State-run lotteries attract poor people and act as a tax on them. State governments know this very well. Yet they continue to pour more money into their advertising budgets.
In addition, state lotteries are promoted as a way to "fund education" so that people can feel better about playing the lottery and so that they can feel a little guilty if they don't play. But this is a very specious way to promote the sale of government-sponsored gambling. Net impact of the lottery on education budgets: zero.
Here’s the whole story.
A Tax on the Poor
Low-income families spend a higher percentage of their income on lotteries than their wealthier counterparts. The average U.S. household spends $162 a year on lotteries. But that average is skewed by the wealthier households who really don't play much. We're much more like our peers in our spending, and the lower-income households we hang out with spend a lot more on the lottery. The number for them is $289, and it's a little bit higher for households that make under $10,000 a year. For them, it's about $597 a year, or just under 6% of their total income (Why the Poor Play the Lottery). But as the researchers say, this is a pattern that often goes unnoticed.
21% of adult Americans believe that playing the lottery is a practical way to accumulate $200,000 in total wealth. Among lower income participants, 38% felt the same way. (Saving a million? Most of us say 'unlikely.') The really surprising part is how many people we hope have the path of least resistance to getting rich.
Authorities have agreed since the 19th century (and perhaps even earlier) that effective regulation is necessary in the public interest. At that time, the U.S. Supreme Court stated in Stone v. Mississippi (1879): "Experience has shown that the common forms of gambling are comparatively harmless when compared with the widespread danger of lotteries. The former are confined to a few persons and places, but the latter invade the whole society; they enter every household; they reach every class; they prey upon the hard earnings of the weak, and they deceive the naive and uneducated."
Moreover, those who are fortunate enough to win the lottery often return to their former circumstances within a few years. Examples abound: there's the garbage collector who won $15.4 million and is back to collecting garbage; the historic 1981 lottery winner who now lives in a trailer; the single mother from Virginia who won over $4 million but is now deeply in debt. The truth is, the National Endowment for Financial Education estimates that 70% of lottery winners end up financially ruined. Why is that? Because immediate decisions have long-term consequences.
If they don't get murdered or have relatives hire killers for them. Only 55% of lottery winners feel happier after winning. And, surprisingly, winners often forget to claim their prizes (in 2013, more than $2 billion went unclaimed). These numbers can be quite alarming.
That is, if they don't get killed or have hit men hired by relatives to kill them. Only 55% of lottery winners are happier after winning, and amazingly, winners often fail to claim their winnings (more than $2 billion went unclaimed in 2013).
How It All Began
Since the early colonies, lotteries have been an important way to raise money. They have funded nearly 200 churches, nearly 300 schools (including Yale and the others in the Ivy League), and railroads, among other projects.
At the time, lotteries were promoted as an almost civic duty - so that citizens would participate and put their dollars to "good use," such as building bridges and roads. Washington was so convinced of the system's revenue potential that he personally ran a lottery to raise money for a western road, and Franklin used them to "enlighten the people" and fund such projects as cannon making.
Nowadays, “education” and “contributing to our children’s future” is a commonly-used angle.
Although lotteries have long been associated with scandal, they remain a popular form of entertainment. Of course, no one is forced to buy a lottery ticket, and the odds of winning a prize are very slim. Still, our society seems willing to tolerate the occasional scandal in exchange for the harmless fun of dreaming about what you could do with all that money.
However, lotteries have resurfaced primarily because states have been in desperate need of funds. It was more than five years after the Louisiana Lottery closed in 1964 that New Hampshire reinstated the state lottery. New York followed suit in 1967 and New Jersey in 1970.
Currently, 43 states and Washington, D.C. have state lotteries. They are much more reliable these days, and much more fun for the lawyers at taxpayer expense. If I'm not mistaken, Arkansas hasn't joined the party yet, but I suppose it only makes sense that almost every state would be in on it. In 2014, lottery sales reached their highest level ever: $70,153,520,000.
States are always looking for ways to get people to put more of their money into lotteries. They do this by making the lotteries more frequent, more accessible, and more richly rewarded. The constancy of this search could be seen as a kind of devotion, not altogether unlike the imitative forms that parents sometimes take when their children are about to meet a stranger. From subscriptions ("Never Miss Another Draw!") to payroll deduction plans, and from instant lottery tickets to daily, bi-weekly, and weekly drawings, to websites and mobile applications, the growth is likely to continue.
Selling Hope
The lottery was defined by Ambrose Bierce as "a tax on people who are bad at arithmetic. Few can argue with that when you look at the math: putting in $1 and getting back only $0.55, especially if you're investing 6% of your $10,000 a year income, just doesn't make financial sense. Despite the underlying math, lotteries are widely accepted. They thrive on the dreams and hopes they sell to the poor who are desperate for money. Buying a lottery ticket is an inexpensive way to "invest" in a potentially life-changing event. The actuarial odds dictate that any one ticket has a small chance of winning, but the event as a whole pays out a huge sum of money. It also helps to have a federal exemption from truth in advertising laws. "Anything is possible." That is the slogan of the Illinois Lottery. Some other good ones are "Everybody Wins" (New York), "It Does Good Things" (Oregon), "Give Your Dreams a Chance" (New Jersey), and "Somebody's Gotta Win, Might as Well Be You" (Kentucky).
Or perhaps “Just Imagine” (Florida) will do?
Oregon built its lottery on the premise of "doing good." Yet this article argues, and with good reason, that state lotteries have a detrimental effect on the lives of poor and working-class people. In short, these are the reasons why what this article exposes is shameful: Life is hard enough for many people without having to pay for 50 percent of the Oregon Lottery's pre- and post-tax revenues and the hundreds of odds and ends that make up its part of "lottery life.
Here is a holiday ad campaign from the Oregon Lottery called "What's In Santa's Beard?" Notice how they convey the message that the lottery is a game of chance played for entertainment, not investment purposes, all within the last two seconds of the ad (which, I confess, I still do not understand 100% clearly after a few replays and watching it in slow motion).
The North Carolina Education Lottery emphasizes that participating in the lottery is tantamount to supporting a worthy cause, even going so far as to suggest that they might be playing with people's consciences to get them to participate. But as you'll see below, the vagueness of the term "good cause" raises some serious questions about just what part of the state's education budget lottery proceeds actually play.
Here's New York's lottery education ad, with certainly more emphasis than other states on helping kids (and remember, despite what that TV news personality said, "everybody wins," right?):
An important aspect of peddling dreams is to trumpet the winners in the ads and news stories (which are really ads) that we see. These stories and ads inevitably - and of course! - have a touch of sensationalism that makes us pay attention to them. And what do they usually show? Very few stories or ads ever show the masses of ordinary people who play the lottery and don't win. No, sir! Those lottery directors don't star in those stories. Instead, the directors of our attention use the winners to direct our attention in their favor.
For example, this $10 million lottery winner "bought a lottery ticket to break a $100 bill. However, when you look at the story more closely, he actually bought two tickets for $20 each, which hardly sounds like his purpose was to break a $100 bill.
But they had to make it an interesting story to catch people’s attention.
Part of the appeal of the lottery is that it's a chance to win life-changing sums of money, no matter how far-fetched that chance may be, for a virtually meaningless investment. For many, putting a few dollars into the Powerball or Mega Millions every week is like making a donation that might help someone, but will never be felt in our daily lives.
This observation was made as early as 1887 by Richard A. Proctor in his book Chance and Luck (which can be found at Project Gutenberg, by the way) - and here he makes more of the same unscientific observations that were prevalent in his time and still are today.
It has long been known that men of the gambling spirit (ninety out of a hundred, to tell the truth) are not deterred by the clearest evidence that the price they are paying is an unfair one when they risk small sums to win large fortunes.
Many studies have come to the same conclusion. In The Appeal of Lotteries and Their Use in Incentive Design, Emily Haisley hypothesizes that spending on lotteries by low-income individuals would decrease if payment had to be made in one lump sum, rather than in installments, which are currently designed to keep individuals high in cash.
Nevertheless, our results suggest a possible application for policies that could reduce lottery purchases by low-income players and promote responsible gambling. What we found suggests that selling lottery tickets in packages of multiple tickets - say, 5 undiversified $1 tickets - might actually reduce lottery ticket sales. Why? Because the low cost of 5 undiversified tickets would be more salient to buyers than the low cost of 1 ticket. And if fewer tickets are purchased, that obviously means less money is spent on lottery tickets.
The small investment is attractive, but people are also attracted to the small chance of winning because they cannot (or do not) think about how unlikely a win really is. In his book Thinking, Fast and Slow (which has sold a million copies), Daniel Kahneman says that we tend to overweight the unlikely events and underweight the probable events in almost equal measure, which, in the end, make up almost all of our lives:
For example, the decision weight corresponding to a 2% chance is 8.1. If individuals adhered to the axioms of rational choice, the decision weight would be 2, meaning that the rare event is given four times the weight it should be given. At the other end of the probability scale, the certainty effect is striking. A 2% risk of not winning the prize reduces the utility of the gamble by 13%, from 100 to 87.1. The simple conclusion is that, contrary to the expectation principle, the decision weights people assign to outcomes do not correspond to the probabilities of those outcomes. People overweight unlikely outcomes; this is the possibility effect. Outcomes that are almost certain are underweighted relative to their actual certainty. The expectation principle, which weights values according to their probabilities, is bad psychology.
Finally, Betting on the Lottery: the sociodemographic correlates across the lifespan concludes that poor people may view the lottery as a social equalizer.
An experiment conducted by Haisley et al. (2008) tested the hypothesis that people who feel poor because of implicit comparisons with others are more likely to buy lottery tickets; i.e., that low-income individuals are motivated to play the lottery to somehow correct their low-income status. Support for the hypothesis was found in that low-income individuals were more likely to purchase lottery tickets when they were made to perceive that their own income was low relative to some reference point. The authors concluded that for low-income individuals, lotteries may be seen as a "social equalizer" because they provide everyone with a chance to win.
Education
It is a big deal, to hear state officials tell it, that they fund good causes with lottery money. In many states, the very good thing is that they help fund education. Well, sort of. Although they don't like to come right out and say it, the lottery doesn't really help fund education very much, if at all.
And for a good reason.
First and foremost, much of the revenue doesn't go to charity. Instead, it goes to reward the winners-understandable, since you buy a ticket in the hopes of winning-but it's often earmarked for even bigger prizes, plus administrative costs. And then the government takes its cut.
What remains is devoted to charitable activities such as teaching, but it is often a drop in the bucket of a country's education budget.
In California, for example, it is 1.4% of the state's education budget, and in Massachusetts it is 4.4%. However, some states have higher figures, such as New York with 14%.
Unfortunately, no matter what the percentage, the money previously earmarked for a good cause is almost always diverted to other areas. State lotteries perpetuate the narrative that they operate "for a good cause" as a means of pulling the wool over people's eyes. The net effect for a good cause? Pretty much zero.
The following are two quotes from a report by the Illinois Association of School Boards. The report is entitled "Where Does the Lottery Money Go?
Although the Common School Fund receives lottery profits, this is really just an accounting gimmick that makes it appear as if schools are getting more money, but in fact reduces the amount of money schools need from other state sources. Lottery profits do not provide schools with additional funding. The unfortunate reality is that the state lottery will continue to be used as a cover to create the illusion that the state is funding schools at adequate levels when in fact it is not.
Here’s an excerpt from Hope and Hard Luck:
The amount of money the lottery gives to educational programs has decreased since the lottery began in 1985. According to W.Va. law, at least 35 percent of the lottery's proceeds must be used to fund educational programs. But in practice, the amount awarded each year is much less than that. In both 2011 and 2012, the West Virginia Lottery Commission sent only 29 percent of its profits to the Department of Education. The Department of Education used that money to fund scholarships for needy students, early childhood education, and to help pay for the construction of new schools.
Some critics are concerned that some of the money has gone to replace funding that was already there, rather than to fund additional programs that wouldn't otherwise be funded.
The results of a research project entitled "Education's gambling problem: The impact of earmarking lottery revenues for education on charitable giving and government spending" are intriguing. They suggest that education lotteries do not serve to funnel more money into state education budgets. In fact, the study suggests that these lotteries may lead to a decrease in charitable giving.
"State education spending does not receive a significant boost when an education lottery is introduced. In studies of several states, the introduction of a lottery was invariably followed by an increase in total state revenues. This was good news for state governments, which welcome any source of additional revenue. But as for the intended beneficiaries of the lotteries - students and their teachers - there was little to cheer about. Despite rising revenues, the states in question failed to direct much of that money into the coffers of their education systems." "...donations to educational causes decrease significantly after an education lottery is introduced; donations to education-related nonprofits decrease by 8% after a lottery is introduced."
In many cases, it's difficult to determine where states are really putting their lottery money. Without being privy to the inner workings, it is virtually impossible to track the funds.
Here’s an excerpt from a New York Times article in 2007:
Beginning in 2002 and continuing through the last completed fiscal year, the Nebraska Legislature diverted state lottery funds from K-12 education and other programs to cover a shortfall in the general fund. This was done in a way that made it appear as if the lottery funds were going directly to K-12 education, when in fact they were not.
"One of many ways to "make up the lost revenue" was to divert lottery money into the general fund," said Bruce Snyder. Snyder is a supervisor in the accounting office of the Nebraska Department of Administrative Services.
Lottery officials complain that they get an undeserved rap for lawmakers' bad decisions. "Our job is to raise money for the things the legislature wants," said Clint Harris, director of the Minnesota Lottery. "We have no control over what happens to the money."
But Brett McFadden, a budget analyst for the Association of California School Administrators, said: "It makes it harder for us to convince people that they still need to support education. They think the lottery takes care of education. We have to tell them we're just getting a few sprinkles; we're not even getting the icing on the cake.
John Oliver had a segment on this very subject on Last Week Tonight:
Conclusion
Lottery, as a concept, is not evil, but state lotteries are.
The states know that, in relative terms, low-income households spend significantly more on the lottery than the average U.S. household, and that the lottery is effectively a tax on the poor, yet their advertising campaigns continue to target the poor.
In addition, many states purport to fund education with lottery revenues, but these revenues are a tiny fraction of most states' education budgets. Moreover, these budgets don't benefit from the funding because the states have the audacity to pretend that it is real funding. Thus, if anything, lottery revenues serve to defund education.
In conclusion, state lotteries are monopolies that can maintain low payback percentages because there is no competition (within the state) and thus can afford to pay high salaries to employees. Meanwhile, of course, the poor spend much more of their income on the lottery.