Sports Betting and the Domain of Responsibility

'Laolu Samuel-Biyi
Sports Betting and the Domain of...

Almost in cycles, there’s always a conversation on Twitter about sports betting. The most recent is one by a person who lost £447,880 over 12 years. These conversations are triggering to my Finance/Economics side, while at the same time appealing to my emotional side, so I follow them with great interest.

The vitriol associated with these conversations is almost always directed at betting companies. In fact, one person mentioned that he considers the founders of betting companies to be the same as drug dealers. As a student of Economics, I find it disturbing when people are surprised that economic agents are taking legal actions that are in their self-interest. I have found that in too many conversations, there is an obfuscation of the domain of responsibility, and it’s even spilling into the social space. I think people generally need to do better in recognizing personal responsibility, third-party responsibility, and the responsibility of the authorities for collective welfare.

Sports betting companies do one thing: They take positions against you while stating their odds beforehand. Imagine a friend telling you “I believe that Donald Trump will win the presidency, and I wager you 1.2x your money on that. That is, if he loses, I will give you your money back + 20%”. You will probably consider that wager strongly if you’re very political in the US, and you won’t think that bet is inherently dangerous. Objectively, there is no harm being done. You can analyze all the facts at your disposal to decide on a position or no position at all, subject to your personal loss aversion. 

Sports betting companies leverage technology to do this at scale. The first step of breaking down this line of business is to consider it as I have above and therefore accept that the betting in and of itself is not dangerous, then move to the next step where, perhaps, it is the scale that could be dangerous. This distinction is important, as it helps to decompose exactly what to demonize and solve for. 

If you made variations of the Trump bet with your friend two, five, or ten times a week, are you inherently harming your friend? The parallel argument here is that betting can be addictive and the effect of losing a bet can be potentially devastating, so you owe it to your friend not to offer him a wager with that frequency. The question to then ask is whether or not that statement is universally true. Do most people get addicted to an addictive thing, and would partaking in it be devastating to most?

To answer this question, switch betting for, say a caffeinated Cola drink. The drink can be addictive, and the effects of sugar can be devastating, but only to people who are prone to sugar addiction and people with something like diabetes. Imagine if a company can figure out a way to profitably sell 5 Naira Cola drinks. While making N5 Cola drinks easily available might be a problem to some, it is not to a majority of others (who are not prone to addiction and have no health risk), so ease of access to addictive and potentially devastating stuff that are not inherently dangerous cannot be the problem. 

So, if we say betting is not inherently dangerous, and ease of access to it is not universally dangerous. So what would be the problem? Well, if a company figures out a way to make money by offering N5 Cola drinks to the entire population of 200m, so, say we now we potentially have 500,000 addicted to sugar and caffeine with the risk of stroke, which creates negative externalities for the broader society as the healthcare system gets overwhelmed and national productivity is affected, whose responsibility is that to solve? 

Remember, you have millions of people objectively deriving utility from the drink, but you also have a significant number of people being damaged as a result of too much indulgence, so where does the domain of responsibility lie? Well, as a business, it is ethical to consider measures that will prevent addiction, but it is important to separate ethics from responsibility. In this case, the company will take rational actions to maximize profits, for example, by retargeting people identified to be Cola drink lovers, and that should be perfectly understandable. 

It is the distinctive domain of the authorities (government) to internalize negative externalities. With knowledge of the influence of cheap Cola drinks on a significant portion of its population, which creates a burden on collective social welfare, the government is then responsible for creating regulations that, for example, restrict the number of cheap Cola drinks that can be sold to particular categories of consumers. It is the domain of anti-addiction charities and social pressure groups to internalize any neglected negative externalities by creating awareness about the risk of addiction,  providing support services, and pressuring authorities to do their job. The authorities could force betting companies to deny deposits from people that exhibit certain addictive patterns.

However, individuals and businesses also have the responsibility to directly do no harm. Now, if the Cola drink is inherently dangerous, where drinking 3 bottles could kill the average person or 1 in 2 people get addicted, then, just like hard drugs, the drink should not be sold, whether or not it is legal. But still, the authorities must define illegality, simply because bad people exist and they need a legal basis for action.  

I don’t dispute that in a society where people are predominantly poor, sports betting might have outsized negative externalities. It is just important to clarify the bone of contention in case there is a future where the population is not poor, or if there’s a product variation that can exclude the vulnerable, without vilifying the product itself or its promoters. The same arguments against sports betting cancel out the opportunity for casinos or even national lottery programs that are very useful for infrastructure financing elsewhere, and these are even bigger games of chance than sports betting where there are things to analyze. Since 2004, the UK’s National Lottery Fund has deployed over 6billion Pounds to over 130,000 projects across the UK. Perhaps if the Nigerian government is struggling to collect via taxation, this is a channel to consider by playing into the demands of the population for the hope of outsized returns and restricting to amounts that won’t hurt livelihoods. 

If you’re dealing in stocks, unless your expectation of returns is entirely in the form of dividends, or you are willing to wait till the company is liquidated (same for commodities), you are essentially merely trading in the asset premium, which is simply a bet on a future state, just like sports betting. If you’re trading in currencies, you are entirely betting on a future state, likewise if you’re engaged in any form of derivatives. There are instruments like margin-trading that have a deeper downside than the loss of capital from betting, but these instruments themselves are not inherently problematic. In fact, nearly every investment decision is a bet against the next best alternative, otherwise, all returns will technically be zero. Your expected return percentage from every investment is a measure of your risk of losing the entire investment, even treasury bills or savings accounts. The finance field has long established that anything with 100% guaranteed capital preservation will have 0% return (i.e, under your bed, and even that is at risk from termites and costs space, hence negative long-term interest rates for some instruments by Western sovereigns). 

There are barriers to entry to trading in stocks, commodities, currencies, and derivatives that essentially restrict it to the elite and those that can absorb losses. There is the knowledge barrier, the technical barrier, the access barrier, the capital barrier, and several regulatory barriers. In the US, the well-hated accredited investor rules prevent the non-wealthy from participating in certain instruments, so as to prevent the social burden of people losing their investments due to lack of understanding or capacity. The laws are “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.” 

In Economics, there is a concept of Pareto Optimality, which is a situation where no individual or preference criterion can be better off without making at least one individual or preference criterion worse off. In advocating for economic changes, especially those that can affect commercial businesses, we need to isolate emotions and consider actions that strive towards Pareto Optimality and not further away from it. 

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