Why poor people win the lottery
articles.moneycentral.msn.com
articles.moneycentral.msn.com
What is really sad is that lotteries are taking money out of the pockets of those that can least afford it (and plenty of times do not have the education to compute the odds).
Lotteries have been named 'taxes for people that are not good at math', I think that should be amended with: and that are being abused because of their desperation to get out of the hole they are in. Not as sexy but it definitely seems to cover the majority of the people that I know that play the lottery.
Over their lifetimes they contribute a fair sum to the (in this country) state operated lottery monopoly, at the expense of their kids and themselves.
If you're kind of poor (not starving though), it makes sense to play the lottery. $10 a month isn't going to cause you to starve, but there is a possibility you'll get a decent chunk of money (not jackpot perhaps, but enough to substantially improve your standing say). Whereas for someone who is well off, getting a few thousand dollars isn't such a big deal.
The usual reason for disagreeing with what you just said is that for most people the utility gain from (say) a 1/6000 probability of getting $3000 is less, not more, than the utility loss of certainly spending $1, and it only seems otherwise because we tend to round small utility differences to 0 mentally. I think this is correct. But here's another reason why you're wrong.
First of all, let me correct something in the previous paragraph. Of course hardly anyone plays the lottery just once, so let's consider playing 10 times per month in a lottery whose tickets cost $1 and whose only prize is $3000, with probability 1/6000. (Oversimplification, of course; I'm going with basically the figures you mentioned, and a fairly typical 50% take for the people running the lottery). So, if you do that for a year then roughly speaking you are paying $120 for a 1/50 chance of getting $3000.
So, suppose there's some person for whom the utilities really do work out the way you describe: getting $3000 with probability 1/50 is worth more than $120. And suppose that person could instead invest their money somewhere reasonably safe and get a return of 1% per annum over (inflation plus their temporal discount rate). For simplicity of exposition, I shall ignore inflation and discounting in what follows, so that's just an annual return of 1%.
Then instead of spending $120 on the lottery over a year, they could invest ~ $119.40 over the same period, at the end of which they will have $120 which they can put into the lottery. Same result, less money spent.
So. Unless your temporal discount rate is higher than the best rate of interest over inflation that you can get, playing the lottery now cannot be your best option -- at least, not if your motivation is that you think the utility gain from having more money when you win is worth the utility loss from having less money because you spent it.
In less-crappy economic times than we've had recently, you can typically get a rate of return that's quite a bit better than inflation. In which case, unless your discount rate is really high, you should not play the lottery with the intention of increasing your net utility.
(Of course, if your discount rate is really high, it follows that you should never save anything: anything you would save you should spend immediately on things that give you immediate pleasure, or put into the lottery at once.)
Except that they lack the utility of playing the lottery for an entire year, which is already worth more than $120 to them, as we can see from the fact that they play the lottery in the first place. :)
The person I was replying to wasn't making that argument, but a completely different one: that the utility from the potential winnings outweigh the costs for some poorer people. I think that's monstrously implausible.
If you're poor, buy one lottery ticket where the draw is as far into the future as possible, or a scratch lottery ticket and don't scratch it until it's about to expire. As long as it is not decided, you are potentially a winner.
You could say this is irrational, or you could just say it's the way people are.
"Investing" small amounts to achieve a big pay-off also hits the problem that large windfalls aren't psychologically or socially very beneficial.
That said, it's deplorable government is running these programs. Only 40 years ago this was the illegal domain of mobsters and sleazeballs. Now the state has muscled in on the action is legitimizing the moral message that you can get something for nothing.
While I like the idea of the charities getting cash I dislike the 'tax on the stupid' and the 'at least some of it goes to charity' line you hear from gamblers.
The lottery is a ticket to dream, and that's probably fine for some people. I'd venture a guess that most people here has a dream that not fueled by a load of cash dropping from the sky, but by some sort of merits based success.
Yes, and if someone wants to play the lottery, they should be allowed to play the lottery.
In general, most people most of the time can act in their own interests better than the state can on their behalf, so that in general, laws that attempt to prevent people from making bad decisions usually decrease overall utility.
http://www.taxfoundation.org/news/show/1126.html
It breaks down the effect of a lottery when analyzed as a tax. It goes beyond "tax on those who are poor at math" or "a tax you volunteer to pay". And it is very devastating.
Choice bits:
Lottery proponents argue that a tax is a mandatory or compulsory payment, and playing the lottery is voluntary, so lottery revenue cannot be a tax. But they're confusing the purchase of a product with the payment of the tax on the product. True, the purchase of a lottery ticket is voluntary, but the tax portion of the ticket price is not, just as a sales or excise tax is compulsory on a voluntary purchase of alcohol, clothing or books. The voluntary nature of the purchase does not make the tax any less of a tax. Using the lottery supporters’ rationale, we’d have to say that because the purchase of a book is voluntary, the sales tax on the book is not really a tax. Just try to buy a $20 book and hand the cashier a $20 bill, but refuse to pay the $1 sales tax and leave the store with book in hand. The only difference between the lottery tax and sales or excise taxes is that the lottery tax is built into the price of the ticket, rather than reported separately.
On wealth redistribution and tax burdens:
The only thing the Wisconsin lottery really accomplishes is a redistribution of some of the tax burden, shifting it from property owners to lottery players.
On regressive taxation:
The National Gambling Impact Study Commission determined that, during the time period studied, not only were lotteries regressive, but the poor spent more as a dollar amount.
How lotteries support education:
In 1995, after nearly twenty years of earmarking proceeds for education, the [Montana] state legislature began transferring revenue to the general fund instead. The president of the Montana Education Association stated that it was an 'illusion' that lottery funds significantly benefited public schools.
But what if it buys hope? And entertainment?
Except, it would be a 50% tax on cinema tickets levied almost exclusively on cinemas situated in poor neighborhoods. Cinemas in rich neighborhoods would pay regular consumption taxes or be tax-free, and not subject to the special one-off inverse-luxury tax.
And $28k in the year 2037 (Age 65 for me) will buy you a round of golf. I play the lottery because it is the easiest way to get rich and, for me, $2/week is worth it.
Tell me another way you can become a millionaire with a dollar and no effort.
"Beware the stale game. People often don't realize that scratch games aren't finished when someone wins the biggest prize; the tickets are left out until they're all sold. That means you might be buying a ticket to a game in which there's no chance for a juicy payday, says Chris Gudgeon, co-author of "Luck of the Draw: True-Life Tales of Lottery Winners and Losers." Gudgeon's advice: Avoid scratch games that have been lingering near the Slurpee machine for ages. "If you're buying the scratch-and-wins, particularly the seasonal ones, don't buy a Christmas one at the following Halloween," he says. "There's a very good chance that all of the prizes are gone.""
Surely, unless you have an information channel that tells you when the big prizes are claimed, the odds of the jackpots going early or late are just the same? And if you do have such an information channel then, in the cases where the jackpots haven't been claimed it would make the odds better for the last remaining tickets.
http://www.gurujeff.com/?p=132
But what's most striking to me is how much of a rip-off the government-run lotteries are. It's very unethical. It's so unethical that even when the mafia was running it back in the day they were more honest.
From the article:
Statistically over several hundred turns, if you play a decent game of blackjack or craps, you put up one dollar and get back 95-97% of your money.
Due to the fluctuations of probability, it will appear as though you’re either winning or losing larger amounts.
Roulette, slots, sports games and horse races are geared to take 5-25% of every dollar wagered - and to most knowledgeable gamblers, 25% is too much.
Even the mafia, when they ran numbers, would take no more than 33 cents on the dollar.
State lotteries are just an out right plain as day rip off taking over half the money you put in.
What about the Super Jackpot Lotteries?
The “Power Ball” or 6/49 games - whatever they’re called in different parts of the country - are all run the same.
You buy a ticket for a dollar; less than 40 cents goes back into the prize pool.