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ON A TUESDAY night nearly 10 years ago at a standard-issue Chicago Italian chophouse, Charles Barkley and Scottie Pippen are sitting at the bar. And they're curious.
For an hour now, they've been hearing a steady stream of muffled voices coming from behind two large oak doors at the end of a long, dark hall. They can't see much, but as they listen closely, they make out words and phrases.
"Thirty-eight thousand dollars."
It's a private party, the bartender explains. Something, he thinks, to do with the NCAA men's basketball tournament, which will kick off less than 48 hours later. They inquire: Might the host like two NBA legends -- and their significant bankrolls -- as guests at his party?
The restaurant manager returns from behind the oak doors.
"They said no."
THE NCAA TOURNAMENT is one of the most wagered-on events in sports. In Las Vegas, according to The New York Times, more than $200 million is legally bet on the tournament every March. That's more than twice what's legally bet on the Super Bowl but just a fraction of the overall total, a subject of great debate and a wide range of estimates. On the low end, the FBI estimated in 2013 that $2.6 billion was bet illegally on the tournament. On the high end, veteran bookmakers estimate the number to be anywhere from $12 billion to $26 billion. Friendly bracket pools are everywhere, with most everyone betting on the NCAA tournament in some form. But there are bets, and then there are bets. You don't get to $26 billion with $20-per-sheet office pools.
Higher-stakes gamblers have a different NCAA tourney tradition, one with a name coined by their British wagering forefathers. Expats in 19th-century India held open auctions to bet on sports with multiple entrants, like golf and backgammon. They called each auction a "Calcutta," after the then-capital where the auctions were held.
There's no official count and no way to even reasonably estimate how many Americans participate in an NCAA Calcutta. But I know anecdotally they are held across the country, and the gamblers tend to fall into two categories: jocks and quants. One reliant on gut and analysis, the other on spreadsheets and analytic models.
In March Madness Calcuttas, tourney entrants are auctioned off -- typically in person, Sotheby's-style (without the artistry or elegance, of course). Each team's price is driven by expected performance. The object is always the same: Buy low, win big. Each win by a team, whether a No. 1 seed or a 16, is worth the same predetermined percentage of the pot. For example, a first-round win earns 0.5 percent of the pot, and a second-round win (and Sweet 16 bid) earns another 1 percent. In a $100,000 Calcutta, that's a total of $1,500. If you paid $1,000 for that team, you're in the money. If you paid $2,000, you have to earn another $500 to break even. You need another win. Or a really big loss. To drive up demand for low seeds, the largest blowout -- the team that loses by the widest margin -- also gets a payout. One Calcutta I know pays 4 percent of its pot to the biggest loser, more than it pays for teams earning an Elite Eight bid (3.5 percent). Marquette's run in 2003, when it made the Final Four as a No. 3 seed (7.5 percent of the pot) and then snagged the biggest loss (by 33 to Kansas), is the stuff of Calcutta legend.
So is Leon, a 70-something, 100 percent Sicilian divorce litigator and auctioneer for the "Lake View" Calcutta in Chicago (my name, not theirs). This pool started modestly above a bar in Lake View with a small group of Chicago Board of Trade clerks and young scalpers. Today, the pot over which Leon presides is one of the largest I've ever heard of, attracting some of the biggest traders in Chicago. How large? Last year's pot was a record $670,000. Florida sold for $55,000. Louisville, $38,000. Even Coastal Carolina (record: 21-12) went for $2,700.
"We thought they'd lose by more," says Jimmy, an old friend of mine and longtime participant in the Lake View Calcutta. His syndicate bought the Chanticleers with hopes of the biggest blowout. No luck. They lost by just 11 to top-seeded Virginia.
Regardless of the team, Leon employs a certain sales technique after he plucks schools randomly from a hat.
"The No. 7 seed out of the Mountain West Conference, New Mexico, is up for bid," announces Leon. "The Lobos are 27-6. They have a new coach. I cannot remember his name, but he's a brilliant guy. A real game tactician. And they play a very, very weak Stanford team in the first round. I saw Stanford play on ESPN last week. They are just terrible and have no chance against New Mexico. Can we start with $2,000?"
New Mexico sells for $8,500.
Five minutes later, Leon fishes Stanford out of his hat.
"It's the team we've been waiting for. Stanford out of the Pac-12. Led by the former Duke great Johnny Dawkins. They're 23-12, but they've played one of the toughest schedules in the country. They should have no problem with New Mexico in the first round."
Plied by a pre-Calcutta meal of all-you-can-eat sausage and peppers, fried ravioli, garbage salad and mostaccioli, and lubricated by an all-you-can-drink bar, participants in the Lake View Calcutta are distracted but somewhat wise to Leon's act. The Cardinal fetch $3,500, about right for a 10-seed. (They end up winning two games to return $10,050, a profit of $6,550.)
In a small banquet room this night, 12 syndicates (teams of three to five people) sit at round tables organized like a wedding reception. They're prepared for the night ahead, with only paper and cellphones at their disposal. Spend too much time staring at a phone and heckling will ensue. "Someone brought a laptop once; it didn't fit the vibe, so the commish banned them," Jimmy says. "We all supported his decision."
From a podium, Leon holds court, a clerk by his side, confirming numbers amid the chatter. A mix of Joe Pesci and Danny DeVito, Leon is a family friend of the Lake View Calcutta organizer, a "hired gun" brought in 10 years ago to provoke more bidding and to keep the event convivial. That means hazing rookies and providing a steady stream of well-meaning barbs and insults to the veterans -- the worst saved for cheapskates with small incremental bids, alums who don't bid on alma maters and anyone who fails to show sufficient respect to teams with Italian coaches.
The auction is a real production. They used to use the restaurant's sound system to make sure everyone could hear Leon. That was until those two NBA patrons asked if they could play.
"We had to tell them they couldn't join," Jimmy says. "Honestly, we don't care who they are. We don't know them. There's a lot of trust that goes into this."
What Jimmy means is that a Calcutta works only if everyone involved can be trusted to pay and not be a pain. And everyone always has in the Lake View Calcutta. Who in their right mind would cross Leon? But it can be harrowing. Like in 2010, when Kansas was the No. 1 seed and tourney favorite. The Jayhawks sold for $48,000. Before the weekend closed, Ali Farokhmanesh and Northern Iowa sent them packing, netting their owner a not-so-cool loss of $46,200. Last year the proud owner of Duke, Ohio State and Michigan State lost $63,000 after all three exited earlier than expected. Another team risked $97,000 and eventually lost $55,000 thanks to early losses by Wichita State ($32,000), Creighton ($21,000) and Kansas ($33,000), offset partly by biggest-loser American University, which cost $1,300 and won $25,000.
Pricing teams is not a simple exercise. Bidders must predict probabilities of teams winning multiple games against unknown opponents but also base value with an unknown, dynamic pot size. "We basically spend all night trying to figure out how much one win will be worth, while protecting the prices you have already paid," Jimmy says. "You bid and bid, even for teams you don't want to buy, just to make sure they don't sell too low. Sometimes you get caught."
HALFWAY ACROSS THE country, in a conference room in the gleaming offices of a San Francisco investment firm, the "Financial District" Calcutta starts at 6 p.m. sharp. Unlike the Lake View Calcutta, this is all business. Participants are grouped in eight consortiums. One is made up of alums of the firm, another of new employees, another a group of outsiders led by the organizer, Will. Each consortium arrives with multiple laptops and Excel models built to discover that line where risk overtakes reward.
"It's actually a great lesson for junior members of the firm," Will says. "They can use analytics in a nonwork environment."
Will's Calcutta is a celebration of math, not bombast and all-you-can-drink Chianti. He uses advanced analytical systems (KenPom and TeamRankings) to estimate probabilities of each team winning each game. He has refined the model but still sees room for improvement. "What I'd really like to do is compare all the ranking systems, see which are the best over time so I understand how to weigh each in my model," he says.
There's no booze at this auction and pizza only if someone remembers to order it. There's no Leon hurling taunts or bullying the market. But it's the same business at the core: teams pulled from a hat and auctioned off. Quick fingers on keyboards create a flurry of sound as each team is announced, models are updated and numbers crunched. Not everyone is as attentive -- or even in attendance. Will recalls one Calcutta when a longtime participant called in from Asia and was silent until his beloved Arizona came up. Before the clatter of keystrokes even began, he had put in a bid of $4,000, which was $1,000 more than any team had gone for. Silence followed, and he became the proud owner of the Wildcats. Seconds later he hung up. "I guess he had somewhere to go," Will says.
Even with analytics and data, biases die hard. "Since most of this office is from the West Coast, Pac-12 teams are always overvalued," Will says. "Our East Coast office has an auction, but that bias doesn't exist." On both coasts, Big Ten teams are undervalued. "Maybe it's because they play ugly basketball."
Those in Lake View might dispute that critique, but everyone agrees, the most important rule of the auction, allegiances aside, is that money talks. Any bid, even if a few seconds late, is still valid. The goal is to make the pot as large as possible. "When I took over in 1999, the pot was $7,000," Will says. "It's grown steadily each year, and now that it's gotten to this point, the execs have started becoming a bit uncomfortable with the amount wagered. So we've decided to give 10 percent each year to charity." The top pot was in 2014 -- just south of $100,000.
Once the tournament is over, it's time to pay up. The Financial District quants are pretty civilized, writing checks and using services like PayPal to settle debts. The Lake View jocks use cash. "One year we did pretty well, and I was owed about $80,000," Jimmy says. "The money was delivered in a brown paper bag to my house, and I wasn't there, so the commish unfortunately gave it to my wife, which means I never saw it. She did occasionally slip a hundred-dollar bill into my wallet. That was kind of her."
The value found in Calcuttas is the same as the value sharp bettors seek in betting the line. Both are reacting to markets where teams are over- and undervalued based on public perception, often identifying inefficiencies with an analytical model devoid of these biases. "It's not a hard thing to model since the rules are so well-defined," Will says. "The only trouble is that they only play each game once. If we could get them to play each game a million times, I'd probably put all my savings into the Calcutta."
IN TRUTH, WHILE the average sports fan thinks that the opening days of the tournament are akin to a national holiday, the pro bettor realizes that an average Saturday during the regular season has almost 10 times the number of games -- and an even greater opportunity to find margins in the market. College basketball is one of the few sports in which an information asymmetry may still exist; there are simply too many teams and too many games for the oddsmakers to track effectively. Some oddsmakers wish they didn't even have to offer as many college games. So the real value for professional gamblers doesn't come from betting on Duke in the tournament but rather from finding value in teams that nobody cares about.
The quants could help. March Madness turns sharp financial analysts and high-powered futures traders into professional gamblers for three weeks. It's not a stretch to look at what happens in Calcuttas every March as a preview of what a world with legal sports betting might look like. Would more quants flood the market, moving lines closer to the mark by providing the speculation that college hoops betting sorely needs?
Perhaps. But for now, Jimmy and Will are sticking to backrooms and boardrooms. While Chuck and Scottie are stuck at the bar.