How to Rein in Runaway Sports Betting

Without jackbooting peoples' right to have fun in dumb ways

Sports betting is growing explosively. In South Africa, the face value of sports betting is equal to 25% of household income. In the US, since the Supreme Court overturned federal laws restricting online gambling in 2018, nominal personal incomes have risen 40%, but the gambling industry’s revenues have risen 55%.

The results have been disastrous, with low-income families in particular facing major new hardships. But the bad effects don’t stop with families of gamblers: gambling has so dramatically worsened household finances, that in states with more permissive gambling laws, banks restrict access to credit for everybody. Legalized gambling is likely to create genuine burdens on the pace of economic growth as it expands. I haven’t yet seen a study exploring possible effects on suicide, but I’m sure somebody is working on it.

But if you just determinedly think unrestricted online sports betting is an unalloyed good, fine, you do you. For the rest of us who remain sane and non-brainrotted, the important question is: How do we try to stop these new harms?

There’s a classic Safety vs. Liberty tension on this issue. It feels crazy to say it’s illegal to make a bet. People have been betting for as long as we have records of humans doing basically anything. Risk is fundamental to human economic activity; in some sense, stock market investments are “bets.” It’s crazy to arbitrarily take a subset of entrepreneurial risk-absorption-for-speculative-profit, which is generally a good thing, and ban it. Especially since most harms fall on the bettor, the argument for strict intervention isn’t obviously compelling.

On the other hand, there are harms and they aren’t limited to the bettor. Society loses out, gambling is a fundamentally unproductive use of money. Money invested in the stock market in principle actually goes to the creation of physical or human capital for the production of new goods and services. Money spent on betting produces only one kind of service: information about what people think are likely future outcomes. Information isn’t valueless, but it’s crazy that the market for information about leisure games is so enormous compared to future forecast outcomes that might actually matter for society. And again, if you’re thinking “But what does it mean for anything to actually matter?” you’re a bugman and you’re just not the audience here, you can stop reading. Furthermore, because gambling can be an addictive disorder which limits peoples’ abilities to exercise control over their own actions, it just isn’t the case that we can uniformly say “Responsible adults should just make their own decisions.” Gamble enough and you run the risk of ceasing to be a responsible adult in charge of your own decisions, as compulsive behaviors capture your brain.

So, what to do? There are basically three approaches: restrict, tax, and regulate. I’m going to go through them, and explain why I think a specific regulatory approach (alongside some taxation) is the best way forward, not blanket restrictions.

Restrict

One way to limit online gambling is just to ban it. Many states still do. I’m not categorically and in-principle opposed to this, however, I think there are some reasons to disfavor it.

First, most states actually allow non-online gaming via their lotteries or, in some states, onsite casinos. It’s hypocritical and weird to do this, but not allow sports betting which people actually enjoy and do socially, which seems preferable to antisocial lottery betting.

Second, lotteries reveal an important fact: gaming can be a valuable revenue source. Depending on the elasticity of online gaming with respect to taxation and your judgment of the scale of harms, it may be possible to set the tax rate at a level which generates enough revenue to offset harms. The optimal amount of online betting for society may in fact be greater than zero.

Third, I think we shouldn’t just handwave away liberty interests. It’s really kind of crazy that it’s a crime to use an online platform to bet on a horse in many states. That shouldn’t be a crime! It just shouldn’t! This is not some kind of intrinsically harmful and antisocial activity in the way that murder or theft or adultery or advocating for shrimp welfare is intrinsically harmful!

So the argument for banning online sports betting seems pretty weak.

Tax

The argument for heavy taxation seems stronger. Governments do things people care about, those things cost money, the money comes from taxes, it makes sense to base those taxes more heavily on stuff we want to discourage anyways than on stuff we don’t want to discourage. “Pareto taxes” or colloquially “sin taxes” are levied on tons of stuff we think creates social costs: guns and ammo, gasoline, sugary drinks in some states, airplane fuel, alcohol, cigarettes and, yes, gambling! Many states have a range of gambling taxes, and the federal government does too. The links I provide here argue against heavy taxation, but their point is actually consonant with mine: if you tax gambling high enough, you can squash the market. They see that as a bad thing. I agree that at some scale the tax becomes equivalent to a ban, and we probably shouldn’t ban gambling; but it isn’t clear to me that the optimal tax rate is the tax rate which maximizes wagers or revenues.

The optimal tax rate for betting isn’t necessarily the revenue-maximizing tax rate. It’s the tax rate which maximizes Revenue From Gambling - Harms from Gambling. It’s possible that harms from gambling could be nonlinear with respect to harms from gambling; this could generate a tax rate above or below the revenue-maximizing tax rate.

But in general, yeah, we should tax gambling. The current 0.25% is something semi-equivalent to a 10% actual tax rate on net gaming revenues. That’s… not that high! It would be reasonable to consider double or triple that amount! Maybe not 10 times that, but higher isn’t unreasonable!

All that said, taxing isn’t enough, and in some cash may even be too much. The issue with betting isn’t mostly related to the bulk of low-frequency bettors. The biggest issues are in bettors who are betting too much as a share of income, and taxation doesn’t necessarily target them well. Moreover, people who bet for recreation may reasonably resent stiff excise taxes being charged on their recreation. So, is there a different option?

Regulate: Let Winners Win

The business of running a betting website is a strange one. They want to induce bad bettors to keep betting. They don’t want good bettors to keep betting. This has been widely reported on: if you win too much in online betting, the website will throttle your betting options.

The fundamental problem facing betting websites is that their actual market is providing a massively greater range of markets to bet on. They want to offer you the option to bet on everything. But there aren’t always actually very many counterparties for those markets. As a result, betting websites provide their own liquidity. Thus, the counterparty for the bet is often the house. In principle there are some legal rules on how a website can supply liquidity, but they are obviously pretty weak. They should be strengthened.

A good regulatory response is simple: ban all win limits. Let winners win. Bettors don’t like limits on winnings. They are obviously unfair. They are also clearly a key source of profits for companies. There are no downside limits for bettors! But there are upside limits! This shouldn’t be legal! If you’re gonna run a sportsbook, run it fairly.

This may sound like a weird regulation for limiting gambling, but it matters a lot. The markets where “sharps” (i.e. highly informed bettors) can most overperform tend to be small- and mid-volume markets. Sharps don’t usually beat regular bettors for NBA championship games. But obscure bets on minor sports? Sharps clean up. Moreover, these kinds of “breadth” markets, where betting companies are extending into more and more sports and kinds of bets, are a key part of the marketing strategy. Most people betting on volleyball are less well-informed than the bookmakers are; the bookmakers can beat them. This strategy fails, however, if a professional volleyball gambler starts placing huge bets capturing the misinformation of common bettors. Basically, “sharps” are capturing the company’s profit margins.

Let them. It will wreck the business model of many companies. They will be forced to charge higher spreads on bets, which is basically “as good as a tax,” except it actually directly communicates to bettors just how unfair the market is for them.

Secondly, there should be limits on how much an individual can lose on a website. Once an individual has lost a certain amount of money, betting websites should be required to shut down their account. The harms of gambling are disproportionately caused by big-losers, and gambling companies can identify those big losers and protect them. They don’t do this because they make money when losers lose.

So no limits for winning, limits for losing is a pretty reasonable regulatory approach. Winners don’t threaten serious social harms. Losers do. Uncapping winners and protecting losers will also dramatically worsen the balance sheet of gambling sites, forcing them to charge higher spreads on bets, which will deter many gamblers.

Finally, states should prohibit gambling promotions. Gambling is an addictive behavior. It should be illegal for companies to provide gifts in cash, kind, or handle to their clients. Again, make the odds equal for everyone. Nobody has different limits, nobody has stacked returns due to promotions, everybody bets on the same playing field, and if they lose too often they get kicked out because that’s dangerous to society. This is a simple regulatory approach, it will work to curtail harms while preserving liberties, and most notably, it’s fair. All that’s being suggested is that betting websites let everybody play the same odds.