Creating a Daily Fantasy Sports Algorithm Using Quantitative Finance, Pt. 1: Intro to DFS

hey everyone in this video I'm gonna

talk about daily fantasy sports and

quantitative finance in particular I'm

gonna talk about some of the

similarities between building a team in

daily fantasy sports and constructing a

portfolio of stocks in quantitative

finance many concepts are shared between

the two fields suggesting that we might

be able to take ideas from one and apply

them to the other in future videos I

will highlight this fact by using some

of quant opions quantitative finance

tools to build a daily fantasy sports

team daily fantasy sports or DFS for

short is a game where participants can

pick a fictional team of real players of

a professional sport a game of DFS is

conducted over one day of competition

and participants can win prizes by

picking players who perform well in

competition that day in many ways this

is comparable to trading a portfolio of

stocks at the beginning of the day you

can enter positions and at the end of

the day your portfolio value reflects

price changes in the stocks that you

held let's go over the rules of DFS to

start we'll go over scoring then we'll

talk about constraints that you need to

follow when building a team and lastly

we'll talk about prizes in DFS players

score points based on events that occur

in their game the exact rubric changes

by sport but at a high level players

score fantasy points by doing things

that are considered good in their game

for example in daily fantasy basketball

a player might be awarded fantasy points

for scoring baskets or accumulating

rebounds blocks or steals ultimately a

participant is scored based on the sum

total fantasy points of all players that

they picked on their fantasy team we can

draw parallels to finance here the

performance of a stock is often tied to

real-life events and the name of the

game in quantitative finance is to

predict the performance of stocks in the

future this is really similar to

predicting the performance of athletes

in a game or competition while playing a

game of DFS there are usually

constraints that a participant must

follow when picking their team here are

some of the constraints first

participants are required to

pick a team with a specific number of

players for example a game of fantasy

baseball might require participants to

choose a team of 10 players second

participants are required to pick a

specific number of players in each

position this rule is sport dependent

but a daily fantasy American football

game might require you to pick one

quarterback five receivers two running

backs and a kicker

lastly participants must pick a team

that fits under a fictional salary cap

for this one game organisers assign a

fictional salary to each player who is

playing a game that day the fictional

salary is usually based on that players

expected performance in some way star

players usually have a higher fictional

salary than bench players each

participant of the fantasy game is

required to assemble a team of players

whose combined fictional salaries are

less than or equal to a particular limit

usually referred to as a cap in

quantitative finance a fund or portfolio

manager might impose their own

constraints on how a portfolio should be

constructed for instance they might want

to limit their exposure to any one

company or they might want to limit the

correlation of their portfolio to the

market as a whole

finally daily fantasy sports have prizes

usually in the form of money prizes are

awarded to the highest scoring teams in

a game of DFS price structures can vary

but the two most common formats are top

heavy and 50/50 in the top-heavy format

the prize pool is distributed unevenly

amongst the highest scoring teams for

example in a game between 20

participants the top player might

receive 90% of the prize pool the second

player might receive 10% and everybody

else gets nothing in the 50/50 price

structure all participants who finish in

the top half of the rankings split the

prize pool evenly for example in a game

of 20 participants everyone ranked first

through 10th are awarded roughly 10% of

the prize pool the analogous concept to

price structure and quantitative finance

is risk in quantitative finance managers

target a specific risk profile some

managers will target a low volatility

low return port

that aims to consistently achieve

positive returns others might have a

higher appetite for risk choosing a high

volatility high expected return profile

in DFS players should choose their risk

profile according to the prize pool for

top-heavy prize pools it is a better

strategy to build a team with a higher

expected return even if it means higher

expected volatility but for the 50/50

prize pools it's best to select a team

that sacrifices some of that expected

value for lower volatility and higher

confidence that the score will be

achieved now that we have a basic

understanding of how daily fantasy

sports work we can move on to actually

building a fantasy sports team in the

next video we'll leverage some of the

comparisons that we made between DFS and

quant finance and we'll build a team of

players using some of quanto pians

quantitative finance tools if you're

interested in learning more subscribe to

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next video comes out