Tuesday, March 14, 2006

Interesting NCAA Pool Format Written About in Monday's WSJ

The Wall Street Journal never ceases to amaze and provide insightful commentary on financial and non-financial issues. As the venerable financial publication has done in the past, the Journal, yesterday, published a guide to the NCAA tournament. The guide included information on some of the teams, a bracket the size of two pages, an analysis of George Washington's rise to college basketball fame, a discussion of atheltic programs at Duke, Northwestern, Stanford, and UCLA that received VC funding, and other insightful pieces on the "business of the tournament."

What was most interesting to me, however, was the piece describing an innovating NCAA pool format called a Calcutta. In a Calcutta, people "buy" teams through an auction. All 64 teams are purchased based on demand among members of the pool (usually your buddies or colleagues). As you would expect, the most expensive teams are the best teams (the Dukes, UConns, etc.). As the tourney plays out, teams you "own" win you money as they get through each round. The winner of the tournament often wins about 1/4 of the entire pot. Here is the article in case you don't have a WSJ subscription.

How to Buy a College Team

A Calcutta auction can be a brainy twist on the traditional tournament betting pool

By PETER SANDERS
March 13, 2006; Page R4

For Dan Gati, the most exciting night of March Madness isn't the final game. Or any game, for that matter. Rather, it comes two days after the National Collegiate Athletic Association announces the seedings for the men's tournament.

That's when Mr. Gati presides over a "Calcutta" auction, an increasingly popular variation of the tournament betting pools that are so common among friends and co-workers nationwide.

Mr. Gati, a 29-year-old lawyer in New York, gathers a handful of friends in an Upper West Side apartment, with two or three more conferenced in on speaker phone, and conducts an auction for each of the 64 teams in the tournament. The money that's collected will be distributed in the following weeks to the "owners" of the winning teams in each round of the tournament.

Last year, Mr. Gati and seven friends threw just under $7,000 into the pot with their bids. The big winner was Mike Kestenbaum, who collected $1,871 -- just over a quarter of the pot -- when a team he bought for $500 at the auction, the University of North Carolina, won the tournament.

"I decided to organize this auction for my friends because I have a lot of free time and I'm good with Excel," says Mr. Gati, who has run his auction every year since 2001. (For serious Calcutta enthusiasts, computer proficiency is essential to calculating how much to bid on each team.) "As we get older and make more money, it gets more and more ridiculous."

For recreational gamblers and sports fans long accustomed to the standard tournament office pool -- where each participant picks the winner of every game before the tournament begins, and points are awarded for each correct pick -- Calcutta-style auctions offer a livelier, and, proponents say, brainier way of betting on one of the biggest gambling events in all of sports.

Participants in a Calcutta auction often rely at least in part on gut instinct or team loyalty, just as they would in any bet. But the bidding process injects a strategic element that's missing in the standard pool.

Computers and Catholics

Calcutta auctions vary slightly according to the whims of the participants, but the basic setup goes like this: Teams are put up for bid in random order until all 64 are sold. There is no limit on the number of teams a bidder can buy. The number of games a team wins in the tournament determines the percentage of the pot the owner is awarded -- a tiny sliver for teams that win only one game, all the way up to perhaps a quarter of the pot for the team that wins six games to take the championship.

In the broadest sense, the bidding is simple as well: Lower-seeded teams typically can be bought on the cheap, while highly ranked squads go for bigger bucks. But for many Calcutta fans, the fascination is in placing a value on each fluctuates as the bidding progresses, since it depends in part on how much money ends up in the pot.team, and then trying to buy a team for that amount or less. And that's trickier than it might sound, because the value of every team

Many bidders conduct elaborate, computer-aided analyses to map out their bidding strategy, taking into account factors including past tournament results and auction histories, as well as each team's prospective opponents. For those who aren't quite up to doing the analysis themselves, there are plenty of pundits online who offer bidding advice, free or for a fee.

It's all part of an annual gambling spree that the Federal Bureau of Investigation has estimated at nearly $2.5 billion in legal and illegal bets. Office pools and Calcuttas generally are illegal but rarely draw the attention of authorities, who focus their resources on bigger, continuing gambling operations where the organizer is taking a cut of the bets.

Still, it's not easy to get gamblers to open up about the big-time Calcuttas, partly because gambling winnings are taxable, and also because some people are concerned that their employers or others would frown on their participation. And Calcuttas do get big. For the past decade, one 69-year-old lawyer in New York has run a Calcutta with a group of about 50 attorney friends. They gather at a bar on Long Island and run an auction similar to Mr. Gati's. The difference: This auction runs well into six figures, with the annual pot reaching between $150,000 and $200,000, the lawyer says. The owner of the tournament winner gets 18% of the total.

"If St. John's, Notre Dame or Villanova are in the tournament, then the bids spike, it all goes up," the lawyer adds. "We've got a big Catholic contingent."

For Mr. Kestenbaum, who is 29 and a second-year M.B.A. student at the University of Pennsylvania's Wharton School, Calcuttas are all about strategy -- using the same tactics found in the business world. Besides participating in the New York pool, Mr. Kestenbaum runs a Calcutta with about 25 of his classmates.

Last year, they held their auction at a Philadelphia bar, laptops aglow as groups of M.B.A. students furiously typed numbers into Excel spreadsheets during the bidding. "There's so much strategy involved in continually trying to estimate the total pot amount at the end, which determines what you're willing to pay for each team," says Mr. Kestenbaum. In 2005, the Wharton group's pool totaled $11,135, a "pretty good size for a bunch of students," he says.

Cornering a Region

Participants use several broad tactics, Mr. Kestenbaum says. One common approach, he says, is "where you own a few expensive blue-chip teams" with a good likelihood of reaching the Final Four; you can also "buy a whole basket of midtier teams, which you own for value." There are plenty of ways to get creative, too. One highly unorthodox strategy Mr. Kestenbaum mentions is to try to buy every team -- or at least every remotely competitive team -- in one of the four regions the tournament is broken up into. That way you have guaranteed winners in every round of regional play, and a good shot at the final prize, since you are assured of having one of the Final Four teams. Of course you would also have guaranteed losers in every round of regional play, so crafting your bids to make this strategy pay off would be particularly challenging.

"The Calcutta has appeal to students here who are investors and are getting ready to go into careers in banking and hedge funds, which require real knowledge and skill about valuation disciplines," says Mr. Kestenbaum, himself off to a hedge fund after he graduates.

Bob Stoll, a professional sports handicapper in San Francisco, agrees that the educated gambler has an edge in Calcuttas. Through his Web site, DRBobSports.com7, Mr. Stoll, 40, sells a road map for bidders to use during Calcutta auctions, based on his statistical analysis of the teams and the auction process.

"What you get in a lot of these auctions are just people who love certain teams and they're not necessarily that savvy," he says. "They forget about teams where the real value is: teams from mid-major conferences that are good and people just don't know it."

Mr. Gati, meanwhile, eagerly anticipates his own Calcutta, and is hoping for better luck this time. Last year, he spent $2 on No. 16 seed University of Montana and $28 on No. 9 seed University of Nevada, Las Vegas. He had a $4 profit between the two and was out of the action after the tournament's second round. "It's more fun when you have more teams," he says. "When you're bidding on a 16 and a 9 and having them eliminated in the first rounds, when you're still running a pool, it's not that much fun."

--Mr. Sanders is a staff reporter in The Wall Street Journal's Los Angeles bureau.

Write to Peter Sanders at peter.sanders@wsj.com8

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