Powerball Lottery Winners: The Killer Reason You Should Not Have Bought That Powerball Ticket

Record Powerball sales have brought the jackpot for Wednesday's drawing to more than $550 million. Forty-two states and the District of Columbia participate in the lottery and as more people play, the jackpot rises. Many states have their own lotteries as well, but all of the sales of Powerball tickets in a state (minus the amount that is needed to finance the jackpot) return to the host state.

Why the surge now?

It's hard to say, though it may have something to do with the fact that the jackpot has rolled 16 times, making the pot enormous. Research also shows that because people buy lotto tickets when they're at the gas station, a boost in travel (such as over this past holiday weekend) can spike purchases. However, gas prices are still fairly high, which predicts a lower purchases. Research finds that when people spend a lot on gas, they're not likely to have money left over to gamble. Also, the ongoing recession has significantly reduced discretionary spending.

Nonetheless, Powerball, which is administered by the non-profit Multi-State Lottery Association, is still attracting purchasers in hopes of winning the now nine-figure jackpot. 

People stress that lotteries are voluntary and so are a preferable source of funding to taxation. Some also argue in favor of lotteries by emphasizing the amount of money they provide to local governments, most often state education funds.

There are merits to these arguments, but they are overstated. 

First, not every cent from the purchase of a lottery ticket goes to education. That's obvious – after all, the jackpot is partly taken out of the ticket sales, but there are other costs of running a lottery. Using state lotteries as a benchmark, only about 35 cents of every dollar spent on lottery tickets makes it to government coffers.

Furthermore, money is fungible. If a state receives $100 million of lottery money for education, this does not mean that total education spending is $100 million greater than it would have been had the lotto not existed. The reason is that legislators who know that $100 million is coming from the lotto may allocate $100 million less to education and spend that money elsewhere. Of course, that money isn't lost; it goes to fund other government activity.

My point is only that though lotteries raise revenue, it's deceptive to think they necessarily help kids learn. It's a nice way to justify lotteries, but it's only partially true. Over time, studies show that per-capita spending on education increases in states without lotteries but not those with.

Still though, there is room to defend lotteries simply because they raise revenue in a voluntary way. The same amount of funding can be achieved with less taxes and a lottery as can be achieved with a system of higher taxes. That's a good thing right?

Yes, but assuming that one is going to raise a given amount of revenue, I think it is better to raise it by explicit taxes than by a lottery. I'm not even talking about addiction. Set it aside. Rather, I'm pointing to the fact that people overvalue the chance to win a large prize, and the reason, as shown by such economists like Daniel Kahnemann, is that the human brain is bad at understanding probability. One way it's bad at understanding probability is that it incorrectly weights the move from having a 0% chance of winning something to having a finite, but extremely small chance of winning that same thing. 

Many people abbreviate the argument I've given by saying that people who play the lottery are stupid. That's a glib (and I think unfair) way to put it though, because the way that gambling and probability mix take advantage of our miscalculations along with the pleasure center of the brain to inhibit rational assessment. Recent discoveries in psychology and economics reveal that humans can only be asked to perform rational tasks in an environment that is at least somewhat favorable to the exercise of judgment and deliberation.

If a just government is one that tries to provide such an environment, then a government that knowingly relies on our rational failings to raise revenue is violating that standard.

Of course, the argument is not over because we often gain from the cognitive flaws of others. I pay my credit card bill on time and so never pay Bank of America for the cost it incurs to let me pay with plastic whenever I want. Nevertheless, there are such things as credit cards for me to use because other people don't pay their bills and have to pay late fees. I don't think it's wrong for me to have a credit card, but it's tricky to say why not.