If the bad news is that members of Generation Z can’t afford to buy a house until they are middle-aged — which isn’t really bad news, honestly, but anyway — then the good news is that at least they are investing their money in high-performing assets. Or so we thought. 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 of 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.
