Traditional economic theory would indicate that individual investors should trend conservative and reduce their risks during times of high inflation, such as the extreme period that lingered globally in the wake of the pandemic.
Yet new research by Alok Kumar, Gabelli Asset Management Chair and finance professor in the University of Miami Patti and Allan Herbert Business School, reveal a contradictory trend—one with surprising and potentially disruptive implications for the economy.
“What we’re seeing in financial markets is not inflation hedging but pure speculation and gambling as people are trying to compensate for the potential loss in purchasing power,” Kumar said. “People don’t generally think—and traditional finance and economic theory doesn’t perceive—that gambling is going to affect prices. But the observed impact of this gambling channel is so strong that prices can move up and down.”
Kumar’s study explores the intersection of inflation and investment behaviors—and ultimately, the implications of those behaviors on financial markets. He highlighted that the topic is largely unstudied and unknown.
“The biggest problem is that no one wants to share their personal financial information for researchers to study,” said Kumar. “Though we cannot directly observe peoples’ behaviors, we can study the implications. If they would have done this, this is what you’d have seen in the market. That’s what we’ve studied.”
Kumar collaborated with researchers Yosef Bonaparte, George Korniotis, and Melina Murren Vosse for the study.
As part of the analysis, Kumar observed the increased intensity of online searches for investment options, used surveys, and data that extends back to the 1960s in order “to create a story of how people invest” during inflationary periods.
The research linked a range of risky investments—gambling, lotteries, Powerball, sports betting, among others. Kumar highlighted the undergirding landscape: Online and mobile betting has exploded in recent years to the point that a global public health commission estimated that by 2028 gamblers could lose up to $700 billion annually. The same commission warned that a significant portion of virtual gamblers are teenagers—more than 1 in 4 teens that gamble is at risk of becoming compulsive or problem gamblers.
“Not everybody experiences inflation the same way,” Kumar noted. “We were able to quantify and measure how people’s sensitivity to inflation and gambling propensity varies in a predictable way across geographical regions.”
The predictions are based on Kumar’s previously published papers on how cultural and religious differences affect gambling propensities. Based on church attendance data, states such as Massachusetts and Rhode Island, which have proportionately high Catholic populations, exhibit average annual gambling per-person rates of $1,000 to $1,200 compared to other states where the average is only $25 or less.
“It's not that one religion is promoting gambling, but just that some are more tolerant,” said Kumar, noting that the Vatican website basically takes the stance that as long as gambling doesn’t harm others, it’s tolerated. The Book of Resolutions of the United Methodist Church, on the other hand, harshly condemns the practice, he noted. Consistent with these religion-based preferences, during high inflationary periods, prices of lottery-type investments are more overpriced in regions with high Catholic concentration.
Kumar suggested that these market dislocations due to gambling should interest the Federal Reserve, which helps to generate monetary policy, as well as hedge fund and money managers who know that long- and short-term strategies do well.
Investors, too, should be cautious of the potential of these increased speculatory behaviors.
“Unfortunately, we don’t have data that can accurately quantify the cost to them, but they should be aware. Maybe investors are taking more risk in domains that we don’t observe, such as Bitcoin,” Kumar said. “They may be tempted to expose even retirement monies to gambling-like investments that were not available before. All these speculators could potentially be worrisome.”