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Your Thesis Title RATIONAL ADDICTION AND SPORTS GAMBLING A THESIS Presented to The Faculty of the Department of Economics and Business The Colorado College In Partial Fulfillment of the Requirements for the Degree Bachelor of Arts By Kai Thompson April 2014 RATIONAL ADDICTION AND SPORTS GAMBLING Kai Thompson May 2014 Mathematical Economics Abstract This thesis applies the theory of rational addiction to sports gambling. Based on this theory developed by Gary Becker and Kevin Murphy, this thesis will attempt to show evidence that gambling on sports is an addictive behavior by seeing if past and future consumption of sports gambling has an effect on current consumption while accounting for other variables. Using two data sets on the amount of money bet monthly on football and annually on the Super Bowl, this thesis runs OLS and two-stage least square regressions of amount of money bet on the independent variables to see if a correlation exists. The results of these regressions show that both past and future consumption have a positive and significant relationship with current consumption in the overall football market but is not significant with the Super Bowl data set. However, the price variable for the overall football market was insignificantly positive, while the same variable was insignificantly negative in the Super Bowl data because of the alignment of the losses and bets variables. KEYWORDS: (Gambling, Sports, Addiction, Pathological Gambling, Rational Addiction, Football, Super Bowl) ON MY HONOR, I HAVE NEITHER GIVEN NOR RECEIVED UNAUTHORIZED AID ON THIS THESIS Signature TABLE OF CONTENTS ABSTRACT ii ACKNOWLEDGEMENTS 1 INTRODUCTION 1 2 LITERATURE REVIEW 5 2.1 Studies Using the Theory of Rational Addiction........................................... 5 2.2 Pathological Gambling................................................................................... 6 2.3 Sports Gambling............................................................................................. 9 3 THE THEORY OF RATIONAL ADDICITON 11 4 DATA 16 5 RESULTS 22 4.1 Econometric Problems…………………....................................................... 22 2.1 Non-Addictive Model.................................................................................... 23 2.2 Addictive Model............................................................................................. 26 6 CONCLUSION 33 7 APPENDIX 36 8 REFERENCES 38 LIST OF TABLES 4.1 Summary of the Variables: Legal Betting Market for Football……………... 17 4.2 Summary of the Variables: Legal Betting Market for the Super Bowl….…... 20 5.1 OLS Regression with Newey-West Standard Errors for the Non-Addictive Model: Legal Betting Market for Football ……………………………………….. 24 5.2 OLS Regression for the Non-Addictive Model: Legal Betting Market for 25 the Super Bowl………………………………………………...…………………... 5.3 OLS Regression with Newey-West Standard Errors for the Addictive Model: Legal Betting Market for Football………………………………………... 27 5.4 Two State Least Squares for the Gambling Demand Equation, Depreciation Rate=100%: Legal Betting Market for Footbal......................................................... 28 5.5 OLS Regression for the Addictive Model: Legal Betting Market for the Super Bowl………………………............................................................................ 30 5.6 Two-Stage Least Squares for the Gambling Demand Equation, Depreciation Rate=100%: Legal Betting Market for the Super Bowl……….…………………... 31 7.1 Correlation Matrix: Legal Betting Market for Football…………………….. 36 7.2 Correlation Matrix: Legal Betting Market for the Super Bowl……………... 37 ACKNOWLEDGEMENTS I would first like to thank my thesis advisor, Vibha Kapuria-Foreman, for guiding me through these last four months and constantly improving this thesis. I would also like to thank Maroula Kraiche, Aju Fenn and Phoenix Van Wagoner for the immense help they provided me while I was running regressions on my data. I would also like to thank Michael Lawton from the Nevada Gambling Control Board for providing me with the data necessary for this thesis. Finally, I would like to thank my family for the love and support they have given me throughout my life. Without any of these people, this thesis would not have been possible. SECTION I INTRODUCTION Gambling has been a significant contributor to national and state economies since its legalization in Nevada during the Great Depression. According to the American Gambling Association, the national gross gambling revenue1 of commercial gambling alone was $37.34 billion in 2012, an increase of 4.8% from 2011. Casino owners aren’t the only ones benefiting from gambling revenue though. Gambling taxes are a major contributor to state government budgets, and help fund various project. For example, according to the office of Minnesota governor Mark Dayton, the approximate $37 million of state funding for the new stadium being built for the Minnesota Vikings is coming from taxes collected from the expansion of legalized gambling. While gambling creates a large macroeconomic impact, there is the potential for disastrous microeconomic consequences. The people who become gambling addicts— known as problem or pathological gambler—are a major economic burden to themselves and on their families. According to the American Psychiatric Association and the National Council on Problem Gambling, symptoms of pathological gambling includes “chasing one’s losses2,” obtaining money for gambling through illegal means (loan sharks, embezzlement, fraud, etc.), failing to honor debts and other financial responsibilities, and asking family and friends for money to gamble (Petry, 2006). The problem of pathological gambling is also fueled by the ease of access to gambling. 1 Total wagers minus total consumer winnings 2 “Chasing one’s losses” refers to gamblers trying to win back money lost in previous games. 1 According to the American Gambling Association, gambling, in some form, is legal in all but two states in the US.3 Before delving deeper into the subject of gambling as an addictive behavior, I would like to clarify the difference between problem gambling and pathological gambling. Problem gambling is the “urge to gamble despite harmful negative consequences or a desire to stop” (Jazaeri & Bin Habil, 2012), while pathological gambling is severe degree of problem gambling that is considered an impulse control disorder4. In other words, a pathological gambler is a problem gambler who experiences physical and emotional symptoms similar to people with a substance disorder (withdrawal, tolerance, etc) (Jazaeri & Bin Habil, 2012). Gambling on sports in particular is a major concern because of its potential as an addictive behavior, especially with the demographic of adolescents and college students. A study by Li et al. (2011) shows in China, the age group with the most people who participated in the sports lottery was between 21-30 years old. Stuhldreher et al. (2007) found that 24% of male college students gambled on sports, while multiple studies from 2007 found that around 34% of male college athletes had wagered money on sports (Huang, Jacobs, Derevensky, Gupta & Paskus, 2007). Gambling on sports also creates ethical dilemmas, especially with athletes. Claussen & Miller (2001) found that 25.5% of Division I student-athletes participating in football and basketball admitted to betting on college sports while still attending their 3 Hawaii and Utah 4 An impulse control disorder displays the following symptoms: (1) repeated behavior despite adverse consequences, (2) increasingly less control over the problem behavior, (3) an urge or craving state prior to engaging in the problem behavior, and (4) a “high” obtained by performing the problematic behavior. (Schreier, Odlaug, & Grant, 2011) 2 university. The major concern that stems from athletes gambling on sports is that the culture of gambling will influence the outcome of games (fixing games). While fixing games does exist, it is not prevalent throughout sports. Huang et al. (2007) found that only 0.9% of the 20,539 college athletes surveyed were asked to affect the outcome of a game due to a sports wagering bet, while an even smaller 0.4% of athletes surveyed attempted to effected the outcome of a game due to a sports wagering debt. Despite being illegal in almost every states, sports gambling has still played a prominent role in American culture. It has also been a significant contributor to the economy in states with legalized sports gambling. In Nevada, the only state where wagering on sports is legal, $3.45 billion was bet in 2012 on sports through bookies. Some events are a bigger contributor to this total than others. For example, in football— the most bet upon sport in the United States—over $1 billion worth of bets are placed annually. Other sports, such as baseball, only receive about half that amount of money in bets5. However, this is only a fraction of the total amount wagered on sports. Most betting takes place through informal and illegal markets. Estimates range from $80 to $300 billion worth of bets annually being placed on sports through illegal means. This can range from a friendly bet between friends and family, to office-wide pools and illegal sports bookies (Rockey & King, 2006). With the addictive nature of gambling having already been addressed, the potential of sports gambling being an addictive behavior is a troubling concern, especially given the main demographics of sports gamblers. Many college-aged students are in a position of financial insecurity and debt. Several
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