Most economists, conservative and liberal, are in complete agreement that lotteries are a bad gamble. You pay $2 for the ticket and your expected return is $1 on average. Yes there is the powerball $200 million prize. But then there are millions of people who get nothing. Or who get a free ticket that gets them nothing. And yet somehow, lotteries are the biggest form of gambling in the country. What gives?
It turns out, that you are getting more than the expected financial return for your $2. You have three days to dream. You can look at the ticket and imagine what you would do if you won the $200 million. After all, it IS possible. And since most people can’t really perceive the difference between 1 in 300 million odds or 1 in a million, it doesn’t seem like such a bad gamble. Look at how jubilant those winners are when they are showcased on the news. They are not fake reality show millionaires. They are scrubs just like you who really really won. And they can live the high life for the rest of their life.
That dream is what is worth the $2. You pay $9 to go to a movie (plus popcorn) and that only puts you in dreamland for a few hours. The lottery is a much better deal than that. Lotteries are a form of entertainment, not a form of income. Seen from that perspective, it doesn’t sound so bad.
But there is an even better solution (thanks to Freakonomics for the tip). One of the big problems with lotteries is that most of the customers are low-income people who spend more than they can really afford. OK, they get a great dream. But then they can’t make the rent. This sucks.
So imagine something called a no-lose lottery. When you put your money in a savings account at a bank, it earns interest. Right now that is very low but it is usually a couple of percent. Let’s say we take a smidge of the interest from everyone’s bank account. That would be millions. Just as much as in a powerball ticket. And we could turn that money into prizes. So instead of using your rent money to buy the dream, you get the dream for a smidge of your savings that you don’t even notice is missing. It would also encourage people to save.
The administrative costs would be minimal. The bank could send you your lottery numbers every month in your statement. No extra mailing (email or snail) and a computer could automatically generate the numbers. They could still do the drawings on the local news and publish them in the local papers. And you could have posters up in the bank to promote the program. Just as much hype if you want.
We can debate over whether it should be part of every savings account (like a tax) or an opt-in for certain accounts. We can debate over whether to have one big $200 million prize or have 200 $1 million prizes. We can debate how to define a smidge and how much can be spent on administrative fees. But I would guess that whatever we decide, liberal, conservative or otherwise, it is better than the lottery.