Talk about your losing propositions! A new study from the University of Kansas found that every dollar spent on online sports betting translates into two dollars not invested in retirement savings.
A new working paper, “Gambling Away Stability: Sports Betting’s Impact on Vulnerable Households,” shows how the proliferation of online sports betting since a 2018 Supreme Court ruling that paved the way for states to legalize sports gambling has not only led to increased betting activity, but also leads to higher credit card balances (and more paid in interest charges), less available credit, and a reduction in net investments. The study found these negative effects are particularly pronounced among financially constrained households.
“We find that people’s household financial balance sheets are being significantly shaped by an increase in online sports betting,” said Kevin Pisciotta, assistant professor of finance at the University of Kansas, in a KU News release.
Co-written by Pisciotta along with fellow KU assistant professor of finance Justin Balthrop, Scott Baker of Northwestern University and Mark Johnson and Jason Kotter of Brigham Young University, the research offers two main findings:
• People draw on funds they would have been putting into savings accounts to use for online sports betting. “We can see transfers of an individual’s amount of money out of a Vanguard account and transfers into DraftKings, for instance. Then we can look at how these things evolve over time,” Pisciotta said.
• They also tap into their available credit through credit cards. “Credit card balances go up. Their available credit goes down. And they make less payments on their card,” he added. That also results in more being paid in interest charges over time.
Another key takeaway is that the introduction of online sports betting did not change how people spend on entertainment—it’s in addition to, and the study found it leads to people allocating less money to savings and investments. Notably, the states that didn’t make sports betting available online (and through smartphones) experienced less-negative consequences.
From the paper’s abstract: “This increase does not displace other gambling activity or consumption but significantly reduces households’ savings allocations, as negative expected value ‘risky’ bets crowd out positive expected value investments. These effects concentrate among financially constrained households, who become further constrained as credit card debt increases, available credit decreases, and overdraft frequency rises. Our findings highlight the potential adverse effects of online sports betting on vulnerable households.”
Sports betting off to the races after Supreme Court ruling
Much of the rise in this activity was triggered by that landmark 2018 Supreme Court ruling overturning a federal ban on sports betting, leading states beyond Nevada to rapidly introduce legislation to legalize both in-person and online wagering. This has generated over $120 billion in total bets and $11 billion in revenues in 2023 alone.
The study covers nearly all online sports betting legalizations in the United States, beginning with the first operators in 2018 and extending to Sept. 2023. Over this time period, 25 states and Washington D.C. passed legislation to allow online sports betting. Specifically, the study looks at the money spent after taxes from 230,000 households in all states 3 years before and after legalization.
Folks who weren’t betting before legalization began betting. Conditional on ever placing a bet after a state legalizes online sports betting, households bet on average $280 per quarter, or over $1,100 per year. While bets come from all along the income distribution, the study found that financially constrained households deposit a larger percentage of their income than households facing fewer constraints.
Legalization cuts stock investing
The researchers examined whether betting affects households’ investing decisions by constructing a measure of net deposits to (after-tax) stock brokerages each quarter. They found people invested similarly during the period leading up to legalization of sports betting, and that legalization reduces net investments by nearly 14%.
“A rough quantification of the causal effect of sports betting on investing behavior suggests that $1 of betting reduces net investment by just over $2,” the paper states. “In contrast with the sizable effects on equity investments, we find that increases in sports betting do not coincide with decreases in participation in lotteries or other online gambling outlets like poker sites.”
“…our results suggest that sports betting leads constrained households to use would-be savings and debt to reduce investments and increase spending on complements to gambling.”
The authors conclude that most of the displacement driven by increases in sports betting falls on positive expected value “investments” rather than other types of negative expected value “bets.”
“We find sports betting legalization significantly reduces household stock market participation more for more constrained households,” the paper states. “Overall, our results suggest that sports betting leads constrained households to use would-be savings and debt to reduce investments and increase spending on complements to gambling, likely leading to a lasting deterioration in their longer-term financial health.”
So while sports betting offers new avenues for state revenue, it also introduces significant financial risks—especially for already constrained households. In light of the findings, the paper says it is imperative for policymakers to consider the broader financial implications of legalization.
“Targeted interventions, stricter regulation of gambling advertisements, and support for safer investment opportunities are crucial to mitigating the adverse effects on financially vulnerable populations,” the authors conclude.
Not aiming to shut it down
The authors, some of whom admit to participating in legalized sports betting, stress that they are not trying to shut down the industry.
“We’re not trying to shut down sports betting. Our goal here is to provide clear estimates of what is happening from the result of online sports betting legalization … and the results are not exactly great for those doing the betting,” Pisciotta said. “We hope our study might help inform discussions about how to possibly improve the environment and the landscape, but that’s going to take time.”
Read the research paper here.
SEE ALSO:
• Financial Health Gap Between Americans Widens
• 401(k) Savings Incentives Seriously Amplify Wealth Gaps: MIT Paper
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.