The Lottery Ticket
The lottery, an popular pastime, is enjoyed by millions of Americans across the nation. Around 57% of US adults spend over $50 billion a year on lottery tickets alone, and all are hoping for the 1 in 292.2 million (according to the latest Powerball) chance to win it big. But the economics involved in playing the lottery don't just have to do with purchasing tickets: they also have to do with the for-profit companies who run the lottery systems, how the winners spend their earnings, and ultimately why millions of Americans believe in the fractional chance to become multimillionaires.
Most obvious is the method of how these companies are able to regularly distribute large sums of money for a seemingly low cost. How the lottery works is that as more buyers buy tickets and enter the pool, the higher the prize money will be. But the increase in tickets sold is not necessarily proportional to the subsequent increase in jackpot value: the companies who run these lotteries are for-profit, and their profit model revolves around taking a share of the revenue. Each ticket costs around $5, and with millions of dollars, they see revenue numbers up in the billions. And each jackpot rarely exceeds $1 billion, so the remainder is profit for the companies.
Additionally, another economic problem to tackle is how winners will choose to receive and spend their money. There are two choices as to how to receive the money: either all at once (lump sum) or in annual payments (annuity). Most winners choose the lump sum method as it allows them to purchase high-ticket items like new homes or vehicles immediately. However, this method incurs the most federal taxes, meaning they receive less money overall than if they had chosen the annuity method.
Finally, playing the lottery has been a traditional American pastime for many decades now. While the chances of winning are astronomically low (getting struck by lightning is a higher possibility), the mere thought of winning millions and living a lavish, luxurious life is enough to keep adults in the constant loop of buying tickets, then losing the draw. Most buyers aren't able to fully wrap their minds around just how unlikely it is for them to win the lottery, and the advertising of these lottery companies make their products seem much more appealing. After all, the only way to have a chance at winning is to buy a ticket, and even though a ticket costs $5, the possibility of an even greater reward keeps these companies in business.
Source: https://smartasset.com/taxes/the-economics-of-the-lottery
https://www.investopedia.com/managing-wealth/worth-playing-lottery/
Most obvious is the method of how these companies are able to regularly distribute large sums of money for a seemingly low cost. How the lottery works is that as more buyers buy tickets and enter the pool, the higher the prize money will be. But the increase in tickets sold is not necessarily proportional to the subsequent increase in jackpot value: the companies who run these lotteries are for-profit, and their profit model revolves around taking a share of the revenue. Each ticket costs around $5, and with millions of dollars, they see revenue numbers up in the billions. And each jackpot rarely exceeds $1 billion, so the remainder is profit for the companies.
Additionally, another economic problem to tackle is how winners will choose to receive and spend their money. There are two choices as to how to receive the money: either all at once (lump sum) or in annual payments (annuity). Most winners choose the lump sum method as it allows them to purchase high-ticket items like new homes or vehicles immediately. However, this method incurs the most federal taxes, meaning they receive less money overall than if they had chosen the annuity method.
Finally, playing the lottery has been a traditional American pastime for many decades now. While the chances of winning are astronomically low (getting struck by lightning is a higher possibility), the mere thought of winning millions and living a lavish, luxurious life is enough to keep adults in the constant loop of buying tickets, then losing the draw. Most buyers aren't able to fully wrap their minds around just how unlikely it is for them to win the lottery, and the advertising of these lottery companies make their products seem much more appealing. After all, the only way to have a chance at winning is to buy a ticket, and even though a ticket costs $5, the possibility of an even greater reward keeps these companies in business.
Source: https://smartasset.com/taxes/the-economics-of-the-lottery
https://www.investopedia.com/managing-wealth/worth-playing-lottery/
Awesome post! I knew that the lottery was a huge business but I'm always taken aback by just how massive it really is. The post on the lottery got me interested in casinos and the gambling business. Outside of actually using slot machines and playing cards games, I wanted to look further into the marketing tactics casinos employ. I found that Las Vegas casinos make an average of $630,000 per day! Casinos emphasize when someone wins -- lights flashing and you can hear the excited screams -- which incentives customers to stay longer so they can be the next person who wins. They also keep their market captive by preventing people from knowing how much time has passed -- they don't have clocks easily visible. Obviously casinos are different from the lottery -- casinos are "controlled" environments whereas lottery tickets you can pick up at a gas station. However, the basic principles of risk and reward still remain. Both casinos and lottery companies make money off of the addicting feeling of possibility. Do you think that these industries need to be more thoroughly regulated so consumers see the possibilities/odds of winning more clearly?
ReplyDeleteSource: https://www.businessinsider.com/how-casinos-make-you-spend-money-2014-8
I agree with Karenna, I had no idea over 50% of adults spend a grand total of 50 billion dollars a year on the lottery! Not to mention that the actual chances of winning the lottery are almost 1 in 300 million. It was also interesting to learn that there are two methods of getting paid if you win the lottery. Overall, interesting article!
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