(Bloomberg Opinion) -- Does legalized online sports betting strain family finances? A recent study, “Gambling Away Stability: Sports Betting's Impact on Vulnerable Households,” argues yes, but the conclusion reflects the moral assumptions of the authors rather than the statistical evidence.
That’s not to say this is a bad study. It is a good and useful one, but it would be better if its conclusion were more neutral and laid out the importance of making investing a more compelling proposition for retail investors. Also, there are some significant issues with the data that argue for treating the results more cautiously than the authors do, and far more cautiously than media reports suggest.
The relevant question for most recreational spending is whether the customer got good value for money. If the authors were studying people who increased spending on books, or concerts, or wine, they would weigh the enjoyment and enrichment the experiences provided against the cost. Instead, the authors treat spending on recreational gambling as a dead loss. This sounds like a moral assumption as the authors do not cite any psychological or sociological evidence that sports betting provides less satisfaction per dollar than streaming video, playing golf or getting drunk at Hooters.
One key finding is that when states legalize online sports betting, net deposits to sites offering these services go up and net deposits to brokerage firms go down. But the authors treat these parallel facts in opposite ways. The money deposited to sports betting sites is treated as money spent, while money deposited to brokerage sites is treated as money saved. The implied assumption is that all money deposited to sports betting sites will be lost, while all money deposited to brokerage firms will purchase assets that retain or increase value.
This assumption is not entirely unjustified if applied to the population as a whole. Most bettors on sporting events including NFL, MLB and NBA games lose money, while investors who buy and hold diversified, sensible, low-fee investments nearly always make money in the long run. But, for the authors to justify their policy recommendations, they need to demonstrate this is true for the population of sports bettors — particularly those who bet significant fractions of their incomes. Some of them might well be more skilled at sports betting than financial trading.
This points to a fundamental issue with the data. The authors only see deposits and withdrawals, not balances. The relevant economic comparison is between net gains or losses from sports betting — withdrawals net of any balance increase minus deposits — and brokerage accounts. Another issue is the data show only certain credit card and bank transfers — whereas much gambling is done with cash or PayPal or other means, and much investing is done through employer plans such as 401(k)s or direct deposit. A third problem is that much of the legalization of online sports betting happened during Covid, when we saw big disruptions to spending, life expectancy, retail financial trading and personal finances. The noise from such massive changes argues for caution in applying the results to normal times.
The final moral assumption is to treat households that spend a high proportion of their incomes as “vulnerable” households that should seek “stability.” This suggests a stereotype of undisciplined, reckless spending leading to ruin. But perhaps some of these are aggressive households, confident of the future, enjoying life today, acquiring useful assets and experiences, who are justified in taking risks. Moreover, due to the data gaps mentioned above, we don’t really know the financial situations of households, we see only a portion of their income and spending, and we can’t always distinguish money spent to acquire assets from money spent on pure consumption.
These objections apply only to the headline findings and recommendations of the paper. When you strip those away, you find a lot of interesting nuance about relations among different kinds of recreational spending — including other forms of gambling such as lottery tickets and online poker — and different types of brokerage activity — including apps such as Robinhood Markets Inc.’s trading platform, robo-advisers and traditional brokerage firms.
It’s also true that the simplest explanation for the authors’ results is that sports betting is reducing the savings and investments of households that should save more and invest more wisely. This conclusion is much more tentative than the authors suggest, but they have done about as good a job as possible given the available data. In combination with other work, we seem to be slowly improving our understanding of these issues.
I have always considered the popularity of recreational gambling, especially lotteries with their gigantic negative edge — expected losses for players — and (to me anyway) zero entertainment value, a challenge to the financial system. If we cannot offer retail products with positive edge for buyers that redirect people’s risk-taking urges into supporting productive economic activity, then we’ve failed both individuals and the economy.
If online sports betting really is syphoning money from productive investment, the answer is to improve retail financial products, not to suppress the competition. Suppression doesn’t help anyone, the same negative effects just show up elsewhere, and removes the pressure on the protected businesses to satisfy customers.
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