The people who recently bought 74 million Powerball tickets might be suffering from probability neglect. They knew that their chance of winning close to $487 million on July 30th was infinitesimal (actually 1 in 292 million). But still, they bought the tickets.
Where are we going? To lottery ticket losses.
Lottery Ticket Buyer Behavior
Nobel laureate Daniel Kahneman tells us that the psychology of terrorism and lotteries can be similar. After 9/11, I became concerned that the Lincoln Tunnel, connecting NJ and NY, could be hit. Driving through it, I make sure to avoid (what I think are) suspicious looking vans and trucks. Like winning the lottery, I know the probability is miniscule. But I still feel better.
Dr. Kahneman says for terrorism and the lottery, our behavior relates to an uncontrollable emotional response. With terrorism we have horrible images while the lottery takes us to happy fantasies. But for both they are uncontrollable associative thoughts. Our response–avoiding the van or buying the lottery ticket– “neglects” the probability because it makes us feel so much better.
Our Bottom Line: Regressive Fiscal Policy
Last year, state and local governments got $20.9 billion from U.S. lotteries. And yes, the money is typically (but not always) used for education. The problem though is that lotteries are a regressive fiscal policy tool. Because everyone pays the same amount, those who earn less spend a higher percent of their income on lottery tickets.
State-by-state lottery totals show us that regular players in South Dakota, West Virginia, Delaware and Massachusetts spend the most each year:
Described at Statistical Ideas, comparing lottery ticket spending to median net worth at retirement, we see a huge opportunity cost. During a lifetime of steady ticket buying, regular lottery players will waste $135,000. Meanwhile the median net worth of a household approaching retirement is close to $166,000. What a difference that $135,000 would have made–especially if it had grown each year as an investment.
So, who really wins the lottery? Not the players.
My sources and more: These NY Times articles, here and here, provide the details on Powerball economics. However, if you are a math person, you will especially enjoy the analysis at Statistical Ideas while Daniel Kahneman’s Thinking Fast and Slow is perfect for understanding the behavioral economics perspective. Please note that as an update from 2013, this post includes several sentences that were previous published.