If you are a serious sports fan, a fairly serious gambler or work in some aspect of high-finance, you may have heard your friends or co-workers kicking around the term “Calcutta auction”, particularly if its close to “March Madness” time (I first came across the Calcutta auction during my analyst years in I-banking). What the devil are they talking about you ask? Quite simply, a Calcutta auction is any auction occurring the Indian city of Calcutta. Kidding! (well, sort of, because technically that IS a correct definition). In the world of sports gambling, Calcutta auctions generally refer to a gambling pool where entrants “buy” teams (players, horses, etc.) in an auction-style format (I do not condone gambling for real money. Capital in this article refers to imaginary funds, or “points”). The easiest way to describe and understand this is to look at the most common modern-day example: the men’s college basketball tournament. Here is a very brief overview:
1. An auction time and location are selected
2. Since there are 64 teams (I know, I know…65 with the play-in game), there will be 64 teams up for auction
3. Teams come up for auction in a random order
4. Entrants begin bidding for the team currently on the auction block. In order for an entrant to “own” a given team, he must be the highest bidder at the end of the bidding round
5. There is no limit on the number of teams a bidder can buy
6. The number of games a team wins in the tournament determines the percentage of the pot the owner is awarded (early round wins are worth a much smaller % of the total pot than later round wins)
That is basically it for the semantics of the auction. Sounds simple, right? Well, in theory it is, in reality, however, Calcutta auctions are highly complex and involve a great deal valuation work (which is why its so popular with investment bankers, hedge fund analysts, P/E analysts, lawyers and anyone else involved in valuation work). If a Calcutta-style auction sounds interesting to you, keep on reading.
A Detailed Overview of Calcutta Auctions
Now that you know the basics of a Calcutta auction, lets dive a little deeper. I will present this example using a men’s college basketball Calcutta once again (keep in mind this info is just as applicable to any other sports…professional football is a pretty common Calcutta format as well).
So, the word is out that a men’s college basketball Calcutta is forming in your office / school / group of friends. If you are interested in participating, the first thing you will need to figure out is how large the pool size is targeted to be (or if you are organizing, how big you want it to be). Estimating the total size of the pool is a critical component to being successful in a Calcutta. You do not want to spend the majority of you capital on a single team, only to find out that that team represents 50% of the total pot. You will also want to determine the % payout of each win in a given round.
For example, if a team you own wins a first round game, it may only be worth 0.5% of the total pot. If they go on to win the championship, that final win may be worth, say, 10% of the pot. It is CRITICALLY IMPORTANT to understand that the total amount you spend on your teams is not an accurate representation of your at-risk capital. This is because the only way you could lose 100% of your capital is if NONE of your teams win a single game, which if you do your homework, is an incredibly unlikely scenario. If you are willing to lose a given amount, you should be willing to spend a decent amount more than that on your teams.
Your next, and most important step, is to do some research on the teams for which you will be bidding. The way people approach this step varies wildly. Some people rely on a “hunch”. Others go with team loyalty – e.g. I went to School X, therefore I HAVE to own them or I love the team’s mascot and want to root for his team. The last group of people, and generally the most successful, conduct sophisticated statistical analysis using complex excel models. The last group is able to approach the auction in the most objective way possible, as they aspire to ascribe “fair” values to teams. This is the approach I take and it has proven quite successful. Now that you have determined what teams you would like to own, its auction time.
The auction is generally conducted in person at a set time and place. The rules of the auction should be clearly spelled out beforehand (e.g. how to signal you want to bid, how long after the last bid you deem the bidding closed, etc.) to avoid any conflict. Each team will be put up for auction until all are sold (In some auctions, the 13-16 seeds are packaged as a single team). Let’s say you win the teams you wanted. What now?
Once the auction has wrapped up and you have your teams, most of the hard work is over, but the fun is just beginning. This is what it must feel like to be the owner of a professional sports team! You will be rooting for the teams you own harder than the school you graduated from (or are currently attending as the case may be). It’s a blast! You will also find yourself updating your cumulative winnings and trying to figure out how many more wins you need to break-even.
If you participate once, you will undoubtedly be hooked!
Source by Scott Fey