by victor matheson
victor matheson, a former editor of the Journal of Sports Economics, teaches economics at the College of the Holy Cross in Massachusetts.
Published April 21, 2023
The past 60 years have witnessed a massive transformation of the gambling landscape in the United States. In the early 1960s, the only legal casinos in the country operated in Nevada, no states ran lotteries, and essentially all sports bets were either made informally among friends or through illegal bookies. These days, 45 state governments sell $100 billion in lottery tickets each year, with multistate lotto games like Powerball and Mega Millions occasionally offering jackpots exceeding $1 billion. Nearly 1,000 casinos and card rooms operate across 41 states, generating over $50 billion in net gaming revenue. And nowhere has the gambling industry changed more rapidly than in sports betting, where nationwide expansion has led to an increase in legal wagering from just under $5 billion in 2017 to nearly $100 billion in 2022. Here I offer a primer on what’s happened and how it’s changing the face of spectator sports in America.
Say It Ain’t So, Joe!
Organized sports have a long and complicated relationship with gambling. As rising prosperity gave people both more disposable income and more free time, spectator sports became an increasingly popular entertainment option. And where there were games, gambling was sure to follow — along with match-fixing.
The first fully professional sports league in the U.S., the National Association of Professional Base Ball Players (also known as the National Association), was formed in 1871, but lasted only five years. Cheating — players taking money from gamblers to intentionally lose games — was probably a significant factor in its early demise.
The National League of Professional Baseball Clubs (now known as the National League of today’s Major League Baseball) was formed in 1876 in an attempt to clean up the game, but it too suffered from the problem. As noted by a sportswriter of the day, “any professional base ball club will ‘throw’ a game if there is money in it.” Indeed, in 1877, the Louisville Grays, one of the league’s original teams, found itself embroiled in a betting scandal and was forced to fold at the end of the season.
Of course, the Louisville Grays were far from the last team to find itself at the center of a gambling scandal. Most famously, “Shoeless Joe” Jackson and seven other members of the Chicago “Black Sox” almost certainly took cash from a gambling syndicate in exchange for throwing the 1919 World Series. But no sport has been immune. Men’s college basketball has suffered from at least seven betting scandals since the 1950s involving top teams including the University of Kentucky, Boston College and a former powerhouse, the City College of New York. The National Hockey League and the National Football League have both suspended insiders for gambling activities. Schemes involving players, coaches, referees and even groundskeepers have been uncovered.
Gambling on sports events, of course, wasn’t seen by all as inherently wrong. But because of the potential for corruption, most leagues long favored strict controls on the presumption that fans would lose interest if they thought contests might be fixed. Indeed, ticket demand is a lot higher for games between the Los Angeles Lakers and the Boston Celtics than “games” between the Harlem Globetrotters and their perennial doormat, the Washington Generals.
Sports betting was common, though generally illegal, throughout the country for much of the 20th century. But state governments, hammered by lobbyists and salivating over the prospect of big payoffs in revenue, began to adopt more permissive attitudes toward gambling in general. That led to the rise of state lotteries as well as the licensing of both commercial casinos and Native American casinos. Alarmed, the sports leagues began to push back, convincing Congress to pass the Professional and Amateur Sports Protection Act of 1992 (PASPA). This law banned sports gambling nationwide, though it did allow sports betting in Nevada’s casinos to continue, as well as more limited sports betting under the aegis of the Oregon, Montana and Delaware state lotteries.
Second, Third and Fourth Thoughts
That was then. Over the next quarter-century, organized sports’ dim views on gambling evolved for multiple reasons. First, on close look, gambling-related corruption in countries with legal sports gambling — notably, the UK — didn’t appear to be markedly worse than in the U.S. In fact, a reasonable case can be made that legalizing gambling actually reduces match-fixing by bringing betting out of the shadows. In a legal setting, leagues can partner with sportsbooks (companies that organize sports gambling) to identify athletes engaging in gambling. In addition, leagues can work with sportsbooks to identify patterns of suspicious betting — tracking that would be nearly impossible if the wagers were underground.
Second, ballooning salaries (except in college sports where the NCAA cartel has kept player compensation low) meant that players were less susceptible to bribery than in the past. When Shoeless Joe allegedly took $5,000 to throw the World Series in 1919, he was only making $6,000 per year (just over $100,000 in today’s dollars) as one of the highest paid players in the league. Today, MLB players snag an average salary of nearly $4.5 million. It is thus hard to imagine any contemporary players with the ability to affect the outcome of the World Series choosing to risk their careers by throwing games.
Third, leagues began to appreciate the bonanza they could reap through partnerships with sportsbooks. For one thing, gambling companies are prime candidates for sponsorship dollars. For another, those who bet on games are more likely to attend, or at least tune in, making media rights more valuable.
Media rights were a very big deal even before legal gambling, but the big deal has been supersized. Most major sports leagues in the U.S. earn over half of their revenues through their sale. The NCAA, for example, is in the middle of a 22-year, $19.6 billion television rights contract for its men’s Division 1 basketball championship tournament (aka March Madness). Indeed, though the NCAA nominally remains a staunch foe of legalized gambling, there is no doubt that the tournament’s runaway popularity — and therefore much of the tournament’s $1 billion/year rights earnings — follows from to the fact that tens of millions of fans bet on the tournament.
The Supremes Change Everything
At the same time the leagues were muting their opposition to sports betting, state governments challenged PASPA in court. The effort was led by New Jersey, which was seeking to reverse the declining fortunes of Atlantic City, a former go-to destination for gamblers on the East Coast that had fallen on hard times after the rise of competing casinos in Pennsylvania and Connecticut. And in May 2018, the U.S. Supreme Court declared PASPA unconstitutional, opening the door to legalized sports gambling nationwide.
Note that the decision did not legalize sports gambling. It simply said that the federal government could no longer prevent a state from legalizing sports gambling if it so wished. And most states so wished.
As of the beginning of this year, 28 states and DC had legalized sports gambling, while another three have blessed casinos on tribal land. Four other states have said yes to sports betting, but the sportsbooks are not yet active.
Texas and California are the major holdouts. Legalization in Texas would require an amendment to the state constitution. Californians, for their part, soundly rejected two voter propositions in November 2022 that would have legalized sports betting, leaving the future of the industry in the state in doubt. Note, too, that Florida does not yet have legal sports betting. Although the state did remove the impediments in 2021, betting was halted by a court order after only a month and remains in legal limbo.
In-person-only states typically averaged total betting of less than $100 per person in 2022, while the comparable figure in states with legal mobile betting is in the neighborhood of $1,000 per resident.
The speed at which states have adopted sports betting is striking. Nevada became the first state in the modern era to legalize casino gambling in 1931. New Jersey didn’t follow suit until 1975, and it took nearly 70 years for casinos to spread to at least two-thirds of states. Similarly, the first state lottery in modern times was created by New Hampshire in 1964, but it took another quarter century before lotteries arrived in two-thirds of the states. Sports gambling, by contrast, will have a footprint covering two-thirds of the country less than five years after the Supreme Court dumped PASPA.
The extent to which sports betting is sanctioned varies widely from state to state, but generally falls into one of three camps. The first bucket includes Texas, California and, in effect, Florida, where it remains illegal. Even in these states, though, low-stake wagers among friends are either explicitly exempted from gambling bans or are simply never prosecuted. In some of these states, Minnesota and Missouri among them, it is likely just a matter of time until sports betting is legalized.
Other states, including Utah and Hawaii, have stoutly resisted most forms of legal gambling for decades, so are likely to pass on sports betting for the foreseeable future.
Next are the states, including Wisconsin, Washington and Montana, that allow casinos to operate sportsbooks on the premises. But importantly, the gambler needs to be physically present to place a wager (just as they typically need to be present to play blackjack or the slots).
The third set of states allows online betting through computers and smartphone apps (all of which also allow on-site betting at casinos). Online betting turns any location in the state, from offices to homes to bars and even sports venues themselves, into sports gambling parlors. The sportsbooks’ internet platforms do, however, block wagers online unless the bettor is physically in the state.
There is a world of difference in impact between mobile gambling and in-person wagering. In-person-only states typically averaged total betting of less than $100 per person in 2022, while the comparable figure in states with legal mobile betting is in the neighborhood of $1,000 per resident. In New York, for example, the sports handle (the total amount wagered on sport competitions) rose from $21 million in December 2021 to $1.7 billion in January 2022 after the state’s first mobile gambling apps went live.
Ironically, in New Jersey, which led to fight to overturn PASPA in order to revive the Atlantic City casinos, only $900 million of the $11 billion of sports betting that took place in the state in 2022 was wagered at its casinos. Even in Nevada, known for its casino pleasure palaces, two-thirds of all sports betting has moved out of the gaming rooms to mobile apps since the latter debuted in 2020.
Sports gamblers will notice other differences among the states. First, no state permits bets on high school or amateur youth sports. However, some allow betting on collegiate competitions, and some do not. Numerous states flatly ban bets on the performance of individual college athletes. More generally, sportsbooks licensing requirements vary, so the slate of available online sportsbooks is different in every area.
Winners and Losers
The biggest winners from the expansion of legalized sports betting are the sportsbooks themselves. Between the court’s decision in June 2018 and the end of 2022, sports gamblers made over $190 billion in legal wagers generating $14 billion in gross revenues for the sportsbooks (that is, the amount taken in from bets minus payoffs to winners). This represents nearly a 20-fold increase in under five years.
The industry is still poised to grow significantly. Several populous states, including Ohio and Massachusetts, are adding sports gambling in 2023 and it seems inconceivable that California, Texas and Florida, home to over one-quarter of Americans, will resist the siren song indefinitely. Total industry revenues would also significantly expand if states including Washington and North Carolina expand sports gambling to include online betting.
The major sportsbooks nationwide include many familiar names and some major established international gambling companies, as well as some new players. As might be expected, the American casino chains that offer sportsbooks on-premises also operate mobile platforms. These include MGM, Bally, Caesars and Penn Entertainment (operator of the Hollywood and Ameristar chains, among others).
Online sports betting has long been legal in a host of other countries including Australia and the UK. And many of the companies that previously arose to serve those markets, including PointsBet, Betfred, Unibet, bet365 and Betsafe, have entered the U.S. market. Several sports media companies — among them, Sports Illustrated, Fox Sports and Barstool Sports — have also unveiled sportsbooks, which does raise questions about the independence of sports reporting when their sportsbooks have significant exposure to betting losses.
In a world where sports gambling was still illegal, companies operated in a gray area. They claimed fantasy sports were games of skill that shouldn’t be considered gambling, though regulators in multiple states argued that cash prizes morphed them into gambling.
The last two major online players, FanDuel and DraftKings, are perhaps the most interesting cases. These companies, founded in 2009 and 2012 respectively, were created to serve fantasy sports players. Fantasy sports allow an “owner” to manage a hypothetical team of real-life players with the performance of that hypothetical team being based on the performance of their flesh-and-blood counterparts. In the beginning, these firms simply offered organizational tools for friends to play fantasy sports among themselves. But they soon began to offer high-stakes fantasy sports contests with large cash prizes to unrelated groups of contestants.
In a world where sports gambling was still illegal, these companies operated in a gray area. They claimed that fantasy sports were games of skill that shouldn’t be considered gambling, though regulators in multiple states argued that the cash prizes morphed them into gambling.
Before the courts could sort this out, though, PASPA was overturned. What was still relevant, however, was the fact that millions of fantasy sports players were already familiar with FanDuel and DraftKings, and were comfortable sending them payments (and receiving money in return) through smartphone apps. This gave the two companies a huge head start in signing up customers for smartphone sports wagering. The two companies are now among the largest sportsbooks in the country despite having never taken a sports bet as recently as five years ago.
Of course, a big loser here has been the black-market bookies whose operations have been decimated by legal competitors. Perhaps one should feel some pity for those dislocated, but it is hard to shed tears for the demise of an untaxed industry that preyed upon those so desperate to bet that they did business with underworld figures who threatened to enforce illegal betting contracts with violence.
Along with the sportsbooks, the sports leagues have profited handsomely. Every important league in the U.S. with the exception of the NCAA has signed sponsorship deals with one or more sportsbooks — often for significant sums. For example, in the largest of these deals, Caesars, DraftKings and FanDuel paid a total of $1 billion over three years to be the official betting partners of the NFL. Sportsbooks have also signed some 150 sponsorship deals with individual teams and sports venues. In addition, at least eight colleges and universities have formed official partnerships with sports gambling companies — despite the NCAA’s stance against betting.
The leagues also gain indirectly from greater fan engagement as bettors take an increased interest in their local teams. One estimate has suggested that the NFL, MLB, NBA and NHL stand to be enriched by $3.3 billion annually from the legalization of sports gambling — though since the source of the estimate is the American Gaming Association, it should be taken with a grain or three of salt. While a neutral estimate is difficult to come by, no one doubts there’s a lot of gold in them thar hills.
State governments have also benefitted financially from sports gambling — or at least they have for now. States tax the sportsbooks based on gross revenue, with rates varying wildly. Michigan takes a gentle 3.78 percent while New Hampshire rakes off 51 percent. The median is around 10 percent. In total, states have collected $2.4 billion in sports wagering taxes since June 2018 — an impressive figure until one realizes it represents just 0.05 percent of total state government revenue.
It is also important to consider where this new spending on sports gambling is coming from. On average, every dollar spent on sports wagering results is roughly 1.3 cents of net government revenue. Every dollar spent on lottery tickets, on the other hand, results in closer to 30 cents of revenue. Thus to the extent that sports betting cannibalizes more lucrative forms of legal gambling, the windfall is an illusion. Indeed, a study of West Virginia gambling found that total state revenue fell after the introduction of sports gambling because it displaced other forms of gambling with higher markups.
The Enemy Is Us
The final stakeholders to be considered are the gamblers themselves. Generally, economists assume that people reveal their preferences through their spending habits. In the words of then-Veep Joe Biden, “Show me your budget, and I will tell you what you value.”
The fact that the industry has grown so quickly following the repeal of PASPA might indicate that Congress’s blanket prohibition of sports gambling deprived a lot of bettors and sports fans from enjoying a form of entertainment they badly wanted. And there is clearly an element of truth here: in a sense, sports gambling provides benefits similar to watching a movie or taking a ride on a rollercoaster.
What sports gambling is most definitely not is a good way for customers to make money. The fact that legal sportsbooks have earned $14 billion in gross revenues since PASPA was overturned means that, in total, bettors have paid $14 billion more making bets than they have won back over the past four years. The sportsbooks’ combined average win rate was 7.7 percent. In other words, for every dollar the typical person bets, they lose 7.7 cents — and, of course, the more they bet, the more they lose.
The fact that people lose more than they win when they gamble doesn’t necessarily mean that gambling is irrational. After all, buying a movie ticket is a gamble that the movie might not be very good, but few would suggest that bad Star Wars prequels constitute a social problem. The catch: gambling is built upon a series of behavioral biases, and for a small segment of the population casual gambling quickly morphs into compulsion.
In one study, 98 percent of individuals exhibiting problems related to online sports gambling were men who averaged 10 years younger than the median participant. And because of the problem of over-estimation bias, even well-educated and tech-savvy individuals are susceptible.
One explanation is that sports bettors routinely overestimate their ability to pick winners, and believe their betting skills exceed the average. The fact that bettors are allowed to pick and choose which bets to make and which side of the bet to take gives them an illusion of control that suggests riches are within their reach if only their picks are good enough.
On top of this, winning appears more common than it is because casinos always advertise big winners with fanfare while quietly collecting money from the myriad losers. And the gamblers themselves do the biggest part of the sportsbooks’ advertising for them by crowing about the $1,000 they won on the Packers-Bears spread last weekend while rarely mentioning the $500 they lost during each of 3 previous weekends.
The data are clear. Bettors, even ones who think they are really good at it, systematically make poor decisions when choosing to gamble. As the old saying goes, “gambling is just a tax on people who are bad at math.” Of course, as my inner economist wishes to remind you, if the entertainment value exceeds the monetary losses, then the choice to gamble is rational. The problem comes when the agony of defeat exceeds the thrill of victory. But gamblers rarely distance themselves from the action sufficiently to do the math.
The American Psychiatric Association has defined “gambling disorder” as the most severe form of problem gambling. Depending on the study, somewhere between 0.5 percent and 5 percent of the adult population meets the APA’s criteria. Young men appear to be particularly at risk from sports betting. In one study, 98 percent of individuals exhibiting problems related to online sports gambling were men who averaged 10 years younger than the median participant. And because of the problem of over-estimation bias — what one might call a variation on the Lake Wobegon Effect — even well-educated and techsavvy individuals are susceptible.
Nearly every state that has legalized gambling is making a gesture toward acknowledging the problem, dedicating some revenue toward prevention and treatment — though whether the commitment is adequate to the task is unclear. In any case, it is important that the sports books not be allowed to manage the issue on their own. After all, the gaming companies make the most money from the gamblers who lose the most money.
* * *
It’s a bit misleading to conclude that sports gambling is here to stay when it has always been with us. But certainly the rapid expansion of legal betting across the states, the advent of mobile betting and the sums of money at stake will mean that sports gambling will remain part of the economic landscape for the foreseeable future.
Is that good or bad? It is a plus for those who can bet to the point that it enriches the experience of watching sports without undermining their own welfare or that of their families. And it is certainly bad news for those sucked into problem gambling who in an alternative universe might never have been tempted to fly to Las Vegas or seek out a local bookie. A tough call, perhaps — but for better or worse, the courts and the major stakeholders in the gambling business have taken the choices out of our hands.