Financial downsides of online sports betting

LAWRENCE — Playing the Powerball lottery. Pulling the handle of a slot machine. Putting money on a horse race. All these forms of gambling provide a risky opportunity for some quick cash.

But according to new research, there’s a big difference between online sports betting compared with other forms of legalized gambling.

“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.

His new working paper titled “Gambling Away Stability: Sports Betting’s Impact on Vulnerable Households” shows that not only does online sports betting lead to increased betting activity, it also leads to higher credit card balances, less available credit and a reduction in net investments. These effects are particularly pronounced among financially constrained households.

Pisciotta points to several reasons why this form of wagering is unique.

“One possible reason is that you think you have some role in the outcome. Most people understand a slot machine is random. With sports betting, you feel a little bit invested and might have some advantage — even though, on average, you don’t,” he said. 

“Also, with sports, you go to the bar, you’re with friends, you’re watching the game in real time while responding to what you’re watching. There’s a community engagement with the actual thing you’re betting on. So there’s more of an environmental and social aspect to it. Of course, there are also so few frictions to betting online using your phone.”

Co-written 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:

1. People draw on funds they would have been putting into savings accounts to use for online sports betting.
2. 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,” said Pisciotta, who admits the last time he personally bet on a game was during the March Madness basketball tournament.

Much of the rise in this activity was triggered by a 2018 Supreme Court ruling that overturned 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.

Pisciotta’s team used a proprietary dataset of consumer transactions from a U.S. data aggregation and analytics platform to arrive at these conclusions. The full database includes over 60 million American users and reveals billions of transactions from 2010 to September 2023.

“We can see transfers of an individual’s amount of money out of, for instance, a Vanguard account and transfers into DraftKings. Then we can look at how these things evolve over time,” he said.

“Sports betting tends to have some addictive components. Some people assume this has a half-life to it: ‘People want to try it out. They like certain aspects of it, but they realize they’re not a net winner, and they just turn off the app.’ We find the opposite. There’s not only an expansion among new users, but the users who tend to be losers are betting more and more over time.”

Has he gotten any pushback from Vegas?

“Directly, no. Indirectly, yes,” Pisciotta said.

He noted how gambling industry reps counter his findings with arguments that people often spend their hard-earned money on items/activities other people frown upon — like video games, YouTube, Amazon or Starbucks. Thus, there’s no reason to be concerned.

He said, “Can you provide evidence that these individuals run up large credit card balances to buy Frappuccinos? Unlikely.”

Now in his sixth year at KU, Pisciotta focuses on initial public offerings, sell-side analyst research and innovation. This is the first time he’s applied his expertise to study vice or entertainment consumption.

“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,” he said.

“If the sports betting industry strings out their customers until they exhaust every possible dollar, I don’t know if that’s a way for this industry to have staying power. 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.”