The Ugly Underbelly of the Lottery

Many people play the lottery. They spend about $80 billion a year, which is a lot of money by any measure. Almost everybody loses, and the ones who win have to pay huge taxes and often go bankrupt in a few years. It is a strange and irrational gamble, but it has an ugly underbelly: People feel that it is their last, best, or only chance for upward mobility.

One way to understand this is by looking at the regressivity of lottery sales. Scratch-off games account for about half of the total sales, and they are disproportionately played by lower-income players. They are also regressive because the prizes are small and often paid out in cash. But there are also lottery games that have large jackpots that attract upper-middle-class people and are less regressive, like Powerball and Mega Millions.

So what does it take to make a lottery game a good idea? The answer is that there needs to be a large enough entertainment value. That would overcome the disutility of a monetary loss and turn the gambling into something that makes sense for most people. Unfortunately, the big jackpots don’t get you that far. They are a form of bait and switch that lures people in, but the prize is much too small for most to make a rational decision to play. They end up spending their money on a long shot that they will never win. That is a bad deal for states and their constituents.