Thursday, April 12, 2012

Lottery Lessons

As happens on a fairly regular basis, a lottery has been in the news. The latest example results from a record jackpot of $654 million.

Lotteries are instructional for a number of reasons. Believe it or not, Adam Smith discussed them in The Wealth of Nations (published in 1776):

In order to have a better chance for some of the great prizes, some people purchase several tickets, and others, small shares in a greater number. There is not, however, a more certain proposition in mathematics than the more tickets you adventure upon, the more likely you are to be a loser. Adventure upon all the tickets in the lottery, and you lose for certain; and the greater the number of your tickets the nearer you approach this certainty.

The chances of winning the lottery are not significantly affected by whether or not you have a ticket. The chances of winning the latest lottery were said to be one in 170 million. There’s no practical difference between zero and .00000001.

Lotteries are an indication of the moral depravity of government. They are essentially a tax levied in proportion to a person’s ignorance of probabilities. They are a scam perpetrated by the government. Lotteries make probability ignorance a crime and the ticket price is the fine.

You could argue that buying a ticket is voluntary exchange, but it is exchange based on cynicism and deception. When it comes to lotteries, governments follow W.C. Fields’ sage advice, “Never smarten up a chump,” as well as, “Never give a sucker an even break.” Lotteries are nothing more than a state-sanctioned numbers racket. The state adds insult to injury by outlawing privately sponsored lotteries.

Most taxes and fees are in some proportion to some quantity. Income taxes are a function of your income, gasoline taxes are a function of how much gasoline you purchase, property taxes are a function of the value of the real estate you own.

Government revenues generated by lotteries are a function of what quantity? The answer, of course, is ignorance. If ever there were a bad bet, especially in terms of magnitude, it’s lotteries. The percentage taken by the “house” is many times higher than any casino game.

Getting rich by winning the lottery is profoundly different from just about any other way of doing so. Most people who are rich have become so by taking some action—hard work, using their talent, being creative, for example. By contrast, winning the lottery involves none of these factors. Winning has absolutely no connection with the rest of reality. The money received is not “earned” in any way. It involves nothing but dumb luck, emphasis on dumb.

It’s a truism that money cannot buy happiness, but numerous stories about past lottery winners lead to the conclusion that lottery money can buy unhappiness. There seems to be something unnatural about receiving such a large amount of money in such an unreal way.

It could be argued that lotteries give hope to millions of people. Hope, however, is not inherently good. Some kinds of hope do more harm than good. Winning millions of dollars in a lottery is a false hope. It is not one based in reality. There is an opportunity cost to that kind of hope. It deludes and distracts people from hopes and ambitions that do have a basis in reality. Hoping to win the lottery enables people to live in denial.

Large lottery jackpots are taxed at the highest federal tax rate, allowing various levels of government to get you both coming and going. For some bizarre reason, possibly guilt, in California lottery winnings are not subject to the state income tax.

Government sponsorship of lotteries should be proof that government does not have the citizenry’s best interests in mind. Government’s heart is clearly not in the right place.

Don’t be a loser or a chump. Don’t buy lottery tickets. It’s the kind of thing Shakespeare was referring to when he wrote, “It’s a tradition more honored in the breach than in the observance.”


Lottery Lessons April 12, 2012,

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at

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