In a lottery, multiple people pay to enter a drawing to win a prize. The prize is typically money, but the term “lottery” also can refer to a government-run process that determines who gets subsidized housing units or kindergarten placements or even medical school slots. Financial lotteries, however, are the ones we think of when we hear the word. They’re the ones that draw hordes of people spending $80 billion per year — more than a household spends on credit card debt — to enter the chance for instant riches.
The lottery relies on math and probability. It offers the same odds to every ticket purchaser, regardless of whether they pick their own numbers or buy a quick-pick from a vendor. Regardless, the winner is chosen at random. The prize pool is defined by the total value of tickets sold minus expenses for promotion and taxes. This is why governments guard the right to run lotteries so jealously.
People buy lottery tickets to experience a thrill and indulge in fantasies of becoming rich. The decision-making theory of risk-taking, known as expected utility maximization, can account for this behavior. But it isn’t the only explanation, as people who consciously choose to take risks may also do so because they believe that doing so will lead to more pleasure in their lives than is possible by playing safe.
Another message the lottery sends is that it’s okay to gamble because the proceeds are used for good causes. In reality, however, the percentage of profits that go to charity is much smaller than the amount of money the lottery actually raises for state coffers. The bottom quintile of income earners — the people who most often play the lottery — have only a few dollars left for discretionary spending. This makes them likely to purchase the tickets and not the opportunities for entrepreneurship, innovation, and the American dream that might have a greater impact on their economic futures.
While there is certainly a sense of luck in winning the lottery, the big winners end up bankrupt in a couple years because they aren’t prepared to manage a sudden windfall. Moreover, they often find that the large tax bills they have to pay eat up most or all of their winnings.
Lottery advertising is misleading because it doesn’t make the point that winning isn’t guaranteed – or even a very good idea – in any way, shape, or form. It simply dangles the promise of instant riches in front of Americans, who should be saving and investing instead. This resource is ideal for kids & teens, but could also be used by teachers and parents as part of a K-12 financial literacy or personal finance curriculum.