Sports betting has become an epidemic, especially among young men. The Guardian recently aggregated some alarming statistics about its prevalence. The story notes:
Somewhere between 60 and 80 percent of high school students reported having gambled in the last year, the National Council on Problem Gambling reported in 2023. A study commissioned by the NCAA found that 58 percent of 18-to-22-year-olds had bet on sports – although it should be said that in most states this is illegal before the age of 21.
Prediction markets have contributed to the normalization of gambling by blurring the line between investment and gambling. You can now essentially place betting parlays on Robinhood, an app previously dedicated to retail stock trading.
In order to see why this uptick qualifies as an epidemic, we can use some economics to see how sports betting will necessarily make the average participant poorer.
Investing vs Gambling
To see why, it is helpful to contrast gambling with investing. After all, what makes betting on your favorite team different from buying some index funds for retirement?
Well, first of all, investing has the ability to be a positive-sum game. In other words, when you buy stock, it can be a win-win. If you buy stock in a company, the company receives money today, which it can use to grow, and in exchange, you get equity in a company that grows in value. It’s a potential win-win. If you buy from a broker, this same logic holds, just with more steps between you and the company.
This ability to have a positive-sum game is why, when individuals diversify into a large number of stocks, their portfolios grow. If someone invests in an index fund like the S&P 500, their money has historically grown at an average of 10 percent annually. This doesn’t require any special insider information or in-depth research. It’s just riding the wave of positive-sum exchanges.
From the perspective of monetary return, sports betting is not positive-sum. If two people bet against each other on the outcome of a game, one person wins and the other loses. This is an example of a zero-sum game. If Jon and I bet $100 on the Bears-Packers game, one person loses $100, and one gains $100. If you add those gains ($100 and -$100), you get zero.
Betting on a sports betting platform is even worse for participants. Betting platforms need to make money on the bets as well; so, one way or another, they take out of that $200 pool. This makes the game negative sum as regards monetary return for participants. If Jon and I use a platform to bet and I win, I get $100 minus whatever the platform takes, say $5, and Jon loses $100. In that case, the net return to the bettors is $95 (my return) minus $100 (Jon’s loss).
If you consider the platform’s $5 gain, it remains zero sum. But after the mandatory house take, the exchange is negative sum for the bettors. This is the first reason why sports betting is financially a bad idea for participants.
Point Shaving and Efficient Markets
The downside of gambling can be even further exposed by economic reasoning. In particular, we’re going to talk about the efficient market hypothesis (EMH).
When economists talk about efficiency, often people scoff. People don’t like the results of markets, and therefore, they believe they can’t be efficient.
Efficiency doesn’t mean we like the results, though. All efficiency means (for the EMH) is that markets incorporate available information when pricing assets.
For example, let’s say Apple discovers a way to improve the speed of iPhones by 10x, and this information becomes publicly available. The company plans to implement this technology in the next-generation iPhone, which will be released next year. Let’s further say that this improvement will lead to many Android users switching phones when the new phone comes out. These sales will mean higher profits and, therefore, a higher stock price for Apple.
Question—will Apple stock prices go up as soon as people discover this, or not until after the new version is released? If investors believe the above information is accurate, they will buy stocks immediately in order to gain from the future improvement in profits. Since everyone rushes to buy the stock today, the information about the future is incorporated into the price today, not when the new version is released.
For an extreme example, imagine a company publicly announced it would declare bankruptcy next week. Do you think stock prices would wait a week to tumble? Of course not.
Markets reflect all publicly available relevant information, and this includes betting markets. If a major player for a team gets injured in practice, gamblers will bet against the team in question and shift the odds.
Since the stock market is positive-sum, others having more information than you may not be a problem. If Apple is in your diversified portfolio, you don’t need to scan headlines to learn about the company’s technological innovations before anyone else does.
Sports betting, though, is negative sum for bettors. If someone has information that you don’t have, they can exploit that asymmetry to earn money off of you.
On average, a person betting randomly on sports will lose money because the game is zero sum for bettors. That means in order to make money consistently, you need to have access to knowledge or information that others don’t.
Here’s the thing, the average person cannot have more information than everyone else, by definition. There are people who bet on sports for a living. Does an average Joe have access to more information and prediction tools than industry insiders? It seems very unlikely. Most participants, over the course of their lives, will be net losers in sports betting.
The best evidence of this can be seen by the onslaught of point-shaving scams being uncovered in college and professional sports. Investigations by federal officers, coach firings, and indictments of players for point shaving saturate recent headlines in the world of college basketball.
Many people involved in these schemes will get caught, but it seems likely that other insiders either knew about these schemes or learned about them by being close to the industry. When you compete in sports betting, you compete against people with this sort of information.
In other words, the odds in any sports betting situation are set by information that average people don’t have access to. In order to win money, you need to beat those odds. In other words, you need to have better knowledge and information than those who make the odds.
The implication here seems straightforward. The average person in sports betting loses money. The statistics match the logic. NBC reported on a study that showed:
…compared with states that did not implement sports gambling, states that did so saw credit scores drop by a statistically significant, though modest, amount, while bankruptcies increased 28 percent and debt transferred to debt collectors climbed 8 percent. Auto loan delinquencies and use of debt consolidation loans also increased, they found.
The structure of sports betting laws is beyond the control of the average person as well, but personal behavior is not. The personal implications here are clear. Sports betting is bad for your personal finances, and average joes won’t win (even if you think you will). You may know a lot about basketball, but do you know as much as the professional bettor whose cousin happens to be a physical therapist or coach of a team?
Every time you see a point-shaving headline, it should be a strong reminder. In a zero-sum game, the winners are likely those exploiting information you can’t access.
