In Praise Of Lotteries

By Stephen D. Simpson, CFA | March 30, 2012 AAA
In Praise Of Lotteries

As surely as Fridays follow Thursdays, large lottery jackpots attract two things in abundant numbers – occasional players persuaded by the eye-popping monetary award to buy a ticket and patronizing warnings from financial writers that lotteries are a sucker's game and only fools play them. Though I'm a pretty hardcore value investor, I'm going to change things up and give some praise to lotteries.

Bad News First
Fairness demands that the negative aspects of lotteries get some air time. For starters, the odds of anyone winning a major American lottery like Powerball or MegaMillions is vanishingly small – one in at least 100 million, typically. As pointed out in some anti-lottery articles recently, your odds are much better of being hit by lighting (1 in 1,000,000), killed by lightning (1 in 2,320,000) or, if you're an American male, being Tom Cruise (1 in 150,000,000).

Playing lotteries also runs the risk of people developing, perpetuating or re-awakening a compulsion to gamble. Many people also willingly convince themselves that their financial condition is hopeless, prudent financial discipline is pointless and the lottery is a valid way of fixing their problems and/or saving for the future.

Last and not least, winning a lottery isn't the golden ticket to a great life that many people expect it will be. While many lottery and sweepstakes winners happily cash their checks, disappear from the public eye, and their lives quite happily, others squander their winnings and end up flat broke.

Good for State Revenue
All of those problems aside, I dare say lotteries are not the horrible things that many financial advisors and writers portray them to be.

For starters, considerable amounts of lottery revenue go back into state budgets. Oregon claims that "97% of every dollar played" goes back to the state and is used to fund projects like job creation, education, and state parks. Likewise, the North Carolina Lottery claims that 58% of lottery revenues go to prizes, 30% goes to an education fund, 7% goes to retailer commissions, and 5% goes to expenses and marketing. Powerball and MegaMillions are a little different insofar as they are operated by multi-state associations, but the same principle basically holds. There are also the much-publicized historical examples of how the Continental Congress used lotteries to fund the Revolutionary War.

Some argue with these numbers and claim that the amount of money that is routed back to the states is inflated. Perhaps that's true, but the reality is that this money was going to be spent by the consumer anyway and the state's take from sales tax, liquor, tobacco, or gasoline taxes is not significantly higher. What's more, those consuming liquor or tobacco are arguably harming themselves and raising state medical expenses.

I would also point out that gambling is all but endemic to human beings. Look around the world and gambling is one of those things you see in practically every culture. So, people can play the lottery, go to casinos, or gamble in other ways. Granted, casino's pay taxes and license fees, but they still get to keep their profits.

Another Form of Entertainment
Where I really believe lotteries get a bad rap is in how the entertainment aspect is under played. Speaking from personal experience, buying a lottery ticket is in some cases like buying a license to daydream for a few hours or days. It's fun to imagine how that money could change your life, and I know I'm not the only one that has spent an hour or two swapping lottery daydreams over an adult beverage or two.

Buying a Powerball ticket for $2 or a MegaMillions ticket for $1 is "bad," but it's somehow better to shell out $10 or $20 for a movie ticket? The whole point of going to a movie is 90 or so minutes of escapism, distraction, and fantasy; Americans didn't spend $155 million on Hunger Games last weekend because they were interested in the allegorical and symbolic significance. So, how exactly is it that the hours of entertainment provided by a lottery ticket are inferior to those provided by a movie, TV show, sporting event, or book?

Does Any Long-Term Good Come of It?
Entertainment for its own sake is more than enough justification for me if people want to play the lottery on an occasional, responsible basis. I want to re-emphasize that last part – I am not talking about taking the rent money and using it to buy lottery tickets, nor am I talking about spending money on lottery tickets when bills are going unpaid. But if somebody decides to forego a movie or a Starbucks latte and buys some lottery tickets instead, who does this hurt?

I do wonder if long-term good can come from this as well. I've known people who spoke wistfully of using lottery winnings to get out of debt, buy a home, or start a business. They thought about it so much, in fact, that they started to work out plans for how they could achieve those goals even when their numbers inevitably came up losers. It may seem bizarre, and I scarcely believe this is a common byproduct of playing the lottery, but maybe the lottery-induced daydreaming does lead people to think more seriously about those things they want and need out of their lives and how to bend their financial situations in that direction.

The Bottom Line
Lotteries are not substitutes for financial planning, work, savings, or investments. Lotteries, when viewed and played responsibly, are instead another entertainment option. Just as it would be irresponsible to spend yourself into financial trouble by over-doing it on movies, books, concerts, graphic novels, electronics, or anything else, so too is it with lottery tickets.

Played with a little bit of discipline, though, lotteries are a cheap license to fantasize and daydream about about how your life could be different. Given that that's the same principle that underpins the entire entertainment industry, I think lottery players deserve a little more respect and a little less hectoring about their imprudence.

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