Study: Sports Betting Legalization Leads To Fund Managers Making Risky Financial Choices

Us sports bettors — well, I’m speaking directly to “us recreational sports bettors who are mostly in it for the fun” — know the drill. That four-leg parlay looks so good. The only thing that looks better? That five-leg parlay. I mean, +1473? Can’t miss. Just have to win, win, win, win, and … win again. EZ game. Just five simple bets. What could go wrong?

Well, everything, usually. That’s why sportsbooks love parlay bettors — they drive profits. There’s the well-known UNLV Center for Gaming Research study that showed Vegas sportsbooks make over 30% on parlay bets, compared to 5% or so on straight bets. And those numbers have translated — and then some — into the online world.

Parlay betting, and other longshot wagers, are probably among of the original versions of what’s known as FAFO: F*** around and find out.

But this mentality isn’t limited to silly wagers. According to new, as-yet unpublished academic research, this risk-seeking behavior is seeping into professional finance.

Fund managers playing roulette

In a December 2024 paper titled Sports Betting Legalization and Mutual Fund Managers Risk-Taking, researchers Ruby Brownen-Trinh (University of Bristol Business School), Ayan Orujov (University of Liverpool Management School and Bangor Business School), and Manuela Pedio (University of Bristol Business School and Baffi CAREFIN Centre at Bocconi University) discovered something that’s actually pretty “big if true”: When states legalize sports betting, local mutual fund managers start making riskier investments with their clients’ money.

The researchers looked at how fund managers made their investment decisions after their states legalized sports betting. Their findings?

“A significant increase in the proportion of risky assets held by treated funds post-legalization, accompanied by decreased performance as measured by funds’ alphas,” the authors wrote.

Translation: Fund managers began buying more volatile stocks, and their performance got worse.

The paper explains that this change isn’t because the clients wanted more risk. It’s the managers themselves who increased the risk, specifically in individually managed funds, with the researchers noting the “increase in risky holdings is significant.”

These aren’t small shifts either. After sports betting became legal in their states, fund managers increased their holdings of lottery-type stocks by about 9% compared to the average fund. Meanwhile, their performance dropped significantly.

Bitcoin betting

It’s not just traditional finance. Cryptocurrency traders are finding their own version of FAFO, according to another new research paper.

In How Bitcoin’s Ups and Downs Are Changing the Way You Bet, researchers Barna Bakó and Máté Csaba Sándor (both from the Institute of Economics at Corvinus University of Budapest) analyzed four years of gambling data from a Bitcoin-based online casino called LuckyBit.

Their finding: Bitcoin’s price affects how people gamble with it. When Bitcoin’s price rises, gamblers take bigger risks but place fewer bets. During periods of high volatility, they bet smaller amounts.

“Higher Bitcoin price levels tend to increase risk propensity while simultaneously decreasing betting frequency,” the researchers wrote. “This suggests that when Bitcoin prices rise, players may feel wealthier or more confident, leading them to take greater risks with individual wagers.”

The ultimate FAFO: house money.

Normalizing FAFO

Both research papers point to something deeper, obvious, and — to this particular person with a middling-to-poor retirement fund — scary: the normalization of (even more) gambling-like behavior in finance, which, let’s face it, is still mostly gambling, but with nicer clothes.

The sports betting paper notes that “legitimation of hazardous behaviours like sports betting … shape individuals’ conduct.” As it pertains to high finance: When gambling becomes more socially acceptable, it appears to influence behavior far beyond actual gambling. Like the performance of my 401K. (Might be better off with a 401CCF, which for those of you who aren’t as financially literate as I, that’s where you deposit 401 cans of cat food in your basement so you’ll have something to eat when you’re 82.) 

Clearly, there’s some spillover here. The researchers found that “an exogenous shock to social norms around gambling increases mutual fund managers’ preference for risk, thereby elevating their risk-taking behavior, while compromising the fund’s performance.”

Feedback loop, anyone? As gambling becomes more mainstream, more people view financial decisions through a gambling lens, including (oy) mutual fund managers.

Chicken Little

The sports betting researchers warn that their findings “highlight the potential unintended consequences of gambling legalization on professional risk-taking behaviors, emphasizing the importance of considering cross-domain impacts in policy formulation and evaluation.”

Listen: I’m not generally Chicken Little when it comes to gambling, but when professional money managers start thinking like college kids putting together a 16-legger, the consequences go well beyond their own personal portfolios. Retirement accounts, college funds, and ordinary investors’ savings are all affected.

Similarly, the Bitcoin study — full disclosure: I don’t even know how to buy Bitcoin — warns about “the broader psychological and financial risks associated with cryptocurrency-based gambling.”

In a world increasingly accepting of the FAFO mentality (DOGE, anyone?) we may need to rethink how we invest with our nest eggs. Interestingly, the mutual fund study indicates funds managed by teams instead of individuals provides a check against excessive risk-taking.

The Bitcoin researchers suggest “stronger consumer protections, responsible gambling initiatives, and public awareness campaigns could help mitigate the risks posed by the intersection of digital finance and gambling.”

Until then, it seems the line between gambling and investing continues to blur. And that FAFO philosophy — specifically the “find out” part — usually ends up with a single word result, and that’s the the first part of FAFO, sometimes with an “oh” attached to the beginning.