22 Aug 2024 Sports Betting and Poor Substitutes

You think we look pretty good together
You think my shoes are made of leather
But I’m a substitute for another guy
I look pretty tall, but my heels are high
The simple things you see are all complicated
I look pretty young, but I’m just back-dated, yeah

“Substitute” – The Who (1966)

According to a working paper summarized in this recent Bloomberg article, researchers found that $1 of household sports betting reduces household net investment by over $2. And, because sports gambling tends not to replace other forms of gambling (like lottery participation), what ends up happening is the total amount of household consumption goes up, increasing credit card debt and bank overdrafts for lower-income households and decreasing liquidity for higher-income households. These effects are worst for lower-income households, but across the income spectrum sports betting seems to have a generalized negative effect on net investment.

Now, I’ll be the first to say I don’t like gambling, but that’s not the focus of today’s blog. Instead, I want to talk about one of the reasons why this increase in sports betting leads to a decrease in investment, and that is this: a bad substitution.

The study provides evidence that many people view equity investing as a form of gambling, so as sports betting has become easier and more prevalent, the natural next step for those folks is to take dollars out of equity investments (or out of cash that would have been used to buy equities) and into some DraftKings parlay. If the S&P 500 and Monday Night Football bets are substitutes, why not pick the one with exciting athletes, incessant commercials, and “free” credits that induce more gambling?

Of course, sports betting has a well-documented negative expected value and is no substitute at all for even a mediocre and easily accessible portfolio, but that fact doesn’t seem to be doing much work to change the state of things.

And all this got me thinking about a few other bad substitutes that we should avoid accepting:

• Whim and Process. Bringing whim into the financial markets is as close to a guarantee as I can give that you will underperform, badly. 
• Debt and Discipline. Some types of debt can be useful and perhaps even wise, but debt as a substitute for discipline is a quick path to ruin for businesses and individuals alike.
• Complexity and Patience. You can’t out-calculus or short-circuit time. The introduction of complexity and cuteness into financial situations that really just need time and discipline gives the false illusion of control and merely delays or negates good outcomes.
• Growth and Discontentment. In a recent conversation with my good friend (and doctor) he said something that has stuck with me: “The only things that grow and grow and grow are cancer and grace.” A life of grace may have some quantitative financial growth; there is often a natural amount of this as careers progress. But a life defined by quantitative growth, by an insatiable pursuit of a numerical more–well, that will probably be less characterized by grace and more characterized by discontentment. 

Sometimes the substitutes are easy to spot if you’re paying attention. But many times—even if you’re paying attention!—these substitutes walk a fine line, and it can be tough to know which side you’re on without wise counsel.

And that stuff isn’t shouting at you like a DraftKings commercial. 

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