Economics of sportsbooks and why they ban the best bettors

Summary

To successfully run a traditional sportsbook like FanDuel or DraftKings, you need to identify your highest performing bettors early, and ban them.A sportsbook is a licensed operator that sets the odds for each sporting event and takes the other side of the bet. Contrary to what many think, a sportsbook is a low margin business. They owe up to 51% in state taxes, pay over $300 to acquire every new user, and have a smaller house advantage than casino games like craps or slot machines. They cannot afford highly skilled bettors, known as sharps. The average casual bettor loses $100 a year; one sharp bettor winning $100,000 wipes out the losses of 1,000 casual bettors. Sportsbooks survive by attracting unsophisticated sports fans who are likely to bet on their own favorite sports team; only around 3% of them are profitable.In the US, a business can refuse service to practically any customer, as long as they do not discriminate based on race, religion, sex, etc. Sportsbooks take advantage of this common law principle to identify their most unprofitable customers early and limit how much they can bet.DraftKings CEO said at an investor summit in 2021:This [sports betting] is an entertainment activity. People who are doing this for profit are not the players we want.The business of sportsbooks is built on losers.There are two main ways to facilitate sports betting: exchanges and sportsbooks.An exchange is a marketplace where people bet against each other instead of against the house. Users post offers and odds are determined by demand and supply, like in a financial market. The exchange itself doesn’t take risk; it only matches bets and charges a commission, typically 2-5% on winnings. Betfair pioneered the sports exchange model, which remains uniquely popular in the UK. In most other countries, however, sportsbooks are the dominant model for sports betting.A sportsbook is a licensed operator that sets the odds and takes the other side of the bet. If the user wins, the sport...