The Frontal Cortex

Lotteries

This makes me sad:

When gasoline prices shot up this year, Peggy Seemann thought about saving the $10 she spends weekly on lottery tickets.

But the prospect that the $10 could become $100 million or more was too appealing. So rather than stop buying Mega Millions tickets, Ms. Seemann, 50, who lives in suburban Chicago and works in advertising sales for a financial Web site, saved money instead by packing her lunch a few days a week, keeping alive her dreams of hitting a jackpot and retiring as a multimillionaire.

“With companies tightening and not giving cost-of-living increases, you have to try to make money elsewhere,” she said, though conceding, “It might be convoluted logic.”

Many state lotteries across the country are experiencing record sales, driven in part by intense marketing but also by people like Ms. Seemann who are trying to turn a lottery ticket into a ticket out of hard times.

Last week, I did a short interview with George Loewenstein, over at Scientific American.

LEHRER: Your most recent paper looked at some of the factors that seem to influence the purchase of lottery tickets. What did you find?

LOEWENSTEIN: We [Emily Haisley, Romel Mostafa and I, all of whom are researchers at Carnegie Mellon] have two papers addressing the motives underlying lottery ticket purchases. All of the research was conducted with low income samples recruited at the Greyhound bus station in Pittsburgh. In all of the studies, we paid travelers $5 for completing a survey on their attitudes toward Pittsburgh, then give them the opportunity to purchase lottery tickets with the money. The variable of interest was, in all studies, the number of tickets they purchased.

One of the papers, just out in the Journal of Behavioral Decision Making was inspired by the empirical observation that the poor spend a disproportionate percentage of their income on lottery tickets. We conducted two experiments to examine whether making people feel poor makes them want to play the lottery.

We randomly assigned subjects to either feel relatively poor or relatively rich by having them complete demographic questions that included an item on annual income. The group made to feel poor was asked to provide its income on a scale that began at “less than $100,000″ and went up from there, ensuring that most respondents would be in the lowest income tier. The group made to feel subjectively wealthier was asked to report income on a scale that began with “less than $10,000″ and increased in $10,000 increments, leading most respondents to be in a middle tier. The group made to feel poor purchased twice as many lottery tickets (an average of 1.27) than those made to feel relatively wealthier (0.67 tickets, on average).

In the second experiment, we indirectly reminded participants that, while different income groups face unequal prospects when it comes to education, employment and housing, everyone has an equal chance to win the lottery. This reminder that the lottery is a kind of “social equalizer” also increased lottery tickets purchases. The group given this reminder purchased 1.31 tickets, on average, as compared with 0.54 for those not given such a reminder.

LEHRER: Have these experiments changed how you feel about the lottery? Would you advocate any changes to the way the lottery system is run?

LOEWENSTEIN: Clearly there is a demand for playing the lottery, and people seem to get something out of it; otherwise they wouldn’t keep playing. But it is well established that low income people spend a higher percentage of their income on the lottery than other income groups (with one study finding that those earning incomes less than $12,400 spend an average of $645 on lotteries each year), so the lottery ends up taxing the poor at a higher rate when it makes much more sense to tax the rich at a higher rate.

The finding from our first study, that when you make people feel poor they play more, is especially sad since playing the lottery is on average a massively losing proposition. The propensity of low income individuals to play the lottery has the perverse effect of exacerbating their poverty. Although there are no easy solutions to the problem, one obvious one would be to cease marketing and advertising that targets the poor. It probably makes sense for the state to sell lottery tickets, because otherwise they will be sold by organized crime. However, does it really make sense for the state to be inducing, through advertising, poor people to play who wouldn’t play in the absence of such inducement?

Similarly, states could promote and offer more games that appeal to wealthier players, such as Powerball, and not those popular with poorer players, such as instant scratch-off tickets. Another obvious solution, though one that is even less likely to be implemented, would be for the state to increase the payout on the tickets, and perhaps to increase the number of moderate size prizes.

Finally, a third option would be for financial institutions to issue investment instruments that have lottery-like qualities (for example, offered in small amounts, available at many convenient points of purchase, provide a small chance of a large upside) but offer a positive rate of return, providing the pleasure of playing the lottery without the steep cost. In many other countries “prize bonds” or other savings instruments are available that pay lottery winnings in place of, or in addition to, regular interest. Regulations in the United States have stymied the development of such offerings.

Comments

  1. #1 bob koepp
    September 15, 2008

    “It probably makes sense for the state to sell lottery tickets, because otherwise they will be sold by organized crime.”

    The thing is, those organized criminals will give you better odds than do the disorganized criminals (i.e., the state). It’s still a waste of money, but just sayin’.

  2. #2 tim
    September 15, 2008

    “It probably makes sense for the state to sell lottery tickets, because otherwise they will be sold by organized crime.”

    It makes no sense for the state to sell lottery tickets. Its a form of gambling. Allow private enterprises to get into the business, regulate it, and tax it.

  3. #3 OftenWrongTed
    September 15, 2008

    Illegal gambling is rampant in my state: Large sums of money are lost on mundane sporting events at the high school level as well as on major sporting events. If a state lottery becomes a reality here there will be even more money given up by those citizens who most need the money.

  4. #4 Becca
    September 15, 2008

    Wait, how many lottery tickets did the people who were still relatively poor in the “relatively rich condition” buy? (i.e. what was the rate of lottery ticket purchase among those making less than $10,000/year?)

    Actually, I really like his last suggestion (#4). If I could “play the stock market” with pocket change, I’d probably have some fun with it.

  5. #5 IBY
    September 15, 2008

    I have always thought that playing the lottery was kind of ridiculous. I mean really, what are the chances? Yes, some people win, but everyone else don’t win.

  6. #6 Mike Haubrich, FCD
    September 16, 2008

    Personally, I find this all patronizing. The assumption is that poor people are not as rational as rich people.

    I would be interested in finding out whether people who are made to feel richer are also willing to overpay for their coffee if it comes in sized as “venti?” How much do preppies spend on Starbucks, anyways?

    If I spend $104 a year by buying 2 Powerball tickets a year, I am spending much less than some of my co-workers who make more than I do spend on going to Caribou Coffee. And I still have money left over for real coffee.

    Perhaps Lowenstein, et al, should do a follow-up study to find out why people buy lottery tickets, instead of clucking their tongues at the working class.

  7. #7 Anittah Patrick
    September 16, 2008

    Methinks you might be projecting your prejudices onto the findings, Mr. Haubrich. Loewenstein isn’t clucking his tongue nor is he stating that poor people aren’t as rational as rich people; in fact, no claims are made about rich people at all, and the bus depot example is simply about self-perception rather than reality. _Feeling_ poor and _being_ poor are two different things.

    The research does suggest that poor and rich people are differently rational. As your comment indicates, resource allocation for rich people may very well be just as irrational as is for poor people, but when it comes to the specific instrument of lottery tickets, it does seem that the irrational behavior is clustered around poor people. Which again is not to say that irrationality, when taken across all measures, is not equal across the wealth spectrum. But when it comes to lottery tickets, poor people are less rational.

    And to your point, when it comes to Starbucks, perhaps wealthier people are less rational than poor people.

    It isn’t a rationality contest, Mr. Haubrich, but as those of us who have concern for our fellow man, it does seem prudent to recognize the reality of the situational irrationality of poor people in order to inform benevolent public policy. To ignore the demonstrated errors of man, at some point, skirts cruelty.

  8. #8 Mike Haubrich, FCD
    September 16, 2008

    Then why not dig into why the lottery is seen as an option? Yes, it is a long, long, remote chance at a sudden change in status, or even a return to what status we may have had.

    It is frustrating to work at jobs we aren’t overly fond of, often overtime, just to keep with the the bills let alone the Joneses. The powerball tickets are irrational, of course, and as you point out all of us have an irrational side.

    My point, perhaps misdirected at Dr. Lowenstein when I was really meaning to direct it at Jonah, is that there are ways that we try to buy into a bit of the hope that perhaps our lives will not always be treadmills. I don’t need Jonah to feel sad for me. Nor do any of the working class.

    Gambling is a very old tradition among humans, and was not brought to the working class by the lotteries. Before state lotteries there were numbers games, and before that there were pickup cracps games.

    What other things could the woman in the NY Times story spent her money on without getting the pity of Jonah? A six pack of beer? Cigarettes? Tithing? There are a lot of foolish ways for people to spend their money even when they don’t have it to spare. A lottery ticket buys a daydream and I don’t see why there needs to be a movement to modify our behavior because some of us indulge in spending money that we earn on a long shot at changing our financial conditions.

    Don’t you think that another way to inform benevolent public policy; such as fighting for an insurance plan that covers everyone? How about pushing for unionizing industries so that the working class return to a better bargaining position? How about a mass transit system that relieves the pressure of high car insurance, fuel and time spent in traffic? How about pressuring credit card companies to stop trapping people in a cycle of debt they can never escape?

    There are many items that should be higher on our list of priorities than modifying our lottery ticket purchasing behavior.

    You can call me Mike, too, Annittah. I may be old, but not that old.

  9. #9 Mike Haubrich, FCD
    September 17, 2008

    And I want to apologize for misspelling your name, Anittah.

  10. #10 Felicia Gilljam
    September 17, 2008

    I have a vague feeling that this isn’t entirely uncommon in the natural world – if you have little to lose, you gamble everything in the hopes of winning big. I.e., if you’re not well off in the first place you’re likely to take more risks (for food, mates or whatever). I can’t seem to dredge up any examples at the moment though…

  11. #11 Jochen Schneider
    September 18, 2008

    I wonder what role the type of lottery and payback plays. One idea would be to lower ticket prices by lowering the payout of the lower tier wins.

  12. #12 wicking fabrics
    May 12, 2011

    Thanks for your posting. I also think that laptop computers have grown to be more and more popular nowadays, and now tend to be the only kind of computer employed in a household. The reason being at the same time they are becoming more and more cost-effective, their processing power keeps growing to the point where they’re as powerful as desktop computers from just a few in years past.