Recently, the Economist published an article on the economics of American lotteries. In it they found that, if Amercia’s lotteries were a single company, they “would be the ninth-most profitable in the country.” Unfortunately, the bulk of these profits come from some of the poorest people in the United States. As the article states:
In the poorest 1% of zip codes that have lottery retailers, the average American adult spends around $600 a year, or nearly 5% of their income, on tickets. That compares with just $150, or 0.15%, for those in the richest 1% of zip codes. In other words, the poorest households spend roughly 30 times more on lotteries than richer ones, as a share of income.
Historically, I used to think playing the lottery was “stupid” and would often poke fun at people who bought tickets. For example, below are a few of my favorite lottery memes I used to tweet out whenever the Powerball jackpot got high enough:
While I still find humor in these images, I’ve had a change of heart when it comes to how I view those who play the lottery.
My problem was that I was too hyper-rational on the issue. After all, if your chance of winning the lottery basically rounds to zero, why would you play? My belief was that you would be far better off by saving and investing that money instead of spending it on lottery tickets. And, if the typical person who bought lottery tickets followed my advice, they would dramatically improve their financial life.
Unfortunately, my theory was wrong. After running the numbers, I’ve come to realize that foregoing lottery tickets isn’t enough to move the needle for the average American. I can prove it too.
Using the data from the Economist article, we know
