Sports Gambling and Volatility (Food for Thought)

To begin my article, I want you to first read a passage from Irrational Exuberance by Robert J. Shiller about the relationship between gambling and the stock market (starts on page 58 of his expanded third edition).

The Rise of Gambling Opportunities

“The prevalence of commercial and government-supported gambling was rising around the world during the Millennium Boom.  This increasing prevalence parallels an increasing respect for markets and private property, as well as an increasing admiration for “winners” and contempt for “losers.”

In the United States, commercial gambling, both legal and illegal, experienced about a sixty-fold increase in real (inflation-corrected) terms between 1962 and 2000.  According to a 2000 telephone survey, 82% of adults in the United States gambled in the preceding year, up from 61% in a 1975 study. The amount lost on gambling by people in the United States in 2000 was more than they spent on movie tickets, recorded music, theme parks, spectator sports, and video games combined.

Most forms of gambling and lotteries were outlawed by the states of this country in the 1870s after a scandal in the Louisiana lottery, and the Louisiana national lottery itself was effectively shut down by an 1890 act of Congress prohibiting the sale of lottery tickets by mail.  From then until 1970, opportunities to gamble legally were confined largely to racetracks, a form of gambling that has limited public appeal and which, at the time, required travel to a racetrack. But by 1975, there were thirteen state lotteries, and by 1999, there were thirty-seven, offering very convenient and easy means of wagering.  Until 1990, legalized casinos operated only in Nevada and Atlantic City. By 1999, there were nearly 100 riverboat and dockside casinos and 260 casinos on Indian reservations. Suring the same interval, betting at racetracks also expanded dramatically, with the development of off-track betting relying on satellite broadcasts of the races.  Cable and Internet wagering on races was possible from home. There was also a proliferation of electronic gambling devices, including slot machines, video poker, video keno, and other stand-alone devices. In some states, theses could be found at truck stops, convenience stores, and lottery outlets. The ubiquity and convencie of gambling opportunities, and the strength of the marketing campaign undertaken to promote gambling were unprecedented in history.  

The rise of gambling institutions, and the increased frequency of actual gambling, had potentially important effects on our culture and on changed attitudes toward risk taking in other areas, such as investing in the stock market.  The legalization of gambling in the form of state lotteries has sometimes been observed to help the illegal numbers business, rather than replace it, and thus it might also have promoted other capricious risk-taking activities. Gambling suppresses natural inhibitions against taking risks, and some of the gambling contracts, in particular the lotteries, superficially resemble financial markets: one deals with a computer, one receives a certificate (the lottery ticket) and, in the case of the so-called mega lottos, one participates in a much-talked about national phenomenon.  Having established a habit of participating in such gambling, it would be natural to graduate to its more upscale form, speculation in securities.

The highest U.S. stock market volatility-occurred between 1929 and 1933-when it was more than twice as high as had ever been previously recorded.  This period of volatility occurred during during a “gambling craze” that was brought on not by legalization, but by the organized crime that was inadvertently created by the prohibition of alcoholic beverages from 1920 to 1933.  The criminal gangs that grew after 1920 to satisfy the nation’s thirst for alcohol found it natural to branch out into numbers games or speakeasy versions of craps and roulette. ORganized crime developed a modern and efficient distribution, marketing, and retail system to supply the nation at large with liquor. Going far beyond its traditional neighborhood strongholds. And this same infrastructure served to facilitate illegal gambling activities on a much larger scale.  Certainly the widespread disrespect for the lar fostered by Prohibition helped legitimize gambling.

A spillover from gambling to financial volatility may come about because gambling, and the institutions that promote it, yield an inflated estimate of one’s own ultimate potential for good luck, a heightened interest in how one performs compared with others, and a new way to stimulate oneself out of a feeling of boredom or monotony.  The the ned of the 1990s, people were constantly subjected to highly professional advertisements that tried to foster such attitudes, even radio and television advertisements that depict typical gamblers’ self-justifications as expressed by professional actors. These marketing efforts, and the experience of gambling or seeing others gamble, may have well have the effect encouraging frivolous risk-taking behavior in the stock market as well.  Such ads were sometimes startingly explicit. In 1999, near the peak of the stock market, a Connecticut billboard advertising off-track betting touted it, in big letters, as being “Like the Stock Market, Only Faster.”

In relation to this passage from Irrational Exuberance, I want to add in my personal and a little more modern investigation to Robert Shiller’s theory of The Rise of Gambling Opportunities and it’s possible effects on the stock market.  I find that the recent rise in sports gambling could potentially add to market volatility, if it hasn’t already.  In addition, I feel the need to state that gambling is one of the many factors, not a wholesome explanation, for market swings, as is described as one of twelve important factors in Irrational Exuberance. Nonetheless, I do find a possible relationship between the recent volatility and recent legalization of sports gambling, in which I’ll exhibit in my investigation below.

On May 14, 2018 the Supreme Court struck down a 1992 federal law known as, The Bradley Act, that stated “(s)ports gambling is a national problem. The harms it inflicts are felt beyond the borders of those States that sanction it.”  Bill Bradley, former professional basketball player and senator, famously stated in the introduction of the bill:

“As a former professional basketball player, I have witnessed first-hand some of the negative effects of sports gambling.  In one game at Madison Square Garden, the Knicks were ahead by eight points with thirty seconds left in the game. We scored a basket, which put us up by ten points.  Instead of cheering, however, a portion of the crowd in the Garden booed. The point spread was evidently eight instead of ten.

On another occasion, a player on our team threw the ball up at the end of a game.  Although the Knicks won the game, the ball ended up going into the basket of the opposing team.  During the next week, the press in New York speculated about what had essentially been an inadvertent act.  It was the prevalence of sports betting which encouraged this speculation.

State-sanctioned sports betting puts the imprimatur of the state on this activity.  It conveys the message that sports are more about money then personal achievement and sportsmanship.  In these days of scandal and disillusionment, it is important that our youngsters not receive this message.  Athletes are not roulette chips, but sports gambling treats them as such. If the dangers of sports and youngsters’ view of them could be seriously threatened.”  

The recent ruling has effectively provided a pathway for the legalization of sports gambling within individual states and is up and running in Nevada, Delaware, New Jersey, Mississippi, West Virginia, Pennsylvania and Rhode Island.  Also, Iowa, Indiana, Tennessee and Montana recently legalized sports gambling in May of 2019. Geoff Freeman, CEO of the American Gaming Association, described the decision as “a victory for the millions of American who seek to bet on sports in a safe and regulated manner” and his association estimates American illegally wager $150 billion in sports bets per year.  Now, $150 billion seems a bit optimistic to me, but from personal experience, sports gambling does appear to be one of the most, if not the most widespread popular forms of gambling, even before it was legalized.

Now, where my investigation begins is with Bill Bradley’s statement that “Athletes are not roulette chips, but sports gambling treats them as such.  If the dangers of sports and youngsters’ view of them could be seriously threatened.”  The spillover effect from gambling, studied by Robert Shiller, would argue spillover effects translate into “Stocks are not roulette chips, but market gambling treats them as such.”  Hence, I’ve slightly edited a S&P 500 chart by adding in a line that marks the the date of when the Supreme Court struck down the Bradley Act, on May 14, 2019, and highlights the ensuing volatility.    

When viewing this chart, the black dot represents May 14, 2019 as the day that the Supreme Court overturned the Bradley Act.  Now keep in mind it took a couple months for the states to begin legalization. Hence, if we look at the ensuing volatility from May 14, 2019 – today (June 9, 2019) there is a bottom of 2,351.10 on December 24, 2018 and a top or peak of 2,945.64 on May 3, 2019.  This highlights a bottom/top value difference of 22.45%. To compare with previous volatility, I’ve provided a chart that marks the beginning date of January 2, 2018.

As one can see, the volatility within (peak to trough) January 2, 2018 to May 14, 2018 is significantly less than that within May 14, 2018 to June 9, 2019.  Now to complete my article, I will state that there is a multitude of factors that cause volatility and sports gambling legalization can’t be viewed as an individual end-all explanation for market swings, but I do think its importance will be recognized as markets continue their surge and swings in what Robert Shiller refers to as the “New-Normal Boom” (2009 – present).  

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