information about the study, visit his web site at www.unc.edu/~cigar

Provided by Research and Economic Development.
Editor: Neil Caudle. Writer: Angela Spivey.

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