There seems to be little written on the moral implications of investing in vice stocks and the financial implications have been discussed elsewhere. The primary concerns with investing in a “vice stock" is the degree of moral culpability for supporting the vice itself and the harm done by the vice.
About one in five people in the world drink alcohol.1 This number seems low, but in Bangladesh, for example, only 1% reported drinking compared with almost 61% in the US. Twenty percent of the world population represents a large potential consumer base.
Along with survey data, the World Health Organization (WHO) also reports that there is no safe level of alcohol consumption due to carcinogenic effects. They also recommend: making alcohol less affordable, banning or restricting alcohol marketing, and reducing alcohol availability.2 It is worth mentioning that additional regulations could also strengthen the position of existing players as it is difficult to break into any space if advertising is not allowed.
That being said, it is clear that alcohol causes some harms to individuals, the healthcare system, and the society at large.
The majority of drinkers do not fall into the use-disorder category but those who do consume a lot. In the US the top 10% of users are responsible for over half of alcohol consumption.3 From a business perspective the company will of course target the individuals that are generating most of their sales as well as new leads. So, while we individually might discourage excessive use the company has a clear monetary incentive to target and encourage use by the heavy users and new user adoption. As a potential part owner of the company we do have an interest in its success, otherwise we would not invest.
Maybe the case would be clearer if we removed the primary consumers who seem to be harmed the most. Suppose that by decree, education, or imprisonment, we only have alcohol users drinking one or two drinks a day. In a world like this, supposing the company was still fundamentally a good investment, there seems to be little reason not to enjoy the financial benefits. The clarity comes from placing responsibility on the users for their choices.
Then from the perspective of assigning personal responsibility to the end-user, our individual culpability as an investor seems to fade away. The majority of harms appear to accrue the the excessive users and although these people can and do comprise a majority of revenues, the company ultimately is not funneling alcohol directly or lighting cigarettes for these users. Would we, as investors, in essence be relying on the consistent prevalence of these high-consumption users? Not necessarily, while the current business environment may be a result of revenues largely driven by high-users and the appropriate scaling of business operations to satisfy demand, the companies could continue to exist were it not for high-user demand, although they might not be as large.
Next, on the personal level, we would not actively encourage our over-imbibing friend to keep at it (or maybe you do?). On the other hand, company advertising would at least passively do so even when it concludes “Please drink responsibly.” Ultimately, we hold individuals responsible for their own choices, barring unusual circumstances such as coercion or insanity. We could not expect to excuse lowered work productivity or attendance because someone saw too many beer commercials or received too many friendly “just have one more” prods.
A further distinction between these two might also lie in the underlying motivations. We might consider an individual, Bob, encouraging excessive behavior to be blameworthy due to his understanding of the situation that clearly involves excess. Why would Bob do this? Maybe to make himself feel better about his own habits or to encourage his companion to stay longer. Both these and other reasons seem insufficient considering the negative consequences for the drinker.
The marketing department, on the other hand, is clearly intending to sell more product. The marketing material, contrary to the case of Bob, is sent out somewhat indiscriminately. Certain areas, demographics, and browsing histories will be targeted for advertising but irrespective of the situation the potential consumer is in at the present time. The apples-to-apples comparison would be if advertisers could target individuals in certain mental or physical states, much in the way that gambling apps, social media, or really apps in general prod users to interact based on notifications and incentives. Fortunately I don’t think we are there yet with substance use, but the potential exists as we integrate ourselves more with carried/wearable devices with both monitoring and ad-serving technology.
This leads us to a different sort of consideration, what about those gambling and social media apps? Social media, despite its negative mental health consequences, isn’t widely considered in the same vein as prostitution, substance use, and gambling. Endlessly scrolling for entertainment can appear to be as much of a vice as having another cigarette. As seen above, there is no safe level of consumption for the vice substances. In terms of harm then the comparison falls flat, as far as we know social media isn’t inherently harmful to adults. Perhaps the key difference then is that we can use social media in a harmless way, whereas other vices are considered to always be harmful albeit to varying degrees. Mounting evidence of mental and social consequences for teenage social media use suggests that it can be harmful but generally with vices they are at least age-restricted to prevent an undue influence on the developing mind. The legal status and parenting guidance for social media use is beyond our present topic.
For the gambling apps, do we consider those to be a vice? Is it always harmful to be a gambler? While there is a risk potential for players to develop an addiction to the behavior, as there is with the other vices, the vast majority of people that gamble money do not rise to the level of addiction. One way to resolve this would be to put vices into a category that has a more significant risk level for developing a disorder level problem, we could say the same thing for any behavior. Eating, exercising, sleeping, all behaviors that could generate problems from overuse but we wouldn’t consider these very likely to turn into problem behaviors. Here is a very rough estimation of the prevalence of different disorder-level behaviors in a given year (often concurrent!):
I want to reiterate that this is a very rough list due to a lack of formal and consistent definitions regarding many of these behaviors. If this information is at least directionally correct, it does not seem clear from the prevalence rates why gambling would be categorized as a vice if we are concerned primarily with the potential outcomes. It appears that gambling might be one of those businesses that we can be morally less concerned with due to the low incident of developing significant problem behaviors and the lack of clear and apparent direct harms when it comes to the typical user. In fact, gambling as a social element, e.g. casual card games, might even be considered positively.
Moving from personal choice, the next topic for consideration would be increased healthcare costs due to the consumption of alcohol, tobacco, and sweets. The CDC estimates that about 7% of healthcare spending in 2018 was due to tobacco use4 and 1% in 2010 due to alcohol use.5 Regardless of the type of healthcare system in place, someone else ends up paying these costs. Data from KFF: in 2021, 20% of healthcare users incurred 82% of total healthcare spending. Once these people reach their out-of-pocket max (if they have insurance), the costs don’t just disappear - they show up in the form of higher premiums and additional costs to everyone else: their employer, other employees/participants, the health insurance company, taxpayers (for Medicare/single-payer). Simply put, these vice enjoyers may pay in health but everyone else shoulders the monetary costs. Although the numbers suggest this is clearly more of an issue with tobacco than alcohol.
While not typically considered vice investing, we could also consider the health consequences of soft drinks and other processed items that are consumed instead of food. The CDC estimated that about 7% of healthcare spending in 2022 was due to diabetes.6 A paper published in Circulation estimated that almost 10% of spending in 2016 was related to heart disease.7 What are the three key risk factors for heart disease? High blood pressure, high cholesterol, and smoking. With numbers like these we would need to hold companies producing these items to the same standards as traditional vice stocks. Alcohol, tobacco, soda, processed foods – we might start running out of stocks to pick from.
Smoking is the leading cause of premature, preventable death in the US, 36% of these deaths are from cancer.8 One study estimated 4% of new global cancer cases in 2020 were attributable to alcohol.9 The WHO estimates that 30-50% of cancers can be avoided through lifestyle changes including: not using tobacco, maintaining a healthy weight, and avoiding alcohol.10 For someone ever diagnosed with cancer, average annual healthcare spending almost triples.11 A large proportion of cancer is attributable to lifestyle choices and the nature of socialized healthcare costs creates misaligned cost burdens.
While it is clear that these vice choices create additional costs for the healthcare system, to what degree do we hold the companies responsible for this? Again, we can imagine a situation where a soft drink manufacturer provides sugary drinks but this could easily be a dessert or a treat were it not for the consumption choices of the consumer. Tobacco companies, on the other hand, appear not to have this justifying rationale. A meta analysis of observational studies summarizes:
Smoking one cigarette a day was associated with a 48% (all studies) to 74% (studies controlling for confounders in addition to age and sex) increase in the risk of coronary heart disease (CHD) in men, a 57% to 119% increase in CHD risk for women, and a roughly 30% increase in the risk of stroke for both men and women.12
If anything would be worthy of additional cost burden – it would be tobacco smoking.
One option might be the imposition of additional costs on items that are clearly associated with negative health consequences such as “sin taxes” or increased medical premium rates (surcharges) for smoking or other lifestyle factors. One article discusses applications from the perspective of behavioral economics and concludes that overall welfare would be increased with a one to two cent per ounce tax on sugary drinks. Additionally they note that the 30% of retained funds in state-run lotteries are similarly net positive although there is the harm potential for heavy users.13 If it is appropriate to extend these conclusions, we can posit that there is an appropriate level of sin tax that can offset the costs of vice consumption.
The question then becomes, “should we”? One practical consideration: would diverted funds being applied to accrued costs or considered general funds once collected? Setting that aside and being philosophically consistent – are we comfortable with the state assessing which things are good for us and imposing financial consequences. As a matter of policy there are currently plenty of sin taxes on the books in addition to various subsidies in tax deferral for retirement savings, and tax incentives for green energy programs. Unfortunately this already is far afield and will be left to the reader’s consideration. But lastly, one study found that tobacco surcharges reduced health insurance enrollment but did not impact cessation.14
A quick aside for guns and ammo related to healthcare costs. The US Government Accountability Office (GAO) found that initial hospital costs for firearm injuries, which included self-harm, accounted for roughly $1.2B annually from 2016-2017 or about .03% of total spending.15 Given the small effect, we will table this for scope although there is certainly more to explore at another time.
Third, the society at large loses out on the potential of productive or healthy alternatives. The employees might work to market air purifying products, the consumers might turn to group sports, the funds might be reinvested into alternative energy. The CDC and other organizations even provide estimates of economic burden for vice use. This line of reasoning isn’t particularly compelling. While certainly possible, it is a big “if”. Prohibition seems to be a good example that we probably would not see everyone turning into angels overnight or even over years.
In conclusion, I am comfortable investing in the majority of vice stocks. The burden of responsibility in most cases falls to the consumer making the choice and while small proportions of consumers may account for the majority of revenues, this does not undermine the legitimate uses of the good. It surprised me to find that the healthcare costs of any tobacco consumption will incline me against tobacco investing given the existing cost distributions in the healthcare system which subsidizes the industry and a dearth of defensible uses. I don’t have a good solution other than to not actively involve myself at this time. Also, while I settled in favor of treating soda more like alcohol than tobacco, the health costs may end up being too heavy to stomach, and I’m still near the fence on that deliberation.
1https://www.who.int/data/gho/data/indicators/indicator-details/GHO/alcohol-consumers-past-12-months-(-)