The Frontal Cortex

Lotteries

The devious slogan for the New York State lottery is “All you need is a dollar and a dream.” Such state lotteries are a regressive form of taxation, since the vast majority of lottery consumers are low-income. As David Brooks notes:

Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is starkly regressive. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, about 9 percent of all income.

A new study by Emily Haisley, Romel Mostafa and George Loewenstein explored some of the reasons why low-income people spend so much money on a product that only returns fifty three cents on the dollar. (Lotteries are such a bad deal that they make slot machines look good.) Here’s the abstract:

In two experiments conducted with low-income participants, we examine how implicit comparisons with other income classes increase low-income individuals’ desire to play the lottery. In Experiment 1, participants were more likely to purchase lottery tickets when they were primed to perceive that their own income was low relative to an implicit standard. In Experiment 2, participants purchased more tickets when they
considered situations in which rich people or poor people receive advantages, implicitly
highlighting the fact that everyone has an equal chance of winning the lottery.

The study neatly illuminates the sad positive feedback loop of lotteries. The games naturally appeal to poor people, which causes them to spend disproportionate amounts of their income on lotteries, which helps keep them poor, which keeps them buying tickets. The saddest part is that these destructive games are run by the government.

Comments

  1. #1 Anibal
    July 30, 2008

    Ive never seen before the lotterie in this form, but it sounds coherent to me: that lotteries are an enmasked form of taxation given the statistical improbablities of having a winner ticket.

  2. #2 yoshi
    July 30, 2008

    Its not a tax its a stupidity usage fee.

    (also believe that governments shouldn’t be resorting to lotteries to fill coffers)

  3. #3 llewelly
    July 30, 2008

    Actually, state lotteries are one of the few ways the government can make money off of its own failure to educate the public.

  4. #4 Mark P
    July 30, 2008

    I have seen some non-professional studies and at least one by an educational institution that indicate that lower-income individuals play the lottery more than higher income individuals, but I have also seen some studies that indicate lowest participation among both low and high income individuals. Some of the latter studies were done by state lottery agencies, and so suffer at least some from self justification. If you are familiar with any definitive studies on who plays the lottery, I would appreciate a link.

  5. #5 Mark P
    July 30, 2008

    My previous comment is wrong – the study by an educational institution actually found that lower-income individuals were not more likely to play lotteries.

  6. #6 OftenWrongTed
    July 30, 2008

    Given that low-income participants in a State Lottery often have an almost fixed level of income, I’d be interested to see where that money would otherwise be spent if it was not spent on a lottery ticket.

  7. #7 knd
    July 30, 2008

    I totally agree with the main argument though it may be excessive to say that lotteries have a significant role in keeping low-income people in poverty. Any data on this?

  8. #8 pushmedia1
    July 30, 2008

    Brooks’ numbers seem out of whack high. $13,000 is about the poverty line and that’s about 10-12% of the population. His numbers imply 10% of the population is buying 33% of the lottery tickets. This seems high to me.

    Also, I second what OWT said. Lottery tickets may be more convenient (and so cheaper), but they’re probably close substitutes with other forms of gambling. If lottery tickets went away tomorrow, this money would be spent on those other forms of gambling.

    The existence of State lotteries doesn’t change the demand for this category of good. Actually, reducing the supply would make the price of gambling go up and that might make these folks worse off!

  9. #9 Mark P
    July 30, 2008

    pushmedia1, I seriously doubt that the people I see buying lottery tickets would find other gambling outlets if the state lottery were abolished for the simple reason that there are no other legal gambling outlets in most states, and the illegal gambling outfits seldom see little old ladies as regular customers. Maybe – and I stress “maybe” – some lottery purchasers would gamble elsewhere, but not many. Do you doubt that heavy advertising and MSM stories about lottery winners influence people to play the lottery?

  10. #10 pushmedia1
    July 30, 2008

    Mark- What would they be spending this money on then? College tuition? Donating to feeding the hungary? A down payment on a Prius?

    Personally, I think most of the benefit of gambling comes from the fantasy it inspires and not the expected payouts. If you’re poor, its nice to imagine yourself not. A book or two has been written with this premise. People like to imagine themselves rich.

    So, if people can’t buy lottery tickets to indulge (and a buck is a cheap indulgence), they’ll look somewhere else.

  11. #11 Mark P
    July 31, 2008

    Oh, I see where you’re coming from. All those shiftless, no-account, lazy “people” sitting around smoking their funny cigarettes, robbing people and playing the lottery deserve to get fleeced. After all, it gives them something harmless to do and helps us avoid paying taxes for all the services we get.

  12. #12 Dunc
    July 31, 2008

    So, if people can’t buy lottery tickets to indulge (and a buck is a cheap indulgence), they’ll look somewhere else.

    Somewhere else where they may stand a reasonable chance of actually getting something in return, perhaps? Even if they are still gambling (I’ve got nothing against gambling) you literally can’t find a form of gambling with a worse pay-off rate. Lottery tickets are about as likely to pay off as a game of three-card monty on the street with a professional card shark.

    I’ve got no problem with gambling, but I’m not too hot on games that are so heavily skewed against the players.

  13. #13 MeridianMan
    July 31, 2008

    This all assumes that people wouldn’t blow that lottery ticket money on something else equally worthless. At least they can’t get drunk or high on the lottery tickets.

  14. #14 cleek
    July 31, 2008

    poor people buy lottery tickets because they want to be rich people. duh ?

    people do win lotteries, after all. even though the odds are miniscule, people still become rich from winning the lottery.

  15. #15 Josh
    July 31, 2008

    and a buck is a cheap indulgence

    True. But the desperate poor spending 9% of annual income on these tickets don’t restrict themselves to one scratch per day.

    This all assumes that people wouldn’t blow that lottery ticket money on something else equally worthless.

    What equally worthless things does the state government sell to poor people? The problem is not that the product is loathsome, though it is. The problem is having government sell it.

    At least they can’t get drunk or high on the lottery tickets.

    Gambling-related mental illness affects 3-4% of US citizens. Incidence of compulsive gambling correlates directly to availability of gambling products. Among the many terrible effects of this disease — which our state governments have no business engendering and then exploiting the consequences of — suicide is most prominent. 45% of compulsive gamblers are suicidal and 16% attempt suicide.

    Actually, reducing the supply would make the price of gambling go up and that might make these folks worse off!

    State lotteries have vastly worse odds than privately run gambling services. The house edge at blackjack averages 2% depending on player skill. The house edge at slot machines in Vegas runs from 1% to 15%. The house edge at state lotteries is very close to 50%.

  16. #16 at all costs
    July 31, 2008

    MeridianMan – you’ve apparently never smoked lottery ticket scratch dust.

  17. #17 Paul Souders
    July 31, 2008

    The actual study is behind a paywall so I haven’t read it.

    This of course won’t prevent me from commenting.

    I wonder if the perceived value of the lottery is relative to the ROI for such a small investment (a few dollars), for people who have very little capital. If you only have, let’s say, $20 in cash that’s not committed elsewhere, the purely rational thing to do is deposit the $20 in a savings account and let it accumulate 2-4% a year. Why, in just 20 years you’d see your savings DOUBLE!

    OR you could buy 20 lottery tickets that offer a potential potential ROI of “millions of dollars right now.”

    If YOU only had $20 to invest (and let’s assume you are debt-free drug-free hardworking nonsmoking nondrinking non-TV-watching non-car-driving, and spend every free minute studying self-improvement books at the library and contemplating your virtue), where would YOU “invest” it? The $20-now-$40-in-20-years plan, or the millions-of-dollars-right-now plan?

    Or, more succinctly: the less you have to lose, the more you can afford to gamble.

  18. #18 tdaulnay
    July 31, 2008

    Lotteries are not a stupidity fee. Many of the people who play them realize that the odds are not all that good.

    Lotteries are something worse; they are a hope tax, a fee levied on people in poor straits who hope desperately for a way out. The American dream has failed for most of these people, they face a bitter grind with little hope of a better situation (something that now also faces the middle and upper middle classes, thanks to Bushite Gilded Age policies). The slim chance that the lottery offers is what they see as the best way out of their poverty.

  19. #19 Chris Bell
    July 31, 2008

    I never understood opposition to lotteries until I was in a very very poor town in rural Georgia one day. A gas station in town had once sold a winning ticket and was therefore “lucky”.

    The line of dirt poor farmers waiting to buy tickets stretched out the doors and past the pumps. It broke my heart.

  20. #20 Josh
    July 31, 2008

    I wonder if the perceived value of the lottery is relative to the ROI for such a small investment (a few dollars), for people who have very little capital

    Interesting. I don’t think it’s the most relevant line of argument. The poorest lottery players aren’t weighing investment opportunities. These people are not saving. They’re too poor to invest. They are struggling to buy food each week. The money they turn over to the state is money they should otherwise use for essentials, not savings. If they wished to “invest” it they would do well to invest in things like suitable business attire that might help them secure better jobs, which would have a much more direct and predictable effect on their financial state than either the “lottery plan” or the “savings plan.”

  21. #21 steven
    July 31, 2008

    I love this blog, but these commenters disgust me. What a condescending view you have of “poor” people.

    My mom is what I guess you guys would consider poor (please don’t let this exclude me from your ivy league salon) and she buys lottery tickets on a regular basis. I think she knows she is unlikely to win any big amounts, but she keeps doing it for the little thrill, for the hope that one day she will be lucky. It’s not about the rational chance of actually winning it’s the precise opposite of that. Life has perhaps not been very fair to her, but when buying a ticket, she thinks that maybe this will be the moment when luck turns (I think it may be just the fact that lotteries are so unrational and “unfair” that makes them appealing to people who think life has not been fair to them.)

    Yes, this is a form of taxation of the poor, but if the state wouldn’t do it, it would probably be private companies running this, and the money wouldn’t even come back to gain society the way state money does (at least hypothetically).

    Also, my mom spends perhaps 0,1-0,5 percent of her income on lotteries, that’s a pretty low price for keeping a little dream (however unlikely) alive.

  22. #22 Mike
    July 31, 2008

    I think the most accurate term is a “tax on the mathematically challenged”.

  23. #23 Paul Souders
    July 31, 2008

    The poorest lottery players aren’t weighing investment opportunities.

    The profile for lottery players suggests otherwise (the stereotypical “little old lady”). It’s way less exciting to play the lottery than damn near any form of gambling. In fact, the lottery is scarcely perceived as “gambling.” Moreover, other forms of gambling have a higher bar to entry. The house edges 2% at blackjack, but you need a couple hundred bucks just to stand at the table.

    These people are not saving. They’re too poor to invest.

    “Not saving,” in this context, is an investment opportunity. $20 is such a paltry sum, and for so many people so unlikely to come again, that simply putting away the $20 actually represents a lousy use of the money. $20 won’t buy “business attire” or any other useful thing, hell it barely buys a pair of khakis at Wal-Mart.

    Of course I haven’t even mentioned inflation, which at the moment makes me feel like a chump for putting away 10% of my paycheck every month. Hell right now the lottery would be a pretty good rational investment compared to savings (the only financial investment open to someone with only $20, BTW). In fact, pretty much every “investment” I’ve made — stocks, house, t-bills, plain-old-savings, you name it — is underwater right now. So what do “these people” know that I don’t?

    Instead of asking why “these people” (people without capital) spend so much on lotteries, ask instead why the other people don’t. Maybe it’s not because they’re smarter, but that when you have a few thousand bucks, there are so many more opportunities for investment, and you can afford to wait out the downside.

    What I’m arguing here is fundamentally what tdaulnay says: lotteries are a “hope tax.” For the poorest players, most opportunities are closed in modern America, because if you lack significant capital you can’t even tread water, let alone get ahead. If all I have is $20 and I’m disinclined to simply drink it away or some other obviously unproductive use — in other words to “invest” it, whether I would use that word or not — the lottery at least looks like a good investment.

  24. #24 steven
    July 31, 2008

    Paul, I agree with almost everyting you said.

    Also, the newspaper stories about lottery winners are sure to make people buy more (unnecessary) lottery tickets, but they are also awesome stories that makes us feel very good. I think there is a value to that.

    It’s like watching Colbert. It will neither change the behavior of politicans nor the media, but it feels good. For a moment the world seems like a slightly less frightening place.

  25. #25 steven
    July 31, 2008

    Also, the truly sad, and much more interesting, fact about lotteries is that all studies I have read about lottery winners say they are just as happy/sad after the Big Win as they were before.

    It would be interesting to read a neuroscientist’s analysis of why that type of quick reward (unrelated to any actual achievments) is not very satisfying to us.

  26. #26 twakum
    July 31, 2008

    Shhh! Its the greatest transfer of wealth from the AARP generation to state coffers one could imagine. Since they are a sacrosanct voting block, this is one way to pry those SS checks out of the hands of people who realy, really dont need all that SS income..as evidenced by casinos and lotteries. One of the sights I recall is a senior center right next to a newstand that sold lottery tickets. On SS check day, the two places became one, with the line of seniors buying tickkees, the line backed up into the Sr center.

  27. #27 Tom
    July 31, 2008

    I’ve noticed here in California that only when payouts are in the 50 million dollar range and up do individuals in my income bracket (300,000+) bother to pay any attention to the lottery and even consider buying a ticket.

  28. #28 Josh
    July 31, 2008

    It’s way less exciting to play the lottery than damn near any form of gambling. In fact, the lottery is scarcely perceived as “gambling.”

    Says you. Don’t forget “video lottery terminals,” which look and feel like slot machines because they are slot machines. (These are available in SD, OR, SC, RI, DE, NY, WV, LA, MT, all Canadian provinces except BC and Ontario).

    But ticket-based lotteries — especially scratchers with their immediate results — also trigger gambling-related mental illness. The fact that lotteries are “scarcely perceived as gambling” helps sell them to voters. The fact that lotteries are gambling helps generate the compulsive behavior that makes them so lucrative.

  29. #29 Paul Souders
    July 31, 2008

    The fact that lotteries are gambling helps generate the compulsive behavior that makes them so lucrative.

    Josh, I don’t disagree with you. I just think that “the lottery is addictive” as a theory fails to explain the uneven socioeconomic distribution of lottery players.

    The neurological or behavioral mechanisms implicit in this theory are “poor people are biologically incapable of gauging risk” or “poor people are biologically more susceptible to addiction,” which seems a little weak.

  30. #30 Ben
    July 31, 2008

    I buy one (1) Powerball ticket for each drawing. I know that this is not an investment. I know that it barely qualifies as gambling. From my point of view it is a donation, a donation to programs that are to some degree needful or desirable. This donation comes with the emotional benefit of allowing a bit of harmless daydream, or fantasy. Yes, I know I’m not going to win. But there is that critical difference between knowing that the odds are so ridiculous as to be effectively zero, and knowing that i have simply shut out the possibilty by not participating. At a cost of something on the order of $100 per year, it isn’t a bad entertainment buy.

    I am routinely dismayed by seeing people in the line ahead of me at the convenience store, people who, judging strictly by appearance, likely do not have my level of disposable income, dropping 20, 30, 40 dollars or more in one shot on lottery tickets. (I’ll confess I’m also annoyed at the time consumed as their orders are processed.) But this is their choice, and I think we have to honor that.

    The real disgrace is some of the advertising done by these lottery agencies. “Whoo-hoo! Get rich tomorrow!”

  31. #31 Jordynne Olivia Lobo
    July 31, 2008

    No commenter has yet observed that state lotteries have wiped out what had been called a scourge of the poor: the mob-run numbers rackets that had, until the state lotteries debuted, bilked their poor and middle class gamblers, perpetuated a huge source of income for organized criminals, and diverted a hefty proportion of law enforcement resources to chasing numbers racketeers.

    People, of every economic class, will gamble because many people, throughout our species’ existence, get a thrill from gambling. To lambaste state lotteries as “taxes” on the poor is to miss this point: the rich gamble in other ways with larger sums than the poor can, such as in investment schemes, on Wall Street, and in real estate. Granted, the rich usually leave themselves a nice reserve, or cushion, so that their gambles won’t leave them destitute, but the drive to risk something or everything will not be abolished by studies of which people spend how much on lottery tickets.

  32. #32 Mike
    July 31, 2008

    Heard this joke recently on the radio — mildly offensive, but with glimmers of truth, especially after reading this article: “What has six balls and rapes poor people?? The lottery!”

  33. #33 Jonah
    July 31, 2008

    Thanks very much for all your comments.

    Jordynne – That’s a really interesting point about how state lotteries replaced mob run numbers rackets. I hadn’t thought about that.

    And I think you also raise a good point about how rich people also gamble: they just play the stock market. The difference, of course, is that Wall Street has a historical return of 7 percent. In other words, it’s like gambling from the perspective of the house: the odds are in our favor. But lotteries – the gambling game of choice for the lower classes – is the worst possible gambling option. Even lowly slot machines have returns somewhere between 75 percent and 90 percent (Nevada regulates the rate of return), which makes the 53 percent return of lotteries seem even more pitiful.

  34. #34 Mark P
    July 31, 2008

    I have seen a couple of references here to studies lottery players, but the only ones I can find are either by news organizations (How valid are they? Who knows?), or by the lottery organizations themselves. Does anyone know of a legitimate study performed by a disinterested organization?

  35. #35 pushmedia1
    July 31, 2008

    I think my last comment was eaten by a spam filter… Mark, take a look at Kearney 2005: doi:10.1016/j.jpubeco.2004.07.004

    She finds evidence lotteries *aren’t* substitutes with other forms of gambling, but she finds evidence lottery buyers using informed choice (i.e. they’re acting in their best interests) when they buy lottery tickets.

  36. #36 Giraffe
    July 31, 2008

    Goodness, it would seem that only the uneducated play the lotteries. Except, well, my wife and I both play. We have college educations, know full well that the odds are completely impossible and still throw away $10 apiece every five weeks. Why? The impossible dream! Will we win? Not a chance. Do we care? Nope.

  37. #37 zach
    August 1, 2008

    From a society standpoint I find lotteries interesting. In a way they are a voluntary tax that people place on themselves to anoint one of their own –you cannot win if you don’t play– into a new class. It is a completely arbitrary way of catapulting an individual (and most likely that person’s progeny) into a different socio-economic sphere, likely never to return. It is not unlike the tradition of the bean-king. Where by the peasants would bake a bean in a cake and whomever got the bean became king for a day and everyone his subjects including the real king. Except with the lotto they have a better than even shot of staying royalty.

    Generally, people change class positions because of brains, or looks and/or sometimes hard work. It is rare to make this transition due completely to chance.

    In addition, many lotteries use the money to fund education. In Georgia, where I am, the lottery has transformed higher education by keeping the best and brightest in the state going to state schools, maybe learning statistics perhaps? Not being a lottery player, I kind of see it as a voluntary stupid tax to make the next generation smarter. People spend their money on all kinds of stupid things, so why not?

  38. #38 jb
    August 1, 2008

    As any savy classroom teacher or animal trainer knows the best way to get people/animals to repeat a desirable behavior over and over is to reinforce them immediately for the behavior with something they want in variable amounts on a variable schedule. So scratch off cards do this admirably. You might win something every so often and the amount will vary each time. E-mail addiction works this way as does keeping your marriage partner happy. Rewarding people on a regular schedule with the same thing gets boring (and would deplete state coffers). Classroom teachers and animal trainers have to be a bit more clever as you can’t throw a fish to a dolphin in mid leap…hence the use of clickers and whistles which immediately tell the animal they did what you want and that the fish will come later. Beforehand you have to click when you feed them so they have that association in mind and you start with reinforcing them every time they show the wanted behavior. Later you go to a variable schedule.

  39. #39 peterchen
    August 2, 2008

    Jonah –

    >> The difference, of course, is that Wall Street has a historical return of 7 percent. [...] But lotteries – the gambling game of choice for the lower classes – is the worst possible gambling option

    You are missing something here:
    Someone mentioned 13K as poverty line, put 9% of that into some investment that returns 7% – you “win” about $80 (and get back the $1170) – for having almost $90 less *available* each month. When you live on low income, $10 today or next week can already make a difference.

    Factor in any fee, any fixed or first-time payment, and they are off even worse. Lottery at least has the chance to change something in their life. Savings don’t.

    Money, at low income, does not behave linear.

  40. #40 Faze
    August 3, 2008

    The first dollar you spend on a lotto ticket is one of the best investments you can possibly make. It’s the second dollar that makes you a sucker. Look, say the jackpot is $50 million dollars. Right now, with no ticket, your odds of being given $50 million dollars for nothing are precisely infinity to one. But for the investment of only one dollar, you instantly drop your odds to (say, depending on the contest) 35 million to one. In other words, you improve your odds of getting $50 million by a factor of infinity minus 35 million. For the price of one dollar, you transform the total and utter impossibility of instant wealth into a real possibility. That’s a staggering benefit for the cost. Compared to that first dollar, however, the second dollar you spend barely moves your odds at all. Everything after your first dollar is money down the toilet.

  41. #41 Dr X
    August 3, 2008

    “Given that low-income participants in a State Lottery often have an almost fixed level of income, I’d be interested to see where that money would otherwise be spent if it was not spent on a lottery ticket.”

    This is an interesting question. Numbers rackets were the genesis of the state games. Before state lotteries were widely established, “numbers” games–mob run lotteries–were wildly popular in poor urban neighborhoods. The numbers racket represented a very large share the mob’s income. The payouts were much smaller than the state prizes, but I understand that the odds of winning something and the percentage of payout was far more favorable to the players than the are the odds and payouts in the state games.

    Of course, the state racket has gone much further than the mob rackets. Legality and ease of play that doesn’t have to be hidden, the freedom to advertise and the freedom to publicize spectacular winnings has induced many more players to play state numbers than the mob could ever draw. What would those additional players do with the money if not spent playing state run numbers? Still a good question.

  42. #42 Dunc
    August 4, 2008

    This all assumes that people wouldn’t blow that lottery ticket money on something else equally worthless. At least they can’t get drunk or high on the lottery tickets.

    I recently encountered the idea that much of American politics is driven by a fear that somewhere, a poor person may not be suffering enough. Thanks for the supporting data point.

    The payouts were much smaller than the state prizes, but I understand that the odds of winning something and the percentage of payout was far more favorable to the players than the are the odds and payouts in the state games.

    So the official state lotteries are actually less fair than mob-run illegal games? Fascinating!

The site is currently under maintenance and will be back shortly. New comments have been disabled during this time, please check back soon.