Sports betting has surged in popularity in recent years. A new study suggests that its legalisation in 37 US states has led fund managers to take greater risks — often to the detriment of their investors. Could the growing normalisation of gambling be subtly altering professional decision-making in ways we’ve yet to fully understand?
Few economic sectors have grown faster than the gambling industry. Its market size in the UK is now more than £15 billion, and the Gambling Commission estimates that around 25 million Brits engage in some form of gambling each month. In short, gambling has gone from an occasional, in-person event to an instant, 24/7 activity involving around half the adult population.
So what impact has this growth in the popularity of gambling had on the way we invest, and, in particular, on our attitudes to investment risk?
So far, most of the research in this area has focused on ordinary investors. For example, a 2024 study by Northwestern University showed that, in US states where online sports betting has been legalised, households have reduced their net investments by nearly 14%.
A 2021 study by Chi Lao from the University of Manitoba found that the opening of a casino leads to a temporary increase in portfolio risk-taking among local investors with a high propensity to gamble. Specifically, these individuals increased their idiosyncratic portfolio risk by 12.86% compared to those unlikely to gamble.
Now a new study, published in January, by academics at the Universities of Bristol and Liverpool has explored the link between increased access to gambling and risk-taking by fund managers and other financial professionals.
Sports betting in the US
The researchers set out to discover whether the legalisation of sports betting in 37 US states since 2018 has influenced the behaviour of professional investors. These individuals control trillions of dollars in investments and are responsible for making decisions on behalf of millions of people. In particular, the researchers wanted to know whether easier access to gambling affects their willingness to take risks with their investment decisions.
To measure risk-taking, they looked at the types of stocks the fund managers invested in before and after legalisation. Specifically, they tracked whether they increased their holdings of high-volatility stocks (those that experience big price swings), high-beta stocks (those that tend to move more dramatically than the overall market) and lottery-like stocks (those with a small chance of huge gains).
They also examined how these investment choices affected fund performance. Of course, if taking more risks led to higher returns, then it might not be a bad thing. But if riskier choices resulted in lower returns, that could be a concern.
The study produced three key findings:
1. Fund managers took more risks after sports betting was legalised in their states
Fund managers in states where sports betting had been legalised invested a higher percentage of their funds in risky assets. This increase in risk was statistically significant and economically meaningful, so not just random variation.
2. Their funds performed worse as a result
Unfortunately, this greater risk-taking did not lead to better returns. Instead, fund performance declined, meaning investors in those funds generally made less money.
3. The increased risk-taking was driven by the fund managers themselves
Some might assume that fund managers were responding to a change in investor preferences; perhaps people in gambling-friendly states started demanding riskier funds. However, the data showed that investor behaviour (measured through fund inflows) did not change after sports betting was legalised.
Interestingly, the increase in risk was mostly seen in funds managed by individuals rather than teams. This suggests that managers were making riskier choices based on their own attitudes rather than responding to market demands.
Why does this study matter?
This study provides strong evidence that policies legalising gambling can have unintended consequences beyond just the gambling industry. In this case, it shows that legalised sports betting can influence how professional investors take risks with other people's money.
The findings also challenge the common assumption that decisions made by fund managers are purely rational. Even experienced professionals appear to be influenced by their environment and changes in social norms.
The authors concluded: “These findings contribute to the existing literature by highlighting how changes in social norms, such as the legitimation of gambling, can influence professional decision-making in financial markets.
“The implications are significant, suggesting that policy changes that alter social perceptions of risk can have unintended consequences on financial stability and investor welfare. Future research could further explore the long-term effects of such a behavioural shift.”
What does it mean for investors?
This latest research shouldn’t give active investors huge cause for alarm. There is anecdotal evidence that some fund managers like to gamble; New York hedge fund manager Boaz Weinstein, for example, recently announced he won a Maserati in a game of poker. There is, however, no reason to believe that fund managers in general are more likely to gamble than any other well-paid professionals.
However this latest research is a reminder of the danger that, whichever active fund manager you choose to invest with, they may have a greater tolerance of risk than you do. This may be down to a performance-based remuneration structure; alternatively, he or she may be overconfident in their own abilities; or, as we’ve seen, they may have a risk-seeking personality.
Whatever the reason for it, this mismatch in attitudes to risk can be a real problem, especially when big risks don’t pay off.
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