(Bloomberg) -- As sports gambling takes off in the US, turning quickly into a multi-billion dollar business, a worrisome trend is starting to emerge: Americans appear to be yanking money out of their stock-brokerage accounts to fund their online betting.
This is the key finding laid out in a recent working paper titled Gambling Away Stability: Sports Betting’s Impact on Vulnerable Households. It claims to find evidence that for every dollar spent on the recreational activity – now legalized in most states since 2018 — net investments in stocks and other financial instruments dropped by just over $2.
The phenomenon is most acute among the most financially strained households, potentially the same ones attracted to get-rich-quick schemes in financial markets like meme stocks and speculative options.
“It’s not just an innocuous rise of a fun entertainment industry, although it surely is that to some types of households,” Jason Kotter, an assistant professor of finance at Brigham Young University who co-authored the paper, said in an interview. “There’s a real cost particularly to constrained households here that I think should concern policy makers.”
Casino defenders see it differently, saying the study, which has yet to be vetted by academic peers, draws false comparisons between investing and gambling, with the latter more apt to compete for entertainment dollars. Whatever the case, thrill-chasing retail pursuits – from sports wagering to financial trading – are booming in the post-pandemic era, and gamified platforms of all stripes stand accused of engagement-bait by giving Americans a dopamine high in a bid to ramp up online action.
Framed this way, sports wagering and equity speculation can be seen as two sides of the same coin. As such, speculative stock trading could even be saving a cohort of gambling-addled Americans from a worse fate: Blowing away their money on online sports wagers — money that instead could be deployed in their stock-trading accounts.
Regardless of your view on the interplay between gambling-like activities, it’s increasingly the subject of research. Robinhood Markets Inc., meanwhile, is taking steps to nudge the retail crowd away from casino-like wagers on the likes of GameStop Corp. and into sensible index-tracking investments.
While trading stocks with shaky finances often draws a parallel to gambling, whether the broad stock investing can be treated as the same category is debatable. To David Forman, vice president of research at American Gaming Association, the paper exaggerated the effect of gambling on households’ financial health, and more importantly, its premise was flawed.
“They talk about spending on sports betting as a negative expected value investment compared to other positive expected value investments,” he said. “That’s just not how consumers think about spending their entertainment dollars on sports. It is not an investment, it’s an entertainment option.”
But to Kotter, it makes sense to compare gambling to stock investing in that both involve risk taking and financial reward. “You might expect a person’s natural proclivities for risk-taking to affect their decisions across both gambling and investing,” he added.
The gaming industry is aware of the financial risk that reckless gambling poses for American households. In March, seven of the largest US online gaming companies formed an alliance to foster responsible gaming, with some firms offering products that help customers better gauge their activity and spending habits, according to Jennifer Shatley, executive director of the Responsible Online Gaming Association.
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The equity market itself, particularly during the lockdown when many sports were canceled or curtailed, has been a microcosm for speculative psychology. Retail traders have been flocking to options trading, now making up a record 18.8% of the total market activity, exchange data compiled by JPMorgan Chase & Co. show.
Regulators have expressed concerns that brokerages are gamifying stock trading in a way that lures people into putting more money at risk. Robinhood’s marketing tactics — such as granting free shares on friend referrals — drew an army of first-time investors during the pandemic when Americans were stuck at home and handed stimulus checks.
Those customers have since matured as Robinhood rolled out retirement accounts and yield products as part of a move to guide them to the next stage of their investing journey, according to Steve Quirk, the firm’s chief brokerage officer. Right now, meme stock trading on its platform is only “a fraction” of what was seen in 2021, he said, and investors broadly are seeking diversification through index-tracking funds.
“We’re getting them on a good path,” Quirk said.
For decades, the interaction between gambling and stock market participation has been of intense interest to Wall Street and research academia alike. To explore the impact of online sports betting on household finances, Kotter and his colleagues employed data from an analytics firm that aggregates consumer transactions across major banks, credit card firms and brokerages.
Armed with information on American users and transactions spanning from 2010 to September 2023, the researchers from Northwestern University, University of Kansas and BYU built a model to determine, among other things, whether access to legalized sports betting affects the population’s propensity to assume other forms of financial risk.
To control for the effect of macroeconomic forces such as interest rates and inflation, the study compared consumer behavior patterns in states where gambling became legalized to those where it’s still banned. While the data didn’t cover things like retirement accounts, their conclusions were backed up against state-level tax filings for the broader population.
Net investment at equity brokerages (top chart) and deposits to sports betting apps (bottom chart) since sports betting legalization. Source: “Gambling Away Stability: Sports Betting’s Impact on Vulnerable Households” by Scott Baker, Justin Balthrop, Mark Johnson, Jason Kotter and Kevin Pisciotta
Notably, the researchers found that as sports betting proliferated, spending on lotteries and other online gambling activity such as poker increased, too. So did things they characterized as betting-related — things like cable TV and dining out.
Yet the binge came partially at the expense of stock ownership, at least when measured by after-tax investments.
Effectively, funds that had been going to reasonable if risky bets like equities are now being funneled en masse into longer-shot bets where the likelihood of winning is lower, the researchers claim. Along the way, those who dived into sports gambling despite stretched finances are suffering, with credit-card debt rising and overdraft frequency growing.
As betting firms are going out to lure and secure the loyalty of sports fans, the researchers suggest their findings should serve as a warning for regulators to take a tough stance on the industry. Coincidentally or not, it also comes at a time when the standard meme-stock campaign has lost some of the punch it packed in 2021.
“The idea that betting is substituting for equity market investment and the rise of betting — those two facts combined to tell a story that is consistent with meme stocks being a little less of a theme now,” Kotter said. “I don’t think it’s the primary cause of the difference, but it’s certainly in the background.”
