Gen Z is mistaking sports betting for investing

Now we are learning that they might not be very good investors, or even investors at all: According to a new survey, more than half redirected funds to sports gambling, which a quarter consider to be part of a long-term investment strategy.

All of which raises the question: How did they get it so wrong?

The survey, from the personal-finance company Betterment, polled 1,000 existing investors evenly divided among baby boomers, millennials, Gen X and Gen Z. It found that Gen Z is twice as likely as the average investor both to use investment money to make bets and to see betting as part of an overall financial strategy.

Their attitude is probably due to a combination of factors, including a lack of financial literacy and normal youthful ignorance. But some of it can be explained by the unique conditions of the current economy. An on-fire bull market can skew perceptions of what's risky and give the impression that success is random. And some of it may just be that Gen Z is bad at risk-taking.

Since the Supreme Court essentially legalized sports gambling at the state level in 2018, it has taken off — with an assist from technology that enables bets on phones, even during a game. There has also been an emergence of risky assets in markets, with phones also enabling speculation. These developments have blurred the distinction between gambling and investing.

The difference comes down to two features. First, investing can be positive sum. If you invest in an index fund, you own a piece of the economy; as asset prices increase, so does your wealth. Public information is incorporated into prices quickly, so there is no informational advantage. Gambling, by contrast, is zero sum — if you win, someone else loses. Winners also tend to have deeper pockets and maybe an informational advantage. You might win sometimes, but it is nearly impossible to earn money consistently.

Second, investing has benefits for the wider economy. Your investment finances jobs, research and development, all of which grow the economy and make everyone richer. Even if you short a stock, you contribute to price discovery, which helps markets grow and makes more capital available. Gambling, if anything, has negative externalities.

Still, even as I concede that these are confusing times, the question persists: How can so many people get it so wrong?

Part of the answer is, it has ever been thus. Every generation gets caught up in something that eventually blows up. Young men, in particular, are wired to take big risks. Yes, in some ways this time is different, mostly because sports gambling has been mainstreamed.

Another reason may be a changing relationship with risk and a frustration with the larger economy. As I explain in my new book, more young people grew up more sheltered from healthy, normal risk-taking as children and teenagers. These are critical years when a young brain learns how to tell good risks from bad. Those who miss out on this development stage can end up both more risk-averse and more vulnerable to risk: When they do take risks, they take ones that are more likely to go badly.

This may be contributing to a sense of financial nihilism common among Gen Z. So far, gambling is more popular with young men. They are taking fewer risks in some areas — asking a woman on a date, say, or moving across the country to start a new job — but more in others. They may be getting their risk-taking fix from sports gambling or meme stocks.

This attitude may be fostered by an economic environment in which success appears to be random. People seem to get rich more by luck than talent or hard work, an impression fostered by all that Silicon Valley wealth and all those Instagram influencers who say they fly private. These impressions are not really accurate; a lot of work goes into those startups and reels. But those fortunes look larger and seem even more random during a boom with lots of capital sloshing around. If economic success seems more random, an index fund seems like a suckers' game, especially when you can bet on the World Cup.

So how does this end? Many of these gamblers will lose money. If they don't lose very much, it may not be a disaster. They might even learn more about investing and the nature of risk. But for bigger gamblers, the price could be catastrophic. The longer financial conditions stay loose, the worse the damage could get.

Odds are (forgive the expression) that some of these patterns will change as younger gamblers mature and experience an adverse market event. A bad stock market may not be correlated with a football game, but it does bring tighter financial conditions and job loss, which make gambling more expensive. Bear markets tend to hit investors with risky positions much harder than passive investors. Bear markets are also when most of us learned the brutal truth about risk and reward.

Gen Z gamblers may learn that lesson harder than previous generations.

(COMMENT, BELOW)

Allison Schrager, a Bloomberg columnist, is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.

Previously:
• Americans Are Richer Than Ever. Why Are They So Angry?
• Government intervention is often the cause of 'market failures', not the remedy for them<
• Reality of math is catching up with the reality of aging
• The influencer economy has crossed the linet
• AI might be a great investment --- but not for the government
• Don't rely on the Bank of Mom and Dad
• Can't find a job after graduation? Blame WFH, not AI
• Trump accounts are a new way to redistribute wealth
• Trump accounts are a new way to redistribute wealth
• Taxing the wealthy won't reduce their power
• A wartime economy would be different this time
• Why aren't Americans working as hard as they used to?
• $100,000 in Social Security benefits is too much
• The Laffer Curve is no longer a punch line
• Yes, Americans are saving enough for retirement
• Is free trade worth the cost in lives lost?
• Mamdani's New York is flirting with fiscal nihilism
• America's human capital is eroding
• Musk is wrong about AI and retirement --- You still need to save
• Go ahead and resent boomers but for the right reasons
• Raiding your 401(k) to buy a house should be an option
• Americans are living in the worst of all tax worlds
• Think of college like you would a junk bond
• The economy needs a little bit of unfairness
• The pension revolution is better for savers
• Affordability isn't a hoax. It's not a crisis for most, either
• America gets retirement wrong. Can Vanguard fix that?
• The American middle class is shrinking, and that's OK
• Want to buy a home? It's OK to wait till you're 40
• Mamdani is benefiting from New York City's changing workforce
• How can an economy this good feel this bad?
• Why boomers have more money than everyone else
• Democratize private investment?
• Lab-grown diamonds are testing the power of markets
• Inflation ate your free lunch, but you're still better off
• Good debt? Bad debt? There's no such thing
• Megabills didn't break the economy before and won't now
• America's broken politics is breaking economics, too
• A college degree is no longer a risk-free investment
• Break up Columbia? Maybe, and the rest of the Ivy League, too
• Even Dems might like MAGA accounts
• Reality Check about possibile volatility in trade war
• Is this really how American exceptionalism ends?
• The free-market conservative is a vanishing breed
• Shareholder capitalism is back
• Europe's risk aversion comes with consequences
• The Oxford curriculum that American universities need
• Private equity won't diversify your portfolio
• The era of declining interest rates may have come to an end, and many investors don't seem to realize it
• This one weird trick could save the U.S. economy
• The Fed's damage to the housing market may last years
• The future of unions looks very different
• To bring back the office, bring back lunch
• Does it really matter who gets into Harvard?
• Our pensions shouldn't be used to juice the economy
• A soft landing won't mean the economy is safe
• The 30-year mortgage is saving the U.S. economy … or is it?
• The one true secret to successful investing
• Less work, more burn-out
• When did risk become a bad word in the U.S.?
• AI-proofing your career starts in college
• Biden has to learn the same lesson as SVB
• Say it with Rubio: Changing clocks is stupid
• Sure, we'll return to the office in 2023 but not to stores
• How to manage the biggest risk of all: Uncertainty
• If you think U.S. pensions are safe, just wait
• Harry and Meghan and the perils of superstar culture
• Norman Rockwell's economy is never coming back
• Burned by crypto? Don't learn the wrong lesson
• Quiet Quitters are looking in the wrong place for meaningful work
• America's MBAs are the latest skeptics of capitalism
• Generation Z is getting a harsh lesson in stock risk
• The biggest threat to the U.S. economy is policymakers
• Buck up, boomers. You're still better off than your parents
• How to manage the biggest risk of all: uncertainty
• Startup boom is the kind of risk-taking Americans need
• Gen Z is too compliant to achieve greatness
• A bigger child tax credit isn't the poverty solution we need
• Finding your power in a higher-priced world
• The Biden administration's plans to double the tax rate on capital gains will prove costly to all Americans, not just the wealthy
• WARNING: Feel Good Now --- Pay Later: Stimulus is crammed with goodies but makes no economic sense
• The 'Stakeholder' Fallacy: Joe Biden's vision of capitalism is a recipe for failure