LOTTERY

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We all love to gamble, most of us anyway; but why? Unless we have a “gambling problem”, or don’t know the rules of the games, most of us gamble for the fun of it. When we go to Vegas, we don’t expect to come home with life changing riches – casino rules make that a virtual impossibility. If we’re smart, we expect to come home slightly poorer. We gamble because we enjoy the games themselves. Plus, it is an undeniable thrill to “beat the house”, even if only to a modest extent and for a limited period of time. For most of us, gambling is not a financial planning strategy.

Or is it? 60 million Americans play state lotteries every year. In states that have lotteries (44) the average adult risks more than $300/year on numbers, scratch cards and other ‘propositions’. While it can be fun at first to scratch a card looking for winning numbers (is this the modern version of the Gold Rush?), after a while it can get pretty tiresome (as did panning for gold). Yet we still do it. Why?

We do it to get rich! Whoa, I thought you just said that you couldn’t get rich gambling. That was in casinos! Lotteries are a completely different kettle of fish. Here’s how they work:

  1. Hundreds of thousands of folks pool their resources (sometimes as much as $30 a throw) to buy a lottery number or a scratch card.
  2. In the better games (i.e. states), approximately two-thirds of the proceeds go back to the players as ‘winnings’ while the state retains one-third to cover costs associated with the games and to fund other budget items (often education and/or transportation).
  3. Most cards, of course, are losers; but a fair number return a modest prize (double your ‘investment’?) to keep players from getting discouraged. A very few cards return prizes ranging from $10,000 up to $1,000,000.

Vegas casinos operate on an overall margin of 5% to 10% (vs. 33%); but some bets on some table games give the house no more than a 1% edge over the player. Some players will tell you they have strategies to shave that margin even further. State lotteries, the very best of them that is, operate on a 33% margin.

So why would anyone buy a scratch ticket when they could gamble at one of the hundreds of Vegas-style casinos that are popping up all over the country? (I have at least 4 within driving distance of my home and 3 more are due to open shortly.)

The answer, I believe, is simple: the average gambler has precisely zero chance of becoming a millionaire at a casino; but she has a distinctly non-zero probability of becoming a millionaire through the lottery. After all, it’s happening for her ‘neighbors’ every day…they even show them on TV! Our prototypical gambler is willing to trade a 5% margin for a 33% margin because the later contains the possibility of a 5, 6 or even 7 figure jackpot.

Many liberal politicians and economists have noted that lower income people spend a higher percentage of their incomes on state lottery tickets than do higher income folks. Of course they do! Higher income earners are able to save money regularly; they have the option to participate in HSAs, IRAs, 401(k)s and other tax advantaged accumulation vehicles. They can even “play the market”. In recent years, a dollar invested in Netflix has outperformed any savings account! (Of course, you had to know what to buy and when to buy it; but we enjoy thinking we can out-smart the experts…and occasionally we can.)

So here’s the fundamental question: does playing a good state lottery (the quality varies widely from state to state) constitute a viable financial planning strategy for someone of modest economic means? The answer, surprisingly, is yes! The state lottery is just about the only financial vehicle that offers certain folks a realistic opportunity to materially impact their economic circumstances.

What’s the magic? A state lottery takes small investments from the many and produces out-sized returns for the few. Sounds like the worst form of ‘robber baron capitalism’, doesn’t it? Where’s Bernie Sanders when you need him?

But wait! The ‘few’ in this case are determined randomly. You don’t need to be rich to win the lottery. You don’t need to have attended a posh prep school; you don’t even need an Ivy League education. Nor do you need to be born a genius…or work 60 hours a week. This is virtually the only way for many ordinary Joes and Janes to get ahead.

Still not convinced? Consider a more subtle argument: out of the 33% retained by the state, a small portion goes to overhead (including advertising) and a similar portion goes to the retailers who sell the tickets (that in turn helps hold down prices on milk and eggs). The lion’s share of the state’s take goes to fund various state and local budget priorities. Most of those projects benefit people of modest means (as well as others).

Plus, were it not for lottery revenues, higher taxes might be required to fund these projects. Those taxes could take the form of job killing taxes on corporations and high income earners or broad based taxes on gas or sales. In either case, the loss of lottery revenue would impact lower income residents negatively…and perhaps even disproportionately.

A dollar ‘invested’ in the Lottery provides the gambler with a 67% return in the form of personal ‘winnings’ and perhaps another 16.5% in ‘social capital’. Now the overall proposition looks a lot more competitive.

One final point: liberal politicians believe that they are benefactors of the middle and lower economic classes. Yet on election night, they often find themselves wringing their hands: “Why didn’t the people understand that we had their best interests at heart?” Why do lower income voters often vote like upper income ones? (Clue: it has nothing to do with Russian interference in our electoral process.)

They do so because they do not what to be hog tied to the status quo; they want the opportunity to become higher income earners and so they often behave as if they already were. That is the secret of conservative electoral success…and it is also the secret of state lotteries. In the United States at least, people value opportunity more than they do security!