Was legalized sports gambling a mistake?

Brad LaPlante  0:00  
Sports gambling is everywhere, from the ads, the addiction that people may suffer, and everything in between. It feels like sports gambling is here to stay. I'm sure you've seen the ads. They are everywhere. They're on the TV, the radio, your favorite sports podcast, and they can be quite annoying. The question that I've been asking myself is, what do we get by legalizing sports gambling? Are the tax benefits really that good? Is it more about the individualization of freedom being able to say, oh, I can gamble on sports. That's for me to decide. My government can't tell me what to do, so I decided to talk with Scott Baker, who is a professor of finance at Northwestern University. Dr Baker was an author on a paper in october 2024 titled gambling away stability sports bettings impact on vulnerable households. His paper estimates the effect of sports betting on a household's debt management decisions. For example, the paper finds that people who gamble on sports are more likely to spend money on related costs, such as cable, eating out at restaurants and other related activities.

Dr. Scott Baker  1:23  
My co authors and I, we ran a study to try to understand the causal impact of sports gambling on basically the rest of the household kind of budget or income statement. So it was a pretty simple paper, using some interesting data, using some data regarding transaction transaction level, credit and debit card banking data, and seeing how people respond to the legalization of sports gambling, just kind of state by state over the past five or six years. And the idea was just to understand, you know, there's kind of new a new destination for people's money. Money is flowing out of their bank accounts, through their credit cards, through the debit cards, into sports gambling websites. Much of this money is being lost eventually. And we're trying to understand, you know, where people are making up for those losses, and whether it is just reallocating expenditures among their various entertainment destinations, or people going to fewer movies and spending some money on sports gambling, or is it taking from maybe more productive, longer term destinations like investments or retirement savings. And so this is what we try to understand by looking at differences in behavior among households who are living in different states of the country where different states legalized sports gambling at different points in time, some have yet to do so. And so these kind of make natural controls. We also tried to delve into individual level impacts, where we isolate people who kind of in the pre legalization era look like they are, folks who are more likely to engage in sports betting should it be legalized, and we isolate the impacts on those individuals relative to others in their same state. And at the end of the day, we see that, you know, this increase in sports gambling is fairly dramatic, especially among a small portion of the population who kind of engage very heavily in it. On average, people who are betting start to bet, you know, one to $200 a quarter, but there's a very large right tail. And this has been kind of growing. It continues to grow for, you know, several years, at least after legalization. And so we're waiting for more data, because this has been such a recent thing to see. You know, to what extent that continues within within people, but there is a big portion of the population that is gambling, you know, non trivial amounts of money and where, when we look where this comes from, it isn't just coming from reallocation of their their entertainment budget. So we see actually increases in the total amount of entertainment spending. We see increases in a few other categories that you also might think could complement sports betting, so things like restaurant spending. So going out to bars, we see some increases in cable and telecom kind of streaming service, sorts of subscription services, and we see some increases in kind of other sorts of entertainment, beyond gambling as well. So all of these increases in spending put pressure on other elements of the budget, and we find that households tend to actually decrease their transfers into brokerage accounts, and not just other kind of Robin Hood desk day trading sorts of sites, but into, you know. Traditional brokerages as well, so fidelity and Vanguard and things like that, people kind of cut back their flows into these sorts of accounts. And we also see pressure on other parts of the budget. We see increases in credit card debt. We see increases in things like overdraft fees. So people overdrafting their checking account tends to kind of go up on this. And all of these things tend to be more pronounced. All these maybe negative effects tend to be more pronounced among individuals who were lower income or who had kind of evidence of financial pressures in the past, kind of before the legalization occurred. So kind of taken as a whole, it's saying that, you know, this isn't just reallocating households expenditures away from other entertainment spending and having a bit more kind of fun doing sports gambling, but for a non trivial amount of people, this is kind of putting some some pressure on longer term savings goals and also nearer term debt burdens as well.

Brad LaPlante  6:01  
So it's more about the you know, this money could have gone elsewhere, and instead it's going towards sports betting?

Dr. Scott Baker
That's right.

Brad LaPlante
Can you talk a little bit about the history of sports betting until New Jersey accepted the first online sports wager in 2018?

Dr. Scott Baker  6:16  
That was kind of the pivotal moment where there was this court case in New Jersey. That was one which essentially opened the floodgates for different states to regulate sports gambling how they saw fit. And over half states and the District of Columbia in the US now have legalized some form of sports gambling. Most have legalized it in a way that allows for mobile betting, which we actually find is, you know, the the by far the largest determinant of kind of the dollars at play here, if you go and do legalized gambling, only on premises, the effects the dollars being bet, and also then the downstream effects on kind of other household financial aspects are just dramatically lower.

Brad LaPlante  7:00  
And so before, to my understanding, right, you had to go to a place like Las Vegas, and you had to place a bet. And so what you're saying is that it's, I don't want to use the word predatory, but it's almost, it kind of seems that way, right? With these, with these betting sites, is, I mean, just gambling in general tends to take advantage of the most addictive population.

Dr. Scott Baker  7:24  
I mean, it essentially, it certainly became much more pervasive, right? I mean, you see sports betting now on every, you know, sports show, they have kind of odds running at the bottom. They have lots of discussions of sports gambling, instead of just talking about, you know, the plays or the players. Now they're talking about the odds and kind of, you know, different parlay bets and over unders and things on every kind of mainstream sports network. So it has certainly changed how kind of America relates to its professional and semi professional sports leagues. And I think you know, it is up for debate about the extent to which you know everybody betting has kind of full understanding of full knowledge of the odds and and the kind of wedge that the House takes in these sorts of bets,

Brad LaPlante  8:12  
I'd imagine that some of the advantages of legalized sports gambling, Just like legalizing any vice, whether it's marijuana or cigarettes or alcohol is tax revenue, right? So do you think that we're seeing the benefits of those? And are there any other benefits that I might not be aware of? So

Dr. Scott Baker  8:33  
I mean, one benefit is that just this is kind of, from a libertarian perspective, you know, this is consenting adults kind of taking advantage of contracts and having fun and gambling. Gambling is kind of always been legal in some form or another in pretty much every society. And this is maybe just, you know, an extension of that. I do think that, you know, having this so pervasive and having it available kind of 24/7 for every sport under the sun worldwide, in your pocket at all times, seems to at least amp up the extent to which people bet quite dramatically. We are seeing that, you know, a lot of people and most bettors, are betting in a fairly responsible way, relatively low amounts of money over time. But there is this tale that really drives a lot of our results that are kind of heavily betting and are seeing a lot of pressure in other elements of their of their budget. And I think that, you know, gambling sites certainly want to promote lots of betting. There's lots of promos. They're pushing notifications to your phone, lots of advertising, you know, and everything like that. It's very profitable. The more bets that are made. The you know, bigger their their own revenues are. And I think that you know, some of these tax revenues are quite, quite sizable, in the hundreds of millions or even billions of dollars. For many states, you've seen dramatic ramp ups, 10s of billions, hundreds of billions of dollars. Nationally, you. Being bet now every year, and that amount is kind of still growing. So I think that you know, some of that tax dollars, some of those tax dollars are probably in the minds of legislators that are, you know, regulating, or that are legalizing this activity.

Brad LaPlante  10:15  
You mentioned, talking about people's expenditures and the way that they're handling their household finances. Now, are people making money on these sports bets?

Dr. Scott Baker  10:25  
So we can't see inside, at least from our data currently, we can't see inside the gambling sites themselves. And so we can't see, you know, if they're holding lots of profits in there. We do see that there are a small number of people who kind of withdraw more than they deposit. So they are kind of net winners in general, and some of those are the people who maybe take advantage of the early promos and then kind of withdraw the money and don't gamble again. But in general, the vast majority of people we see kind of depositing and not withdrawing more than they are depositing so. And I think that's played out in kind of surveys and other sorts of data, where the vast majority of people, they might not be huge losers, but on net they are. They are losers. I mean, the same as most people going to kind of any casino, any trip to Vegas, there's probably going to be some winners in a friend group, but you know, mostly you know, people are going to be net losers.

Brad LaPlante  11:13  
We've talked a little bit just about how pervasive the ads have been. And, you know, from, I guess, from my perspective, it just seems like what's to gain, right? We've got the advertising. We've got the, you know, some people are, I don't know. I can imagine that some people are really hurting because of how addictive gambling is, and some people are just have more addictive personalities than others. So I guess, you know is, do you think it's worth it?

Dr. Scott Baker  11:47  
I think that's a hard question. You know, how much joy do people get? I think for a lot of people, you know, being able to bet on their favorite team, you know, maybe that does make some of the games, they get a little more invested in it, a little more, you know, emotionally satisfying for for some wins. So, you know, we're trying to provide in this paper, and there's a couple other papers that have been written recently about some of the kind of credit, like credit scores and delinquencies and other financial aspects. So I see us as kind of providing some empirical financial evidence to the debate, and we're not as well equipped to answer the question of like, is this net, you know, worth it to society overall? But I think with the you know, our paper tries to make clear that there are some costs. There are there are some costs there. There are certainly some benefits to allowing people to kind of freely contract and have fun in the way that that they want to and wager their money how the way they want to, but there are going to be some costs. And in a world in which we are, you know, a lot of state legislators and federal government are trying to, you know, encourage people to do more, say savings in the long term, savings for retirement and things like that, trying to get people out of credit card debt and be a little more financially responsible in general. This kind of works against that to some extent. And so I think there's, there are, there are trade offs, and this is kind of one side of the ledger that we are trying to quantify.

Brad LaPlante  13:14  
Is there any way to put this back in the bottle? Do you think that eventually, at any point, we might roll back on how pervasive online sports betting is.

Dr. Scott Baker  13:24  
I think it's possible there are other sorts of vices maybe that have seen kind of restrictions in advertising, or where they can advertise, when they can advertise. So things like cigarettes or alcohol sometimes have restrictions on on advertising. They can still be legal, and they can still be sold to kind of adults, but maybe they aren't able to, you know, sponsor stadiums as freely, or advertise quite as freely to places, especially where maybe minors would see so I think that is something that is being debated by some state legislatures, the extent to which this is kind of legalized but restricted in how public it can be, versus a blanket legalization or a blanket ban.

Brad LaPlante  14:11  
That was Dr Scott Baker. You can find his paper in our show notes. And if you could do us a favor, please follow us wherever you listen to podcasts and leave us a review, if you can, goes a long way in helping the show. As always, I will see you again next week.