The stock market is a casino. To be precise, it is 15 percent casino.
So says Alok Kumar, an economist at the University of Miami who studies the relationship between gambling and stock-market data. In a recent paper, Kumar and his co-authors show that 15 percent of total U.S. trading involves “lottery-like stocks,” or cheap and volatile securities with a chance of a big payoff.
GameStop, which was the No. 1 traded stock in the world for several days last week, does not actually fit Kumar’s definition. The stock is too expensive now, and before Reddit traders discovered it, it was not particularly volatile. Textbook “lotto stocks” are no-name or forgotten companies like Blackberry and Kodak. Obviously, there’s a great deal of YOLO-ing to be done with a stock like TSLA, as well.
GameStop, however, is linked to lottery stocks in an important way: Its Richter-scale swings are intimately tied to the presence of retail investors. GameStop’s meteoric week was the dramatic culmination of a year of unprecedented democratization of the stock market. In Kumar’s research, which spans three dozen countries, stock-market gambling clearly rises with market participation.
The bon mot attributed to Joseph Kennedy—it’s time to sell when the shoeshine boy starts giving stock tips—seems very quaint, and not just because no one has worn leather dress shoes since last March. The subreddit WallStreetBets, which drove the GameStop runup, now has 8.4 million members, and millions more casual visitors. The app Robinhood, whose no-fee trades pushed brokers like E-Trade and Charles Schwab to quash transaction costs, got 3 million downloads in January alone. With the pandemic keeping so many people at home, Americans moved quickly from sourdough to stocks. Markets soared, fortunes were made, some people lost it all.
One popular way to think about this episode has been as a David-and-Goliath story of downtrodden internet traders taking down heavyweight hedge funders. But there’s a more accurate and more obvious way of seeing things: A democratized stock market is just one of the ways that America is rapidly renewing its taste for gambling.
Typically, stock-market gambling is correlated with casino restrictions, Kumar says, which reflects a fixed baseline desire to place bets shifting to what’s available—a theory that may apply to pandemic-era closures of actual casinos. But it does not follow that more widespread stock market access necessarily eats into the popular appetite for casino gambling—on the contrary, many forms of gambling may thrive at the same time.
One of my pandemic pastimes has been making wagers on PredictIt, the “academic” site for betting real money on the outcomes of American political events (such as the margin of the Georgia Senate runoffs). Another has been playing online poker, which is a nice way to keep up with friends. (Everyone is playing games online, which suggests that brick-and-mortar… oh, never mind.)
Another has been watching basketball, where the NBA is leading the way in rethinking pro sports as a betting opportunity. In August, the league introduced a separate telecast for games called NBABet Stream, which incorporates point spreads, odds, and betting analysis into the game. In July, D.C.’s Capital One Arena became the first NBA venue to open an on-site sportsbook, with a ceremony that featured season-ticket holders of the Capitals, Mystics, and Wizards making bets.
The Athletic, the network of sports sites that’s quickly become one of the most popular media properties in the country since its founding five years ago, is creating a “dedicated betting vertical” with BetMGM (an offspring of the famous resort in Las Vegas) called “The Athletic Betting Hub.” William Hill has partnered with CBS; DraftKings with ESPN. The Commodity Futures Trading Commission is entertaining a proposal to open futures markets for NFL games.
The sports-betting frenzy comes on the heels of a May 2018 Supreme Court decision that ended Nevada’s monopoly on the practice. Since that decision, more than two dozen states and the District of Columbia have approved sports bets. No one really knows how big the market is, but it’s likely in the tens of billions.
Since the re-emergence of Atlantic City as a gaming destination in 1978, many local governments have considered casinos as tools of urban regeneration. Cities like Niagara Falls; Bethlehem, Pennsylvania; Detroit; Springfield, Massachusetts; St. Louis; Cincinnati; Cleveland; and New Orleans have approved downtown casinos with varying success. Mostly, they fail to revive their surroundings, though they do create jobs and tax revenue. (As do riverboat casinos, which are common in many inland states.) Andrew Yang, the entrepreneur currently leading the field in the New York City mayoral race, would like to build a casino in the New York Harbor.
It’s a little hard to fathom just how great a reversal this represents from a half-century ago. In 1964, there was just one state lottery. In the 1970s, going to a casino likely meant taking a trip to exotic Las Vegas; today, most Americans live within an hour or two of a legal craps table. Revenue from tribal gaming, most of which was permitted by a 1987 Supreme Court decision, grew from $212 million in 1988 to $35 billion today. And all that without mentioning the internet!
The coalition of puritan moralists, “goo-goos,” and consumer protection advocates that produced the widespread gambling bans in the early 20th century is far gone. While they never succeeded in quashing numbers games and bookies, which often became the work of organized crime, they did keep gambling out of the public sphere.
We’re all in Pottersville now. It’s easy to see why there are many supply-side advocates for gambling; the house may always win, but so too does the local government, which reaps tax revenue but rarely bears the social costs of gambling’s dark side (at least, not directly). In any case, the deregulatory wave leaves little incentive to be a hold-out on sports betting or casinos. If the state next door has slots, you might as well too.
The appeal for bettors is as old as time, but some critics have seen a contemporary spirit to the fever since last March, as low economic mobility, expensive housing markets, high levels of social distrust, and being locked in the house have encouraged moonward risk-taking in the portfolio. Here’s Alexander Sammon writing in n+1: “By the time the pandemic hit basically every American institution failed, except, crucially, for the market. American society emerged like some genetically modified chicken, with cartoonishly oversized financial markets hanging from the chest of a body that could barely walk, see, or breathe.” As user B217 put it on WallStreetBets on Wednesday, as GME lost ground: “They really think losing some money is new to the 99%? The 1% literally rob us and cheat us out of money every single day, this isn’t anything new. This is just the closest we’ve gotten to flipping things in our favor slightly- even if it was only something like 0.012% of their wealth.”
With their onboarding of normies into the stock market, are Robinhood and WallStreetBets forces for good? The research suggests individual investors underperform institutions, and not only because of transaction costs. They buy stocks in the news. They buy companies that are geographically near them, or companies where they work. They sell winning investments and keeping losing ones. They do not diversify their portfolios.
Still, as the stock market resumes its bull-run detachment from historic patterns, regulating day trading is a tough proposal—as Sen. Elizabeth Warren found out when she tried to argue for taking on market manipulation as GameStop shares shot skyward. Critics were not impressed. As Slate contributor Matt Zeitlin wrote on Twitter, “Even if something is an obvious get-rich-quick scheme that depends on finding a sucker to hold the bag, many people will want to participate in it and get mad if they’re told no.”
And indeed, why not me? To win on GameStop, on the Bucs, in one of the many casino games (craps, roulette, slots) that are now more linguistically familiar as metaphors for the economy? The social costs of gambling are complicated—but the rewards are clear. And what else have I got going on these days?