The lottery is a popular form of gambling in which numbers are drawn to determine the winners of prize money. It is one of the most widely played games in the world, and is the subject of considerable research by behavioral economists. In this article, we examine some of the economic theory behind it, and compare it to other forms of gambling such as poker and horse racing. We conclude that the basic principles of probability and game theory apply to lotteries, and that there is no rational basis for prohibiting them.
Since New Hampshire initiated the modern era of state lotteries in 1964, virtually every American state has now adopted them. The arguments for and against them, the structure of the resulting lotteries, and their evolution over time have followed remarkably similar patterns. Lotteries enjoy broad public support and develop substantial specific constituencies: convenience store operators (a major source of sales); lottery suppliers (heavy contributions to state political campaigns are frequently reported); teachers (in states where revenues are earmarked for them); state legislators; and so on.
A key argument used to promote the adoption of lotteries is that they provide a painless source of revenue. In a traditional lottery, players voluntarily spend their money on tickets in the expectation of winning a prize. Because of this, the net cost to society is a small fraction of the amount raised. This contrasts with the alternative of taxing the general population to raise the same amount of revenue. Lotteries are also often defended on the grounds that they provide a way to finance projects that would otherwise be beyond the scope of government finances. This is sometimes referred to as the “taxpayers’ dividend.”
In practice, however, these benefits are usually overstated. Lottery advertising is notorious for misrepresenting the odds of winning, inflating the value of prizes (the prevailing prize money is typically paid over several years, with inflation dramatically eroding its current value), and so forth. Many critics have argued that lotteries are harmful to the health of society as a whole, and that they exacerbate problems such as compulsive gambling and the erosion of personal responsibility.
Despite these criticisms, there are reasons to expect that lotteries will continue to be popular with the public. First, the emergence of new types of games has dramatically altered the nature of the industry. Lotteries were initially little more than traditional raffles, with the public purchasing tickets in the expectation of a drawing at some future date. New innovations in the 1970s introduced instant games, such as scratch-off tickets, that offer lower prize amounts and more frequent draws.
Another factor that is driving the continuing evolution of the lottery is the gradual exhaustion of available prize pools. As a result, ticket sales rise dramatically when rollover prizes are offered, and then begin to decline. To combat this, lottery officials introduce new games to generate excitement and maintain revenues. The results of such innovation are not yet in, but it seems likely that they will show that it is possible to sustain and even increase revenues over the long term without sacrificing the attractiveness of the games to most potential bettors.