New Evidence Shows Why People Gamble

Is it for fun or as an investment?

My article on teaching economics with Bluey is now published in Social Studies and the Young Learner! It’s paywalled, and copyright prohibits me from posting it for mass consumption, but email me and I’ll send you a link.

---

In 2018 the Supreme Court legalized sports betting. If you happen to be a 40-something-ish-year-old man like me who likes sports, then the internet will find you and make sure that sports betting ads cling to you like a shadow. Sports betting is big business, pulling in more than $7 billion since 2018 in new state government tax revenue.¹ But even sports betting hasn’t hit the vertiginous heights of spending that scratch-off lotteries capture. According to NPR, Americans spend more money on scratch-off lottery tickets than on pizza! Gambling laws are loosening, and people’s attitudes towards betting are becoming more permissive.

Where does the value in betting come from? I mean, what do people get out of it?

No money, no fun.

A friend of mine likes to gamble at casinos, so I asked her. The thing is, she’s an economics and personal finance educator. She knows her stuff and I trust her, so I was intrigued.

“It’s fun,” she told me, “I like the excitement, the rush, chatting with the dealer and the other players, and spending time with my husband. It’s recreation.”

“But don’t you lose money?” I ask.

“Sure,” she says, “But I see it as the cost of a night out.”

Here is her plan: she sets a double budget. She spends a maximum of $300 and three hours at the casino. She leaves whenever either one of them runs out.

“I’ve always had the $300 budget,” she told me, “But I found that if I was winning I would stay far too long and eventually lose. The time limit gets me out of there with whatever I still have.”

That is one way to think about gambling. As paying for entertainment. But there’s another reason people might gamble: to get money. And some new economics research shows that not only is getting money is a major reason people gamble, but it also replaces other ways to get money.

According to new research by Scott Baker and colleagues working for the National Bureau of Economic Research (NBER), when sports betting is legalized it increases total gambling activity. Where does the money come from?

“This increase … significantly reduces savings, as risky bets crowd out positive expected value investments,” they report. People invest in betting rather than in stocks.

Who is making these bets? According to their findings, “These effects concentrate among financially constrained households, as credit card debt increases, available credit decreases, and overdraft frequency rises.” That is, it’s people who can’t afford to lose.

Another paper shows that if gamblers do make money in the stock market, they end up spending more money on betting anyway. So not only do they treat betting as an investment, they tend to treat it as their main investment.

That’s the value that people feel they are getting. People treat gambling as an investment, not as the fee for a fun night out. Even the fun is gone, as sports betting now gives folks another reason to hunch over their smartphones! (Did we need more reasons?) My scrupulous fun-having, casino-haunting friend is an outlier.

As you’ll remember from my previous article about “passive income,” it’s important to teach kids about the tradeoff between risk and reward. All our choices involve risk. You have to take some risks in life if you are to seize opportunities. You miss 100% of the shots you don’t take, right? So what’s the difference between a real investment risk and gambling, and how can we teach the kids about it?

Here’s a way: have you ever played The Claw game at the video arcade? The one where you guide a mechanical claw over a heap of stuffed animals, and snatch one to safety? You know that The Claw is going to drop your stuffed animal most of the time. You know who doesn’t know? The kids. They think that the game is a prime opportunity to get a sweet toy.

No no no, I’m not suggesting that you actually play this game with them. (Play Skee-Ball instead; that’s real fun.) Have the kids watch the Bluey episode entitled “The Claw.” In it, the dad sets up his own Claw game at home and lets the kids play… then intentionally drops the stuffed animal again and again while singing, “You lose! You lose! You looooose!”

Bluey naturally accuses her dad of rigging the game. And that’s just the point he’s making: there’s no way you can consistently win. In fact, he gets his kids to do chores overtime just to make payments for the game. (Mom is unimpressed.)² Just so with all forms of betting. The house always wins over time. Why else would they set up the game?³ It seems fun at first, but if you’re chasing profits, “You looooose!”

If your kids are a bit older there are some great lesson plans that can serve as resources. Here are a few new ones:

• Beyond the Bet: The Economics of Gambling curriculum from the Federal Reserve Bank of St. Louis. Lesson 2 has the kids bet on the outcome of funky classroom games. Fun!

• Risky Spending and Teen Gambling from the Council for Economic Education, in which students make an infographic.

• My lesson Is Efficiency Ethical? courtesy of the Council for Economic Education, which includes a townhall simulation in which kids debate whether to allow a new casino.

• Whatever neat lesson the Foundation for Economic Education makes to go along with this article on Friday.

When taking risks, it’s worth asking what’s being produced. Where is the value coming from? And are there better alternatives? Questions like this will guide you and the kids through all sorts of decisions, and help decide which risks are worth taking.

1. “Good on Paper” from The Atlantic Weekly. The stat can be found around the 28:00 mark.

2. Bandit, the Dad: “The house is getting clean and I’m teaching them a lesson!”

Chilli, the Mom: “Neither of those things is happening!”

3. Unlike in real investing, where you win the more time you stay in the market.