The Economics of the Lottery Ticket

By Derek Thompson

The lottery system is a madly profitable business, pulling in $70 billion a year -- more than movies, music and porn combined, says Jonah Lehrer. But how does a sucker's game like scratch lottery make so much money? And why are poor and educated people more likely to buy tickets, as the evidence shows...

While approximately half of Americans buy at least one lottery ticket at some point, the vast majority of tickets are purchased by about 20 percent of the population. These high-frequency players tend to be poor and uneducated, which is why critics refer to lotteries as a regressive tax...

Ryan Avent points readers to this fascinating Boston Globe article on a new theory of poverty. Economists have observed that extremely poor people tend to act in ways that worsen their indigence. They are more likely to drop out of school, have children in their teens, abuse drugs, commit crimes, and not save money.

Some economists suggest it's because the extremely poor view the world through the lens of problems and relief rather than the competition for scarce goods. Here's a simple explanation:

If, for example, our car has several dents on it, and then we get one more, we're far less likely to get that one fixed than if the car was pristine before. If we have a sink full of dishes, the prospect of washing a few of them is much more daunting than if there are only a few in the sink to begin with. Karelis's name for goods that reduce or salve these sort of burdens is "relievers."

Karelis argues that being poor is defined by having to deal with a multitude of problems: One doesn't have enough money to pay rent or car insurance or credit card bills or day care or sometimes even food. Even if one works hard enough to pay off half of those costs, some fairly imposing ones still remain, which creates a large disincentive to bestir oneself to work at all.

Seen in this light, the fact that lottery tickets are more likely to impoverish the impoverished is besides the point. Buying a ticket means buying hope, and hope salves hopelessness. The prospect of great wealth weighs more than the likelihood of increased poverty.

"The core of the problem has not been self-discipline or a lack of opportunity," Colgate economist Charles Karelis says. "My argument is that the cause of poverty has been poverty." In other words: The extremely poor are different from you and me; they have less money.

Read the full stories on Wired, Economist and Boston.com.

This article available online at:

http://www.theatlantic.com/business/archive/2011/02/the-economics-of-the-lottery-ticket/70622/