Online Sports Betting Is Gaining Popularity — at the Expense of Traditional Investing

The S&P 500 and Dow Jones Industrial Average notched new records this month as earnings season kicked off. However, while the major indices continue hitting all-time highs and a record share of Americans now own stocks, a growing number of investors appear to be vacating the market in favor of sports betting.

A July study led by Scott Baker, an associate professor of finance at Northwestern University, found that households increased their bets by $1,100 per year while simultaneously decreasing their investments by 14% when states legalized sports betting, a form of gambling that involves online wagering on the outcomes of professional athletic events.

This trend in riskier financial behavior has been developing — and accelerating — since the U.S. Supreme Court overturned the Professional and Amateur Sports Protection Act, aka the Bradley Act, in 2018. According to Sportsbook Review, that year Americans placed $6.6 billion in online sports bets. By 2023, that figure had ballooned to more than $121.1 billion. So far in 2024, it stands at $84.5 billion, and there are still a slew of games to go before the year's end.

As this trend continues to develop, it could lead to concerning implications for household budgets and long-term investment prospects as gamblers continue to divert funds away from the markets, according to Baker. The growing popularity of online sports betting — now legal in 38 states and Washington, D.C. — has been coupled not only with a decrease in traditional investments but also lower credit scores, higher credit card debt and higher rates of account overdrafts.

"This money that's going into sports betting is mostly being lost," Baker says.

However, the consequences aren't equal across the board. The study found that the "estimated effect of legalization on net investments is both negative and statistically significant on average for low-savings households and households with higher frequencies of overdrafts," with the impacts being "significantly more negative" for those households than for their high-income counterparts.

According to the study, while all households that engaged in online sports betting saw a decrease in investments of 14%, low-savings households saw a decrease of 41% in investments. The research claims that "[t]hese households, already in relatively bad financial shape, are more likely to divert funds from their investment portfolios to betting activity," ultimately exacerbating their hardships.

While stock ownership is at a 17-year high, lower-income households are already in the minority of shareholders. The top 50% of wealthy Americans own 99% of all stocks; the bottom 50% of American earners hold just 1%, per Federal Reserve data.

One worry Baker expresses is that despite stock ownership becoming more prevalent, disruptions to long-term growth investments can be difficult to recover from. For low-savings households that may be more reliant upon those investments down the road, this could be particularly concerning, given the instant gratification that can be provided by online sports betting.

"For a lot of people," Baker says, "it's hard to see the value of compounding growth over 30 years versus 'I can hit this 800-to-1, eight-leg parlay and have some great gains today.'"

How easily accessible sports betting is presents another threat to household budgets. Popular sportsbooks like FanDuel and DraftKings offer apps that make online sports betting seamless and instantaneous. And beyond decreasing investments, the simplicity of placing a quick bet on Monday Night Football could be having a negative trickle-down effect.

Baker's study found that online sports betting increases credit card debt for low-savings households, a group that also saw an uptick in their credit card balances relative to high-savings households of about 8%. Those people made lower quarterly credit card payments by an average of about $890 following legalization. Low-savings households engaging in online sports betting also experience increased overdrafts, reductions in available credit and lower credit scores, according to the study.

Why it's hard to research sports betting

Washington State University's Kahlil Philander — whose research focuses on public policy and consumer behavior in gambling, including casinos, sports and online betting — contends that Baker's findings should be taken with a grain of salt, noting that the study hasn't gone through the peer-review.

Philander argues that methodologies aiming to measure the effects of a change of policy must be precise in their use of dates, or they could risk introducing bias to the results. Since the Bradley Act was overturned in 2018, state-by-state legalization wasn't instantaneous — nor was it uniform — which could potentially obscure or sully certain findings.

"The way that sports betting rolled out, it wasn't like all of a sudden one day the light switch turned on and it was 100% from the get-go," says Philander. "I know they try to look at the effect over time, but there are things that I don't think are necessarily captured in the first version of these studies and might change over time."

One of those things is known as the novelty effect, or a temporary increase in interest to something new that tends to wear off over time, which Philander believes can contribute to a lessening of gambling behaviors over time.

However, Baker points to figures in the study that demonstrate observable persistence. "People are likely to continue sports betting over time," he says. "In the quarters after they make bets, they are continuing to make bets."

While Philander's research hasn't focused on income levels vis-à-vis online sports betting, he is concerned with one demographic in particular: younger Americans. According to a survey conducted by St. Bonaventure University, the majority of people participating in online sports betting are ages 18 to 34, with just 15% being over the age of 50.

"Age is an important determinant," he says. "The longer you've been exposed to gambling, the lower your risk goes ... When you first get exposed and have this novelty effect, you're not necessarily aware of the risks."

Gambling vs. investing

The growing popularity of online sports betting is a worrisome trend at a time when Americans continue to struggle with inflation and as a concerning percentage of people are projected to exhaust their savings during retirement. So it's particularly important to understand the distinctions between gambling and investing, which are two behaviors that are sometimes erroneously conflated.

The first nuance is that stocks involve ownership. Shareholders maintain an interest — albeit a small one, for most investors — in the ongoing affairs of publicly traded companies, whereas gamblers own nothing.

Another distinction is that while both investing and gambling involve certain degrees of risk and reward, the former can produce steady gains over time. The latter involves short-term risk with historically negative statistical outcomes.

For example, investing in an S&P 500 index fund, which mirrors the performance of the broad stock market, has produced an average annual return of 10.52% over the past 30 years. Conversely, this year researchers at the University of California, San Diego found that of the more than 700,000 gamblers they surveyed, 96% percent lost money to online betting. Just 4% turned a profit.

So while the majority of active traders often lose money, passive investors who simply mirror an index fund can be profitable over the long run. Baker points out that even if investors underperform the market, they can still net positive returns. That likelihood with online sports betting is significantly lower.

"Year to date, if you're up 15% [in an investment] but you're losing to the market, you're still up 15%," he explains. "With sports betting, you may need a 20% edge just to break even."

Additionally, publicly traded companies are regulated by the U.S. Securities and Exchange Commission and are required to file quarterly earnings reports that provide investors with access to transparent balance sheets and income statements. That information can help prospective and current shareholders hedge against potential losses. Online sports betting largely operates on assumptions about athletes' performances, weather conditions or other circumstantial, unsound and highly speculative factors.

For many investors, deciding to purchase shares of a company is a decision based on data that shows consecutive quarterly revenue and earnings growth. However, assuming the Miami Dolphins will cover a 10-point spread because the Buffalo Bills aren't acclimated to subtropical temperatures and stayed out too late in South Beach is simply gambling.

And while an avid fan might believe they have better odds with a familiar team than they would at a casino, that's simply a manifestation of cognitive distortion — the false belief, according to Philander, that people can predict winners simply because they understand sports.

"Someone who watches a lot of sports might be more inclined to think that they can predict winners better there than they could, for example, on a slot machine. They may fully understand that a slot machine is entirely random, but there is some determinative effect from sports betting making them more likely to gamble," he says. "A lot of people gamble feeling that way."

Even when those folks don't develop a serious gambling disorder or face negative financial consequences, this can be dangerous. If you find yourself in one of these positions, resources like the National Problem Gambling Hotline offer services that can help.

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