The Economics of Sports Books

by Carl Tannenbaum, Chief Economist, Northern Trust

Online sports gambling illustrates many economic principles.

I ran a simple football pool in college.  Participants submitted sheets that picked the winners of the weekend’s games (no point spreads involved), and the person with the most correct choices got a ten dollar prize.

Sports wagering has come a long way since then.  Global revenue derived from this activity now exceeds $100 billion, and is expected to grow exponentially in the years ahead.

I was thinking about this evolution in the wake of allegations that American basketball players and coaches provided gamblers non-public information in violation of league rules.  They are not the first to be accused; the list of sportsmen worldwide that have run afoul of the law is a long one.  But this most recent episode has raised questions about the propriety of sports wagering.

Normally, I would leave this debate to policy makers.  But gambling is fertile ground for the illustration of some economic principles.  Here are a few observations I would share on the topic.

• •  There is a substantial body of economic literature that supports legalized wagering.  Betting has been going on in the shadows for a very long time; its influence on sporting events is hardly novel.  Restrictions often drove online wagering activity offshore. In light of this, National Basketball Association Commissioner Adam Silver urged bringing betting from the shadows into the light in a 2014 editorial.

Legal sports books allow for monitoring that can be used to curb abuses. The indictments announced last month stem from that kind of surveillance.  The industry notes that the recent revelations are a sign that the system is working, and that the severe penalties meted out to violators serve as a deterrent.

• Legalizing something also makes it easier to tax.  Licensed betting shops were allowed in the U.K. beginning in 1960; according to Statista, Britain collected £3.6 billion in taxes last year from gambling.  Tax proceeds from wagering received by U.S. states grew by a factor of ten in the five years after a court ruling allowed the broader opening of sports books.

• Taxes raised from betting can be used to fund a range of social programs.  But the benefits derived must be weighed against the consequences that befall some bettors.  A study published earlier this year by UCLA noted increases in debt delinquencies and bankruptcy filings in areas which legalized sports gambling.

In Britain, data on betting patterns is used to identify gamblers who might be getting themselves into trouble, and to curb their wagering. These are worthy of consideration in the United States.

• The pandemic bears a lot of responsibility for the explosive growth in sports betting.  U.S. regulators initially proposed that bets be taken at physical locations where gamblers could be screened and registered. This approach, it was thought, would reduce the likelihood that gamblers would become overextended.

COVID-19 made physical proximity risky, and turned attention to online portals.  Like other applications that people access on their devices, wagering applications use techniques that encourage sustained engagement.  Free bets, notifications that create urgency and customer loyalty points all have roots in behavioral economics.

The basketball betting scandal has raised alarm about the integrity of the games, and prompted calls for curbing wagering.  But those in search of arenas in which they can take risk will find a number of alternatives. Better to improve monitoring than to prohibit activity.

I recently got a pitch from one of the online betting portals, touting the potential returns from a basketball parlay that depended on which team got the first foul, what player would be the first to miss a free throw and when during the game that the total score would exceed 100 points.  Too complicated for me…bring back the old football sheets.

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