An Economist on the Lottery

Last night before two winners were drawn, the Mega Millions Lottery had its largest pot in history at $640,000,000.  That’s a tad over half a billion dollars!  The odds of winning are 1 in 175 million.  If you do the math the “expected lottery ticket value” of a $640 million payoff with 1/175,000,000 odds is $3.66, assuming you’re the only winner selected.  This probably explains why so many people laid down a buck to purchase tickets for this lottery.  In today’s blog I’ll discuss lotteries and some of their implications.

1.    While it is tempting to receive positive publicity immediately, don’t claim any large prize until you’ve spoken to a good lawyer.  It may be possible for you to change residency to a state with no income tax prior to claiming the prize.  Years ago a middle school teacher in Wisconsin won about $360 million.  He was able to change residency from Wisconsin to Florida within 30 days.  When he finally claimed his prize as a legal resident of Florida, he saved about $50 million in Wisconsin income taxes!

2.    Buying lottery tickets may not be irrational, assuming you buy just one ticket.  Milton Friedman wrote a paper on lotteries years ago.  He concluded that paying $1 for a ticket allows the person to “dream” all week about how he will spend his money.  This “dream” gives pleasant thoughts to an otherwise unexciting life.  The “dream” creates some positive utility (satisfaction) for the ticket buyer.  Friedman concludes that if the additional satisfaction of the expected winnings “dream” exceeds the dissatisfaction of losing a dollar’s worth of income, the purchase of the lottery ticket is rational.    This assumes that the buyer doesn’t spend inordinate amounts of income on the lottery.   After all, you need buy only one ticket to experience the “dream.”

3.    Generally speaking most lottery tickets are purchased by those who can least afford them.  People with low incomes are twice as likely to purchase a lottery tickets as people with high incomes.  As such, most economists believe that lottery schemes are “regressive”, meaning that they negatively impact poor people more than rich people.  The same could be said for taxes on liquor and cigarettes.

I thought seriously about buying a single ticket to the recent $640,000,000 Mega Millions Lottery, but by the time I had run all of my errands, the time had expired.  Guess I’ll just have to “dream” smaller dreams.

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