And to finish the thought, these people are usually poor money managers to begin with.
Every time the jackpot here in Michigan zooms to $40 million or something, there is always the pathetic stat of something like 75% of the lottery tickets are sold within Wayne county (Essentially Detroit) and the rest is scattered through out the state.
It always seems to be some old guy from up north that wins.
My hairstylist also cuts the hair of an accountant who specializes in people who’ve won the lottery. This client says that most who win go broke within something like 2 years because of frivolous spending and in-fighting. His suggestion if you ever win is to not do anything with the money for at least a year and avoid impulsive purchases.
My advice:
Don’t tell anyone (other than spouse) you won.
Don’t have the newspaper print your name as a winner.
Pay off all your major bills and set aside the IRA and College fund stuff for the kids.So at least if you do blow the wad, you’ve taken care of the big issues and have something to show for it.
Ohio was creating problems for its winners by insisting that the lottery commission be allowed to use their “name and likeness” in their adds featuring winners. They also had the problem (common to several of the state lottos) that they had annual payments and when person A died prior to the final payout, the spouse of A (not being a ticket holder) was simply cut off.
Somebody beat the state at the advertising game by going to a lawyer and establishing a trust to which they donated the ticket. The “trust” won the lottery and, as the mere administrator of the “trust” they were not obligated to allow their “name and likeness” to be used by the lottery commission. The Ohio Supreme Court upheld the validity of the trust concept, so now (the smart) winners don’t turn in their winning tickets until they have established the trust.
Now the spouse of the winner can be named a co-administrator (or something) of the trust so that Ohio can’t cut them out of the winnings.
In addition, Ohio now allows the winners to take the cash instead of the monthly payments. (The cash is the smaller amount needed to establish the trust that would have paid out the annuities to get to the “winning” amount, but it is still a sizable chunk of cash.)
Tom~
Getting back to utility theory - it pretty much explains why poor people play the lottery, and do so rationally.
The bottom line is that the utility in a lottery ticket isn’t just measured by its investment value. There is also entertainment value, the value of hope, and the utility value of the money involved. Risking a dollar to win a million has more utility for a poor person than for a rich person, because winning the million would change their life more.
The converse of this explains why poor people often don’t buy insurance, while rich people do. Insurance is a ‘bad bet’, because your expected return is always less than the money you put out. For a rich person, insurance is ‘smart’, because the amount of the premiums doesn’t change their life much, but losing a significant asset like a home does. For a poor person, the cost of the premiums cuts directly into their standard of living in a significant way. So even though an insurance policy has the same mathematical expectation for a rich or poor person, it makes more sense for the rich person to buy insurance.
Is somebody forcing poor people to play it? If so, that needs to stop. But if those poor people are playing the lottery of their own free will, it’s hardly preying on them.
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peas on earth
If you give me more information on the Lottery, I can tell you precisely how much you’ll lose by playing, in terms of money.
For instance, how many numbers do you choose, and how many possibilities are there for each number?
The lottery actually benefits the poor. For one thing, it gives some people the emotional relief to believe that they may not be stuck in poverty for the rest of their lives.
Of course some people go overboard and spend the grocery money on lottery tickets, but most poor people just buy a couple of tickets a week. Not enough to really put a dent in their standard of living. It has real value.
It may have real value, but its misguided. I remember reading in my paper a couple of weeks ago that a study showed that 60% of people polled believed they had a better chance of getting $500,000 through winning the lottery than through a lifetime of moderate but regular investing. At eight percent interest (a pretty low rate for most index funds these days) you could invest something like 75 dollars a month for 40 years and have this amount of money…
Also, I think that the hope they can entertain when they buy the tickets week after week is offset by the disappointment of losing yet again, and the increasingly jaundiced view of life and money that such regular disappointed can affect.
That’s your opinion, but it’s refuted by the fact that many poor people do play the lottery. It’s a fallacy to think that they all must be misinformed or misguided.
Utility theory was developed in part to explain why people buy insurance. Insurance is a sucker bet. Insurance companies are profitable because they don’t have to pay back as much money to damage sufferers as they take in. So why should anyone buy insurance? And why do some people NOT buy it? It turns out that people have different utility curves, depending on their personal wealth, aversion to risk, income, etc.
An example: Let’s say I offer you a deal where you can flip a coin, and if it comes up heads you get one million dollars, and if it comes up tails I shoot you. Would you do it? Most people wouldn’t. Now, how about you pick a number from one to 10. If you get the right number, I shoot you. But if you pick the other nine, you get one hundred thousand dollars. Most people would probably still decline. Now how about a 1 in 100 chance to win ten thousand dollars, but if you’re wrong you die? Maybe. For a poor person it’s more likely. How about a one in 1,000 chance to win 1000 dollars? Hmmn… One in 10,000 to win 100?
This ‘utility curve’ is not linear, even though the expectation is the same. In all of these cases we’re saying that your life is worth a million dollars, but your choice of taking the ‘deal’ will vary greatly with your own wealth and aversion to risk. A millionaire would never take the initial deal, because the increased utility of having 2 million vs 1 million is not worth it. A destitute person might take it in a second. Haitain boat people take a deal much worse than that.
The same applies to all decisions that involve risk. The curve is not linear, and the same bet can be stupid for one person and smart for another. This explains insurance AND poor people playing the lottery.
$75 a month??? If I could spare that much money, I’d use it to make a bigger dent in my credit card debt, which will help even more than the investing you suggest. You’re missing the point. WE’re not talking about people who have spare money laying around. We’re also not talking about people whose financial problems are such that they can wait 40 years to solve them!
OTOH, I’m not talking about people who spend between $5 and $50 a week on lottery tickets. I’m talking about people like me, who never by more than one single ticket for any given game. For the cost of one small dollar, you get one infinitesimally small, but nonetheless very real, chance of getting enough money in the immediate future to solve all their financial problems and relax, for at least a short while.
The entertainment value is incredible. On a biweekly lottery, the dollar I spend today will keep me daydreaming for the next 3 or 4 days. You can’t get that kind of entertainment from any movie or theme park that I know of, and certainly not for that price.
dh - I find it astonishing that you think poor people are not widely misinformed about financial matters. I think it contributes greatly to their being poor. There are millions of people who have a sustainable income that does not sustain them because of their poor spending habits. Credit card debt is one the biggest example of this. Compared to credit cards, lotteries are small potatoes. Also, lotteries really do not fit your example of above. A millionaire risks much less than a poor person (as a percentage of his net worth) by betting a dollar - yet he doesn’t do so. Is he really that much more risk averse? I mean, assuming that the dollar means 1/10,000th as much to him as the poor person, he would have to be at least 100 times more risk-averse since a 80 million dollar pay off would still be signifcant to him. And I’m dividing its significance by a factor of 100!
Keeves - I am talking about the $20 a week player. Almost invariably these people are poor. If they invested that $80 a month they would have a retirement. Obviously if they have credit card debt they should pay that first.
You miss the point. The relative change in lifesyle from losing a dollar is small for the rich person or the poor person, but the relative change in lifestyle from winning a million is much greater for the poor person. Thus, the lottery ticket has more utility for the poor person.
And sure, lots of poor people are misinformed about finances. But when treating millions of people as a group, you have to assume that they are acting rationally (that means within the context of the knowledge they have).
A good example is the stock market. The average investor probably has a lot of misconceptions about how the market works. But when you put millions of them together, they move a stock rationally (i.e. the price of the stock reflects all available information about the company in a rational way).
Anyway, utility theory is not some harebrained scheme I’m cooking on you. It’s an accepted branch of mathematics. And it really does explain this stuff.
BTW, utility theory also explains the demographic makeup of casino patrons. In fact, you can use it to predict it with accuracy.
Rich people get no sympathy from me. If they don’t really like being rich they can send me a blank check.
I’ve often thought that people don’t really want to win the lottery. I think investing a few bucks a week on some state lottery is just upkeep for a good dream at night. You know, “What would I do? How great would life be if…” It gives people something to talk about, like the time I ALMOST caught that big fish.
What percentage of people that play the lottery don’t really need the money? Old people play the lottery, they also play Bingo. I don’t think they see either as a get-rich-quick-scheme.
dhanson
The problem with utility theory is that it begs the question. The axiom behind it (as I’m sure you know) is that rational beings will act to maximize their satisfaction within a set of constraints. Given that, all neoclassical economists do is balance the equation with some form of psychic income. If an individual spends $1 for a lottery ticket, then that individual receives more than $1 in satisfaction for it. (your basic argument) How do we know this? Because utility theory tells us that the individual wouldn’t pay $1 for a lottery ticket if there wasn’t a dollar more in satisfaction. Big deal, your theory predicts the results, because the theory explains away any counter-intuitive results.
Utility theory is an excepted theory, but there are others. Look at the axiom. We can bend a few points 1. What if humans aren’t rational? 2. What if they don’t always maximize their own utility? (the altruism problem, neo-classicists always fall back on some Randesque world where I only give my wife a gift because it benefits me. The love scenes in Atlas Shrugged, what a scream!!)3. What are the relevant constraints?
Lotteries are a tax, a regressive one at that. Even under utility theory one of the constraints is the amount of information available to the economic actor. The state governments through their ads showing massive lifestyle changes for winnners, serve only to spread this disinformation through a community that the same goverment has failed to provide the basic math skills to determine that one has a better chance of being struck by lightning than winning a lottery.
The problem with Neo-Classical economists is that they never grow up. They are like geocentrists who hold so heavily to their axioms that spend careers doing obscure research in order to prop that axiom up. Neoclassical thinking does a good job in explaining a lot of economic behavior, but really falls short in describing things like labor unions, business cycles, altruism and a litany of others.
Sloth: Individuals act rationally, but only within the constraints of their own knowledge. What is ‘rational’ for one person would be totally irrational for another. Utility theory doesn’t really encompass that, because that’s not its job.
The problem you have with discrediting utility theory is that the theory works in a predictive fashion. Insurance analysts can predict acceptance rates for various policies with accuracy, using utility theory. So it clearly applies in the real world. The trick is in knowing its limitations.
When it comes to risk, I will acknowledge that the average person’s conception is woefully inaccurate. When people are asked to evaluate the risks of dying from car accidents vs cancer vs heart attacks, they are often wrong by orders of magnitude. Likewise, they have a hard time grasping miniscule risks like the odds of winning the lottery.
Then there is the misinformation about games of chance. Many of the people who gamble a significant chunk of their income do so not because it has positive utility, but because they are completely wrong about the nature of the game they are playing. Money management schemes, ‘hot’ and ‘cold’ slot machines, etc. are all wrong, but most casual gamblers believe in them.
I am against the state lottery because I do not see why the government should take money from people for a governmental function and then pay a lot of that back in winnings.
The government has the power to tax, set fees and raise bonds. Isn’t that enough ways to get money?
Why not set up a government savings account where you deposit $5 per week out of your paycheck and the government returns it with interest in 5, 10 or 20 years?
If people want to gamble, that is fine. There are plenty of outlets for that, but that does not mean that the government should support it.
Here in California it is ironic. When I went to school in the 60’s California had the best educational system in the country. Then in '78(?) Proposition 13 was passed that drastically reduced property tax revenues that formed the basis for most school funding. The lack of funds, the recession and the uptick in immigration have pushed CA schools to the bottom.
So we passed a lottery that effectively hurts the people who need it the most to provide extra funding for education. Since it can only go towards extra-curricular activities (and IIRC capital improvements) by statute, it does not directly address the issues that caused the decline in the first place. But it is much easier to pass a lottery than a bond or a tax.
There was a story in the Washington Post some years ago about the first winners of Maryland’s lottery. They’d won $1,000,000, getting $50,000 a year for 20 years. The Post caught up with them after they’d gotten their last check.
Many of them said it was the worst thing that had happened to them. Basically, they weren’t good money managers, and blew it all.
One guy had borrowed against his future payoffs. By the time he got his last one, it was completely garnished. He was working in Florida as a janitor for the highway department, cleaning rest stop bathrooms.
I always read stuff like that and go, “WTF”? I mean, we’re not talking rocket science here. Comparing the size of numbers is a gradeschool skill.
It just totally bewilders me how an apparently fully functional adult with no obvious mental impairments could be surprised that if they spend all they’re making, they won’t have any left. I can understand maybe some initial jubulation, but hell, you’ve got 20 years to sit down and figure it out.
I hereby offer that if anyone reading this wins a million dollar lottery and is afraid of it ruining their life, you are welcome to rid yourself of this terrible problem by giving it to me. 
peas on earth
Some people simply spend beyond their means, no matter what their means are. I read yesterday that Elton John is 40 million dollars in debt. The courts have limited his spending to ‘only’ 40 thousand dollars a week. There is a long list of celebrities who have had to declare bankruptcy. Burt Reynolds comes to mind. Some of them make bad investments, but many of them just spend money like mad.
How 1 million can really get you in trouble goes something like this: Buy a $500,000 house, putting $200,000 down. Spend $200,000 on a sailboat. Go on a long trip. Blow money like mad, wind up broke.
Now, you get a property tax bill for $10,000, which you don’t have. The sailboat needs hull work, and it’s $20,000. Oops. Sell the sailboat. Lose $100,000 on the sale. Now you’ve got a hundred grand, so you relax. Another tax bill comes in. The house needs a new roof. But guess what? Roofs for 4000 sq foot houses cost $20,000. Uh oh, we’re broke again. And the mortgage payments are $3000 a month. Sell the house. Uh oh, it won’t sell. A few months go by, and now you’ve lost all the equity in the house. The bank takes it, and you wind up with nothing.
I’d like to expand on this, sorry, but this is kind of an agenda for me. I’ve always seen the lottery as something a little darker than entertainment or a tax. I see it as one more method the government uses to keep the masses happy. As in the following:
But 99% of them will. This is why I wouldn’t agree that it benefits the poor. The actual chance is so remote that it is not really statistically valid, at least in the amount of time we have to play the game. As stated before, the lottery, in giving this false hope actually promotes unwise spending and poor money management.
These are called savings bonds, they do exists.
“Teaching without words and work without doing are understood by very few.”
-Tao Te Ching