Explosion of online sports betting is taking its toll on the way people invest

The explosion of online sports betting is taking a toll on personal finances, especially those in financial trouble.

That is the conclusion of a recent article, “Gambling away from stability: the impact of sports betting on vulnerable households.The authors found that sports betting has exploded since the Supreme Court struck down a federal law banning it in 2018. Since then, 38 states have legalized it and it has become a growth industry, generating a total of more than $120 billion in bets and $11 billion in wagers. turnover alone in 2023.

This has added significant sums to the public purse, but has come at significant personal cost to gamblers and their families. Those who participate tend to invest less and have higher debt.

“Our results show that sports betting leads not only to increased gambling activity, but also to higher credit card balances, less available credit, a reduction in net investment, and an increase in lotteries,” the authors conclude.

The authors noted that these negative effects were especially noticeable among “financially constrained households.” That term is undefined, but the implication is that this group tends to have lower savings, lower cash levels to cover expenses, higher debt levels, and lower net worth.

The authors used a quarterly panel of 230,171 households in states that have legalized gambling. About 7.7% of households placed sports bets online, with a household average of $1,100 per year.

Not surprisingly, people who gamble on sports have less money to invest, especially in the stock market. The authors found a large decline in net deposits into traditional investment accounts. “Two to three years after betting becomes legal, there is a noticeable decline in net investment compared to states where betting is not yet legal,” the report said.

The authors estimate that legalization reduces gamblers’ net investments by nearly 14%, and that every dollar spent on sports betting reduces net investments by $2.13.

But the implications are much broader.

“The increase in gambling and consumption is driving an increase in financial instability in terms of reduced credit availability, increased credit card debt and a higher rate of bank account overdrafts,” the authors said.

This is especially true for households with financial constraints. The higher credit card debt indicates that these households are not just shifting money from one type of entertainment to another (e.g., shifting money from lottery betting to sports betting). Instead, they “take on more and more debt to finance an addictive losing proposition.”

Here too, lower-income households suffer disproportionately. The bottom third of households, as measured by income, saw the largest increase in sports gambling expenditures relative to income.

There were notable differences between the characteristics of gamblers and non-gamblers.

Both groups had similar incomes, but gamblers showed riskier behavior. They were more than twice as likely as non-gamblers to have ever invested in crypto or ever overdrawn their bank account. They were four times more likely to play online poker or buy lottery tickets.

These results are consistent with several previous studies. A Study from 2009 The conclusion is that gambling-related activity is greater among low-income investors, who tend to bet excessively on state lotteries and are also overweight in risky lottery-type stocks.

The authors point out the dilemma for policymakers. By continuing to legalize and expand activities such as sports gambling – where the vast majority lose money – the government is sending conflicting signals.

On the one hand, the government’s attitude is: these are adults, they have the right to spend their money the way they want. And we need the money.

But governments have other priorities that they promote, including encouraging saving money for retirement, which are clearly at odds with promoting gambling.

“As legalized sports betting gains popularity, it potentially undermines government efforts to promote savings through tax breaks and financial literacy programs,” the authors conclude.

“Policymakers should consider how the allure of gambling can divert money from savings and investment accounts, especially for households with disabilities, which could impact household financial stability and long-term wealth accumulation.”