Friday, September 22, 2006

Arguments for liberalising gambling

Gary Becker and Richard Posner provide a case for liberalising gambling at their joint blog. In particular they advance arguments for accepting online gambling. As one opposed to increasing the extent of gambling I need to be able to counter or address these arguments.

Demand for gambling. Posner sees illegal gambling as an under-enforced, ‘victimless’ crime resulting from a voluntary transaction not from a theft. The law is under-enforced because the risk entertained in gambling is voluntary. Detection is difficult and the public’s willingness to spend to prevent it low. The argument for criminalization is that gambling is an unproductive, addictive activity that drives problem gamblers to bankruptcy. It is of course difficult to understand how legalised gambling, carried out by the state or on the basis of a monopoly concession, does not have these same adverse characteristics.

From an economics viewpoint gambling is a productive leisure-time activity. Its attraction is mysterious because expected monetary payoffs are negative. Only risk lovers should derive net expected utility from gambling. But many gamblers have insurance and therefore demonstrate risk aversion. This can be explained by supposing the gambling activity itself yields rewards. People may enjoy the thrill of risk or the adrenalin rush, of gambling – this provides consumption if not positive expected investment utility. There is also fascination with uncertainty and randomness itself. Indeed these are the dominant factors behind the small gambles people take while playing poker, slot machines and other games. Finally, gambling offers a small probability of winning a lot thereby significantly changing one's economic situation, even with a large probability of losing a little. Economists explain this by assuming the marginal utility of income is rising (not diminishing) over some income intervals.

Some people falsely believe they are ‘lucky’ not realizing that ‘luck’ is only ever observed ex post – no one has an asset called ‘luck’. Others might be so miserable that their marginal utility of money is low, which truncates the downside risk of a gamble. So if you only have $1 left in the world, even if you are risk averse, your sensible move might be to buy a lottery ticket, on the theory that it is costless. This suggests that social insurance encourages gambling by reducing its costs. If marginal utility is increasing in income, the benefit of winning will confer more utility than an equal loss will confer disutility.

Gambling Addiction. Some people become addicted to gambling and go bankrupt. A 2000 study by John Barron, Michael Staten, and Stephanie Wilshusen estimate that abolishing casino gambling would reduce US personal bankruptcies by 1.4% and by 8% in counties near casinos. This percentage going broke as a consequence of casino gambling is small – other forms of gambling might boost it - raising the question whether a harmless activity for many should be curtailed to protect the addicted few.

Making bankruptcy more difficult – making it more difficult to wipe-out your debts - should reduce gambling and gambling-related bankruptcies.

The addiction argument is used by legal gambling firms to support restricting other gambling but all they are doing is trying to prevent their customers from bankrupting themselves so their customers can pay their losses!

Internet gambling. Internet gambling poses a competitive threat to conventional legal gambling. Casinos have high overheads – staffs, equipments - with the exception of lotteries which the states depend on for revenue. Moreover, except for lotteries, legal gambling imposes time costs on gamblers, who have to travel to place a bet. It is because of the overheads and the states' revenue hunger that odds offered the gambler are so bad (they are even worse, when the time cost of the gambler is added). There may also be monopoly rents that worsen the odds.
Internet gambling establishments have low expenses, so they can offer fairer odds as well as flexibility with respect to amounts wagered. Legal casinos oppose fairer odds by claiming that poor odds offer a measure of control over gambling.

Governments are concerned about online gambling because it threatens the revenue and other political advantages they get from taxing and regulating gambling. Internet gambling is hard to regulate and tax because online companies can set remotely and make gambling available to anyone – some are located either on ships at sea, or in small countries that allow them to operate in return for a cut of the profits.

Opponents of online gambling argue it is dangerous because it encourages and strengthens gambling addictions. The fact is, however, that gambling is even less addictive than drinking, and is not nearly as addicted as smoking. Other supporters of a ban on online gambling claim that it is used to launder money. The laundering argument against gambling is less strong since there are many other ways to launder money.

Arguments favouring online gambling include the weak arguments against it, the common human desire to gamble, and also that addictive aspects of gambling are exaggerated. Indeed, it could be argued that it should remain tax free, along with purchases of other services over the internet. Tax-free online gambling would put pressure on governments to reduce taxes and restrictions on gambling which would give individuals cheaper access to ways to satisfy the mainly harmless desire to play games for money, and to bet on sporting and other events, including lotteries.

As with many other laws, restrictions on gambling mainly impact the poor and middle classes since wealthier individuals can and do gamble through equities, derivatives, housing, and in many other ways that are not readily available to families with modest incomes. There are many ways to spend money in ways that others do not approve. Why single out families with modest incomes who enjoy the excitement of gambling, or the dreams gambling provide?

My response. These are sensible libertarian arguments that I have sympathy with but on balance reject. My general response is that much gambling offers little consumer value and does a lot of harm. It offers no happiness at all to a user who is addicted – only relief from the discomfit induced by withdrawing from the behavioural addiction.

Generally I don’t think individual preferences are sacred. People make cognitive errors and bad decisions. Gambling that does not rely on skill exploits such errors by feeding on fantasy and selling empty dreams. If this is true then a major part of gambling policy should be to persuade gamblers that their recreations can do them harm – this is not inconsistent with a liberal gambling policy.

Pokies, in particular, seem to have a hypnotic effect on many who, despite the relatively attractive payout ratios, keep gambling on them until they lose their shirts. Also consistent with a liberal approach to policy is a requirement that all forms of gambling display accurate information on expected losses. Finally, those who do have gambling self-control problems should be able to self-exclude themselves from gambling venues and should have industry-funded access to treatments for gambling problems.

But I do agree with much in this posting. Giving monopoly power to a few service providers might inhibit gambling by reducing availability and by increasing costs of gambling but these policies most hurt the poor and the socially-disadvantaged. Much the same implications hold if other demerit goods such as cigarettes are heftily taxed or if volumetric pricing, based on alcohol content, replaces value-based taxes on alcoholic products. In all three cases (gambling, cigarettes, booze) there is the significant prospect of illegal markets develop which constrains the possibility for restrictive policies. The poor might have less financial knowledge than those who are wealthy which creates a special case to provide such knowledge and to perhaps limit their exposure to certain risks.

Admitting online gambling, in my view, increases access to gambling excessively. This would be a dangerous social experiment. Online gambling might enable huge amounts of money to be lost by credit card or wire transfer – these types of transfers might be less real than using real cash in a casino for example. Monopolists can be preventing from deriving excessive earnings taxes from gambling by setting minimum payout ratios for gambles such as the pokies and by heftily taxing operator earnings.

Generally a good Becker-Posner post. I’ll return to these issues again.


Anonymous said...

Victimless: not exactly. The families that have to pick up the debt of the gambler are clearly victims. They derive no benefit and much cost. Couldn't there be some way of ensuring families don't bear the costs, without at the same time reducing costs to the gambler? Can't think what, especially with internet gambling, though.

Anonymous said...

A practicle problem is how to enforce it. I don't see any obvious way -- it would be nice to know if you had any suggestions here, otherwise it is not going to matter much whether the Australian government bans it or not.

hc said...

Fair enough Christine - victimless with respect to participation unlike a theft. The external costs you mention can arise in many ways. Maybe secure assets for affected family. Also currently spouses can get first claim on a variety of income support benefits.

May not need to ban it. How about making credit card debts realised online as uncollectable. No obligation to pay. That might reduce the incentives of vendors to supply.

Anonymous said...

"Couldn't there be some way of ensuring families don't bear the costs, without at the same time reducing costs to the gambler?"

Divorce your deadbeat husband and make him pay child support?

"May not need to ban it. How about making credit card debts realised online as uncollectable. No obligation to pay. That might reduce the incentives of vendors to supply."

It is already basically impossible to fund an internet gambling account with a credit card. Mainly because of threats and ultimatatums by the US government towards the major CC companies.

I was able to do it 6 years ago when I started internet gambling, now I would have to send a wire transfer to an online money broker like Neteller to do it.

Luckily for me it is the internet gaming companies that are sending funds to me rather than the reverse.

These transactions are conducted via international bank wire transfers.

Luckily for you Harry the internet gambling bill in the US is still alive. So in the near future you will be safe in the knowledge that I have lost my job and I am now collecting welfare. Congratulations.

hc said...

Sam, Some of the gambling counsellors I spoke to in Adelaide spoke of clients with up to $80,000 credit card debt from gaming on the internet.

I wonder where the facts do lie here?

Anonymous said...

Harry: It's possible there are some places you can still use it because the CC companies haven't identified those companies as "gambling enterprises" yet.

It's also possible the debts were rung up before the clampdown (which only happened 6 months or so ago).

Anonymous said...

Sam: divorce not such an easy option for most people - there's that whole 'for better or for worse' stuff. Not to mention 'he said he'd change'. And if he or she has no money, he/she pays child support how?

It's not always husband/wife problems, btw. I know of a case where the kids were stuck paying off their mother's debt after her death (and during her life, too, for that matter).

I'm glad you're making a net gain. But that's not the experience of most people.

Anonymous said...
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Anonymous said...

i agree with the legislation which aims to ban credit cards as a payment method for online gambling of any sort... i mean its a no brainer when you consider you are placing somebody else’s money on an uncertain event happening with the aim to recoup more than you invested. Chance and credit do not mix well in my opinion, and continuing to allow it would only contribute further to negatively affecting the high levels of personal debt many citizens today find themselves in. I agree however, in a sense that it won't work - i mean whats the point in banning credit card payments for online poker, for example, but not online sports betting? slightly hipocritical no? I mean how can you allow someone to participate in online horse racing betting, but not have a gamble on a hand of cards? both activities involve a large degree of chance, and neither are guaranteed to yield financial return.
It also infuriates me that the minority of irresponsible gamblers [those paying with someone elses money!] have now ruined the fun of online betting for everyone else - those like me who pay with money they actually have in their bank!! boooo