Should the Government Support the Lottery?
MIT OpenCourseWare
The Lottery Puzzle 0:00
State lotteries in the United States pay out only about fifty cents for every dollar spent, making them a massively unfair bet, yet they remain hugely popular and a major source of revenue for states. That combination of unfairness and popularity is puzzling, and there are four theories that try to explain it.
Two Theories That Fail 0:32
The first theory, that people are simply risk-loving, falls apart once you notice Americans spend two trillion dollars on insurance, which shows they are clearly risk-averse in other areas of life. The second theory, built on so-called Friedman-Savage preferences, says people are risk-averse over small gambles but risk-loving over huge ones, which would explain playing Mega Millions. But this fails empirically too, since ninety-nine percent of lottery money comes from small scratch tickets, not giant jackpot games.
Entertainment Versus Mistake 3:00
The third theory says people gamble for entertainment, since the thrill of scratching a ticket and hoping to win can itself be worth something in their utility function. The fourth theory says people are simply uninformed or making mistakes about how bad the deal really is. Which one is true matters enormously for policy, because if it is entertainment the government should support lotteries as a form of voluntary taxation, but if it is mistakes the government would be encouraging bad decisions. The stakes are real, since in some low-income communities people spend up to twenty percent of their income on the lottery.
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