(Bloomberg Opinion) — Does legalized online sports betting strain family finances? A recent study, “Stability of gambling: The impact of sports betting on vulnerable households,” argues yes, but the conclusion reflects the authors' moral assumptions rather than statistical evidence.
That doesn't mean this is a bad study. It is a good and useful one, but it would be better if its conclusion was more neutral and presented the importance of making the investment a more compelling proposition for retail investors. Also, there are some important issues with the data that argue for treating the results more carefully than the authors do and much more carefully than the media reports suggest.
The relevant question for most recreational spending is whether the customer is getting good value for money. If the authors were to study people who increased spending on books, concerts, or wine, they would weigh the pleasure and enrichment experiences provided against the cost. Instead, the authors treat gambling expenses as a dead loss. This sounds like a moral assumption since the authors cite no psychological or sociological evidence that sports betting provides less satisfaction per dollar than streaming video, playing golf, or getting drunk at Hooters.
A key finding is that when states legalize online sports betting, net deposits to sites that offer these services increase and net deposits to brokerage firms decrease. But the authors treat these parallel facts in opposite ways. Money deposited on sports betting sites is treated as money spent, while money deposited on brokerage sites is treated as money saved. The implicit assumption is that all money deposited with sports betting sites will be lost, while all money deposited with brokerage firms will buy assets that maintain 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, reasonable, low-fee investments almost always make money in the long run. But for the authors to justify their policy recommendations, they need to demonstrate that this is true for the sports betting population—especially those who wager significant portions of their income. Some of them may be more adept at sports betting than financial trading.
This indicates a fundamental problem with the data. Authors only see deposits and withdrawals, not balances. The relevant economic comparison is between net sports betting profits or losses – withdrawals without any increase in balance minus deposits – and brokerage accounts. Another issue is that the data shows only a few credit card and bank transfers — while many gambles are made with cash or PayPal or other means, and many investments are made through employer plans such as 401(k)s or direct deposit. A third problem is that most of the legalization of online sports betting happened during Covid, when we saw major disruptions in spending, longevity, retail financial trading and personal finance. The noise from such massive changes argues for caution in applying the results to normal times.
The ultimate moral assumption is to treat households that spend a high proportion of their income as “vulnerable” households that must seek “stability”. This suggests a stereotype of undisciplined and reckless spending that leads to destruction. But perhaps some of them are aggressive families, secure in the future, enjoying life today, gaining wealth and useful experiences, which are justified in taking risks. Moreover, due to the data gaps mentioned above, we do not really know the financial situations of households, we only see a part of their income and expenses and we cannot always distinguish the money spent on buying assets from money spent on clean. consumption.
These objections apply only to the main findings and recommendations of the paper. When you strip them down, you find many interesting nuances about the relationship between different types of recreational spending – including other forms of gambling such as lottery tickets and online poker – and different types of intermediation activity – including applications such as Robinhood Markets Inc. trading platforms, robo-advisors and traditional brokerage firms.
It is also true that the simplest explanation for the authors' results is that sports betting is reducing the savings and investments of households that should be saving more and investing more wisely. This conclusion is much more tentative than the authors suggest, but they have done 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 downside – 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 advantages for shoppers that redirect people's risk-taking incentives to support productive economic activity, then we have failed both individuals and the economy.
If online sports betting is really cashing in on productive investments, the answer is to improve retail financial products, not to suppress competition. Suppression helps no one, the same negative effects just show up elsewhere and takes the pressure off protected businesses to satisfy customers.
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