By Sam Taube, NerdWallet
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Sports betting apps now allow millions of Americans to put down serious money on the outcomes of games, and on in-game events such as a specific team scoring first, all from the comfort of their smartphones.
According to Goldman Sachs Research, U.S. sports betting has grown into a $10 billion industry since a 2018 Supreme Court decision allowed states to legalize it — and it could grow into a $45 billion industry in the years ahead .
That growth is apparent in the stock prices of sports betting companies such as DraftKings (DKNG). DraftKings shares have more than doubled in price since the company went public in 2020, albeit with significant volatility since then.
Buying shares of companies that operate in the sports betting industry (like DraftKings) may add some volatility to your portfolio, but it’s still an investment in a traditional asset. So how does that stack up with sports betting itself?
The difference between betting and investing
According to Chris Woods, a Charlotte, North Carolina-based certified financial planner, one of the biggest differences between an investing habit and a sports betting habit is long-term outcomes.
“You’re going to end up with a lot more money over the course of 10 or 20 years in the market, with consistent investing, than you would with the win-some-lose-some approach of betting on sports on a weekly or monthly basis,” Woods says.
For reference, the average total return of the S&P 500 index over the last few decades is about 10% per year, or roughly 159% per decade, before inflation. That’s a level of consistency in returns that would be hard to match with any kind of betting.
However, Woods notes that there’s another difference between sports betting and investing, which helps explain the former’s popularity: a lot of people know more about sports than the stock market.
“Part of the problem with investing is that many people don’t understand it that much, so they just don’t do it. Sports betting feels familiar. They know the players, they know the teams, they know the sport,” Woods says.
How heavy sports betting can affect your finances
In a paper published in July, researchers from Northwestern University, Brigham Young University and the University of Kansas looked at how sports betting has affected households’ investment, spending and debt management decisions since legalization.
The researchers found that sports betting tends to reduce households’ savings, as “risky bets crowd out positive expected value investments.” In other words, many sports bettors divert money that they would have otherwise saved or invested to fund their bets.
“These effects concentrate among financially constrained households, who become further constrained as credit card debt increases, available credit decreases, and overdraft frequency rises,” the researchers wrote.
Frank Paré, an Oakland, California-based certified financial planner, says it’s important to understand this kind of behavior in a human context — especially in the case of those “financially constrained” households.
“When households are under stress, there are studies that show that their ability to think logically kinda goes down. So the focus becomes ‘how to make money fast.’ And if you believe you have an edge because of all the information you have regarding sports, that’s going to be your go-to,” Paré says.
However, Paré says that a financially-stressed household may worsen its situation by diverting money to sports betting.
“If it’s diverting from your required living expenses, you’re putting yourself at risk of not having a stable household,” he says.
Woods adds that the opportunity cost imposed by betting money instead of investing it can make it more difficult to achieve long-term goals such as retirement. “You’re missing out on an opportunity for the consistent value creation that we’ve seen in the stock market over the long term,” Woods says.
Is it possible to bet on sports responsibly?
Paré and Woods both say that it’s possible for some people to enjoy sports betting in moderation, provided that they set healthy limits for themselves.
Paré says that one way to set guardrails on your sports betting is to limit it to special occasions — for example, making a small wager on the Super Bowl but not on regular-season games.
Woods adds that people should never bet money they can’t afford to lose.
“If people are going to do this, I would have them set up a budget, and put this as a line item in the budget. Treat it just as you would your other entertainment outings. So if you have a certain amount of money set aside for going to the movies, for going to concerts, for something like that, I would include it as a line item like that — as an expense,” Woods says.
But Paré and Woods both say that some people can find themselves unable to control the risks of their sports betting behavior. In other words, heavy sports betting can sometimes be a form of gambling addiction.
Anyone who thinks they may be struggling with an addiction can contact the National Problem Gambling Helpline, run by the National Council on Problem Gambling. The phone number for guidance and help is 1-800-GAMBLER (1-800-426-2537). The council also offers help via text message at 800GAM (800426), and via chat on their website.
If you feel that you are able to set healthy limits for yourself, a financial advisor can also be a good resource for gauging how much you can responsibly budget for entertainment expenses such as sports betting.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
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Sam Taube writes for NerdWallet. Email: [email protected]. Twitter: @samuel_taube.
The article Sports Betting Can Be a Gamble for Your Financial Health originally appeared on NerdWallet.
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