The lottery contributes billions of dollars annually to American life. Some people play it for fun, and others think of it as their only shot at a better future. But how does the lottery actually work? This article by David Cohen at the New York Times examines its economics.
Lotteries, he writes, “work because they are a form of voluntary taxation.” That is, the state collects money for a specific line item in its budget, and in return, it offers a chance to win an expensive prize. If the expected utility of winning the prize outweighs the cost of the ticket, a player will rationally choose to play.
This is the fundamental idea behind state lotteries, and it has shaped the lottery’s popularity in the United States for almost two centuries. Its roots are ancient—lotteries were used in the Roman Empire, Nero was a fan, and the Old Testament includes instructions on drawing lots for everything from land to slaves. But the modern lottery began with a state-level effort to raise funds for public works in the eighteenth century.
When that effort proved popular, it caught on across the country as states searched for solutions to their fiscal crises that wouldn’t enrage an increasingly anti-tax electorate. And, as Cohen points out, lottery proponents soon realized that they needed to change the way they marketed their product. They stopped arguing that a lottery would float the whole budget, and started promoting it as an investment in a particular public service—most often education or veteran benefits, but also elder care and community parks.
Those investments, however, aren’t as lucrative as they seem. As the aforementioned chart shows, the number of lottery players has risen as incomes fall, unemployment rises, and poverty rates increase. Moreover, as with all commercial products, lottery sales spike when it is advertised in neighborhoods that are disproportionately poor, black, and Latino.
In addition to the fact that lottery money doesn’t necessarily translate into better public services, there are other reasons to avoid it. For one thing, lottery winners are prone to spending their winnings on extravagant purchases and, in some cases, to ruining their lives with credit card debt. There is also the risk that a lottery winner will lose most or all of their winnings within a few years.
And of course, the most important reason not to buy a lottery ticket is that it’s a waste of money—Americans spend $80 billion on them each year. There are many more useful ways that people can invest that money, including paying off debt, building an emergency fund, and saving for retirement. It’s no wonder that so many Americans are struggling to make ends meet.