The impact of sports betting on financial markets

There are now more insights into the sports betting industry than ever before.

Many experts have long sought to establish similarities and links between sports betting and financial market investing. After all, both involve taking your chances in the hope of winning. Sports betting and financial markets share key similarities and huge differences, with the former directly influencing the latter. This article will examine the impact of sports betting on financial markets in detail.

Sports Betting And Financial Markets

Financial markets and sports betting markets share numerous features. Both have lots of activities, professional analysts, and vast amounts of information. Also, the way bookmakers' odds continuously shift in the days leading up to games shares a lot in common with evolving stock prices.

However, these markets are distinct in major ways. For starters, sports betting behaviour isn't influenced by macroeconomic factors. Admittedly, the entire sports betting market is subject to the overall economy. Therefore, you can expect fewer people to gamble during an economic recession. However, on a more personal level, what's happening with oil prices or the stock market has very little to do with whether one game will be priced differently than another. Furthermore, the outcome of games in the sports betting market is factual evidence for whether prices were accurate or not. 

Understanding Stock Market Strategies

Value and momentum trading are undoubtedly the two most effectively consistent stock market strategies. Value traders fish for underpriced stocks and wait for other investors to catch on. On the other hand, momentum traders search for stocks on the rise, buy them at high prices, and sell them for even higher prices. 

Two economic schools of thought have different answers regarding why these strategies are effective. Economists who believe in market efficiency think that prices accurately reflect all available market information. As such, investors can only earn profits by entertaining more risk, and the effects of value and momentum arise from that process. On the other hand, behavioural economists think that value and momentum traders simply identify irrationality in the market. According to them, investors pick out wrongly priced stocks due to human error. Momentum traders simply exploit the idea that winners will continue winning, and value traders zoom in on overlooked aspects of companies. 

It was hard to determine which school of thought was right because the stock market's nature makes it challenging to prove one over the other. Indeed, there's no way to determine whether an enterprise's stock price is accurate at any given time. 

Tobias Moskowitz, an American financial economist and a Yale School Of Management professor with a longstanding interest in the relationship between sports and economics, conducted a study to test whether sports betting markets have value and momentum effects. To him, it was conclusive that behavioural phenomena were at work if they did. His research found that sports betting contracts had strong momentum effects. This means that bettors typically overprice teams in great form. He also found some decent evidence of value effect: bettors underpricing lesser-known teams. His belief in the behavioural perspective grew stronger than that in market efficiency at the end of the study.

How Sports Betting Directly Affects Investing

Behavioural finance studies human behaviour and how it results in investment errors like the mispricing of assets. This field's theories suggest that biases and psychological influences fuel investors' financial behaviours. 

In a study conducted with Eric Johnson, Richard Thaler, one of the leading figures in the behavioural finance field, concluded that individual investors typically entertained more risk in their investment allocations following prior gains (house money effect). On the other hand, investors adopt a "break-even" behaviour and select riskier investments after prior losses.

A study titled "Does what happen in Vegas stay in Vegas? Football gambling and stock market activity" was published in the Journal of Finance and Economics' October 2020 issue. This study was conducted by Robert Van Ness, Justin Cox, and Adam Schwartz. The study acknowledged prior research establishing that the tendency to gamble and invest is correlated and based on socioeconomic clienteles. Ness, Cox, and Schwartz then went on to say that Thaler and Johnson's break-even and house money theories were in line with how gambling sentiment affects stock market trading behaviour, especially for lottery-like stocks. For example, sentiment from winning a football bet creates more positive emotion and causes investors to be more excited. As such, they are less risk-averse and make stock selections more confidently.

To test this hypothesis, they examined whether football betting payouts caused changes in retail investing in lottery-like stocks and over-the-counter (OTC) traded stocks. They used football gambling data from the Action Network. This data has all the betting activity for NFL and NCAA games from 2009 to 2018. These researchers found that:

• Betting losses are linked to spikes in retail stock participation, especially for lottery-like stocks. This supports the "break-even" theory that investors leverage lottery-like stocks to try to break even or offset losses suffered during football activity.

• Delayed stock market retail trading sentiment influences betting activity. This proves the house money investor behaviour.

• Over-the-counter trading activity is higher after football betting losses.

• Over-the-counter market activity causes an increase in football betting activity. This supports the house money and break-even theories of behaviour.

• Lottery-like stocks are generally not profitable. However, retail investors overweight them in the hopes of hitting the jackpot and recovering their losses irrespective of their unprofitability.