The S&P 500 and the Dow Jones Industrial Average set new records this month as earnings season began. However, while the major indexes continue to hit all-time highs and a record share of Americans now own stocks, a growing number of investors appear to be abandoning the market in favor of sports betting.
A July study by Scott Baker, associate professor of finance at Northwestern University, found that households increased their bets by $1,100 a year while reducing their investments by 14% when states legalized sports betting, a form of gambling that includes online bets on the results of professional sports competitions.
This trend toward riskier financial behavior has been evolving and accelerating since the U.S. Supreme Court struck down the Professional and Amateur Sports Protection Act, also known as the Bradley Act, in 2018. Americans placed $6.6 billion in online sports bets that year, according to Sportsbook Review. . By 2023, this figure has grown to more than $121.1 billion. It currently stands at $84.5 billion in 2024, with many more games to come before the end of the year.
As the trend continues to evolve, it could have troubling consequences for household budgets and long-term investment prospects as players continue to divert funds from markets, Baker said. The growing popularity of online sports betting, which is now legal in 38 states and Washington, D.C., is coupled not only with a decline in traditional investments, but also with lower credit scores, higher credit card debt and higher overdraft rates. accounts.
“The money that goes into sports betting is largely wasted,” Baker says.
However, the consequences are not the same across the board. The study found that “the estimated effect of legalization on net investment is both negative and statistically significant on average for households with low savings rates and households with higher overdraft rates,” with the effects being “significantly more negative” for these households than for their families high-income colleagues.
According to the study, while All households that engaged in online sports betting saw a 14% decline in investment, and low-savings households saw a 41% decline in investment. The study claims that “these households, already in relatively poor financial health, are more likely to divert funds from their investment portfolios to bookmaking activities,” which ultimately compounds their difficulties.
While share ownership is at its highest level in 17 years, low-income households already make up a minority of shareholders. The richest 50% of Americans own 99% of all stocks; According to the Federal Reserve, the bottom 50% of American workers own just 1%.
One concern Baker expresses is that even as stock ownership becomes more common, disruptions to long-term growth investing may prove difficult to recover from. For households with low savings levels, who may be more reliant on these investments in the future, this could be especially concerning given the instant gratification that online sports betting can provide.
“A lot of people,” Baker says, “have a hard time understanding the value of compound growth over 30 years versus saying, ‘I can play this eight-leg combination at 800-to-1 odds and make a big profit today.’
The ease with which sports betting is available poses another threat to household budgets. Popular sportsbooks like FanDuel and DraftKings offer apps that make online sports betting easy and instant. In addition to reducing investment, the ease of placing a quick bet on Monday Night Football can have a negative trickle-down effect.
Baker’s research found that online sports betting increased credit card debt among low-saving households, a group that also saw their credit card balances rise relative to high-saving households by about 8%. After legalization, these individuals reduced their quarterly credit card payments by an average of about $890. Low-saving households who engage in online sports betting also face increased overdrafts, reduced available credit and lower credit scores, according to the study.
Why It’s Difficult to Research Sports Betting
Kalil Philander of Washington State University, whose research focuses on public policy and consumer behavior in gambling, including casinos, sports and online betting, said Baker’s findings should be taken with a grain of salt, noting that the study was not peer-reviewed. -review.
Philander argues that methodologies aiming to measure the effects of policy changes must be precise in their use of dates, otherwise they risk introducing bias into the results. Since the Bradley Act was repealed in 2018, legalization in every state has not been immediate or uniform, potentially obscuring or tainting certain findings.
“Sports betting hasn’t evolved as if the lights suddenly turned on one day, and that’s been 100% from the beginning,” says Philander. “I know they’re trying to evaluate the effect over time, but there are things that I think aren’t necessarily reflected in the first version of these studies and may change over time.”
One of these things is known as the recency effect, or a temporary increase in interest in something new that tends to wear off over time, which Philander believes may help reduce gambling over time.
However, Baker points to numbers in the study that show remarkable persistence. “People will likely continue to bet on sports over time,” he says. “For a quarter after they bid, they continue to bid.”
While Philander’s research did not focus on earnings versus online sports betting, he is interested in one demographic: young Americans. According to a survey conducted by St. Bonaventure University, the majority of people participating in online sports betting are between the ages of 18 and 34, and only 15% of them are over 50 years old.
“Age is a big determining factor,” he says. “The longer you gamble, the lower your risk… When you’re first exposed and experience the novelty effect, you’re not necessarily aware of the risks.”
Gambling vs. Investing
The growing popularity of online sports betting is a troubling trend at a time when Americans continue to battle inflation and a certain percentage of people are projected to exhaust their savings by the time they retire. This makes it especially important to understand the differences between gambling and investing, two behaviors that are sometimes mistakenly conflated.
The first caveat is that shares involve ownership. Shareholders retain an interest (albeit small for most investors) in the day-to-day activities of public companies, while players own nothing.
Another difference is that while both investing and gambling involve a certain degree of risk and reward, the former can provide consistent returns over time. The latter involves short-term risk with historically negative statistical results.
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% had lost money to online betting. Only 4% made a profit.
So while most active traders often lose money, passive investors who simply mirror an index fund can be profitable over the long term. Baker notes that even if investors underperform the market, they can still make positive returns. This probability is much lower with online sports betting.
“Year to date, if you’re up 15% (investment) but you’re underperforming the market, you’re still up 15%,” he explains. “When betting on sports, you may need a 20% edge just to break even.”
In addition, publicly traded companies are regulated by the U.S. Securities and Exchange Commission and are required to file quarterly earnings reports, which provide investors with access to transparent balance sheets and income statements. This information may help potential and current shareholders hedge against potential losses. Online sports betting is largely based on assumptions about the performance of athletes, weather conditions or other indirect, unreasonable and highly speculative factors.
For many investors, the decision to buy a company’s stock is a decision based on data that shows consistent quarterly growth in revenue and earnings. However, assuming the Miami Dolphins will cover a 10-point spread because the Buffalo Bills didn’t acclimate to subtropical temperatures and stayed in South Beach too late is just a gamble.
And although an avid fan may believe that he has a better chance with a familiar team than in a casino, this is simply a manifestation cognitive bias is the false belief, according to Philander, that people can predict winners simply because they understand sports.
“Someone who watches a lot of sports may be more inclined to think that they can predict winners there better than, for example, on a slot machine. They may fully understand that the slot machine is completely random, but there are some determining factors. the effect of sports betting makes them more likely to gamble,” he says. “A lot of people play with that feeling.”
Even if these people do not develop a serious gambling addiction or experience negative financial consequences, it can be dangerous. If you find yourself in one of these positions, resources like the National Problem Gambling Hotline offer services that can help you.
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