In the Wealth of Nations, Adam Smith said that lotteries were patronized by those with a “vain hope of gaining some of the great prizes.” The current Powerball lottery, estimated at $1.5 billion dollars, has become the single largest jackpot in history. If a winner is announced tonight when the balls drop, he or she will have the chance to walk away with $930 million dollars in cash.
In the American Journal of Economics and Sociology, Blalock, Just, and Simon note that Adam Smith was mostly correct more than two hundred years ago: “The hope of obtaining great prizes is not completely vain, but the probability of gaining such prizes is exceedingly small.”
Since U.S. states get some 45% of total lottery sales, lotteries, which have exploded in popularity in the past few decades, have become valuable sources of government funding. This is not without controversy, however, since lotteries have been called regressive forms of taxation, taking more from those at the bottom of the economic ladder—the poor buy more lottery tickets than anyone else—than those at the top. Others, including lottery officials, say these games of chance are just forms of entertainment. Americans do spend far more on lotteries than the movies, for instance.
Blalock and his colleagues analyze what they call the desperation and entertainment hypotheses of lottery consumption. While middle class and wealthier lottery consumers may indeed play for fun, the poor are more “likely to view the lottery as an effective investment tool.”
Their study, using data from 39 states over ten years, found strong support for the desperation hypothesis: “Lottery ticket sales rise with increases in the poverty rate.” Remarkably, those below the poverty line contribute the largest increase in lottery sales. “Lottery participation is strongest among those in poverty who seemingly have the greatest chance of escaping it.” But of course, extremely long-shot gambles are neither an effective personal strategy nor an efficient state policy for alleviating poverty.
The great irony is that the majority of those who fund the jackpot are the very people who can’t afford to “play.”