Powerball, EuroMillions, and Lotto Max: Investment, Risk, or Gratuitous Gamble?

Friday, June 25, 2010 marked a monumental day for Canada. After an extensive advertising campaign, Canadian's made Friday’s Lotto Max draw the third-biggest selling lottery of all time. With a $50-million jackpot and 47 $1-million prizes, consumers succumbed to flirtatious dreams of wealth, flocking to lottery kiosks across the country. While standing in line at the lotto kiosk, I was struck by the diversity and habits of today's lotto players. Some players picked their own numbers using predetermined patterns, while others relied on quick picks. One woman swore to me that her method of consistently betting the same number would enable her to overcome the 1 in 29 million odds of winning. Others, including myself, rationalized the purchase of a ticket as nothing more than a charitable investment, with a long-shot possibility of return. Through my discussions with many lottery ticket purchasers over the last week, a number of critical questions emerged which merit further discussion. Can the purchase of a lottery ticket from large lotteries including the Powerball, EuroMillions, and Lotto Max, be classified as a rational investment? And why, despite the incredibly low odds, are we so tempted by the possibility of a larger prize?

While even the most addictive gambler would quickly discount the fact that playing the lottery is an investment, many individuals, even the most rational, have found themselves absorbed by the psychological fixation of winning. Perhaps this fascination stems from capitalist society's obsession with wealth creation, an obsession that seems to grow, rather than fade, with time. Psychologically, it is very easy for the possibility of a large payout to become a psychological blinder. These blinders, reinforced through advertising, encourage people to dream about what they would do with the winnings, rather than focusing on the little amounts they loose weekly. Furthermore, when big jackpots emerge, there are often social pressures that encourage conformation and influence purchasing behavior. In many offices, people brag openly about what they would do with their winnings, while subtly macerating others that do not participate in the lottery.

Another reason for our perpetual fascination with large lotteries stems from humans innate need to satisfy our psychological insecurities. Many critics have called lotteries an unfair tax on the poor simply because the people with the least money tend to spend the most on lottery tickets. While that may be true, it is also true that those in the lower income brackets are often comfortable taking higher risks financially, which seem rationale at the time, and qualify as a sustainable investments. People of all classes often tend to believe that they can only get poorer. Thus, buying lottery tickets - while not being viewed as a reliable way to build personal wealth - does follow the basic rule of investing, where players accept a high risk of loss in exchange for the promise of high returns. Moreover, while classical economists argue vehemently that the purchase of lottery tickets is irrational, purchasing tickets may enable purchasers to experience an indulgent fantasy that compensates for that risk or loss. In such cases, if the entertainment value (or other non-monetary value) obtained by playing is high enough for a given individual, then the purchase of a lottery ticket could represent a gain in overall utility. In such cases, the monetary loss would be outweighed by the non-monetary gain, thus making the purchase a rational decision for that individual.

From a probability perspective, the chances of winning a lottery jackpot are determined by several factors, including the count of possible numbers, the count of winning numbers drawn, whether or not order is significant and whether drawn numbers are returned for the possibility of further drawing. While these factors contribute to create incredibly low odds, recent trends in player demographics continue to provide interest. As lottery winnings grow, we are slowly seeing an increase in the number of mid to high income earners playing the lottery. Why? For mid to high income earners, perhaps it is not their obsession with wealth, greed, or need for psychological indulgence. Rather, perhaps their participation stems from humanities innate inability to deal with the concept of randomness. Over time, history has shown that human beings at all income levels have a difficult time coping with randomness. Human beings are hardwired to look for patterns, even when irrationality points against this. As the global economy fragments, one could argue that the purchase of lottery tickets is a compensation mechanism. Indeed, this, along with the other, more utilitarian factors, are certain to have played a role in driving purchasing behavior in the recent Lotto Max. Approximately 16.5 million tickets were sold last week in Ontario, a province with a population of about 13 million. The large jackpot built up a tremendous amount of excitement, with many individuals believe that this week was their week. Unfortunately, as evidenced by the weeks of unclaimed jackpots, 48 chances to win a million dollars did not necessarily translate into 48 new Canadian millionaires. With Lotto Max, while the extra Maxmillion prizes are attractive, they unfortunately didn't increase significantly players chances of winning. Players still had to match all seven numbers on their ticket to win — and the odds are the same as winning the jackpot at 1 in 29 million.

Despite criticisms, it is important to recognize the benefits that revenues from all lotteries create. In 2008/09, the British Columbia Lottery Commission distributed $1,082.0 million to the Government of B.C. for programs that enrich lives in communities throughout the province, with $657.6 directed by Government to consolidated revenue for public service programs, including health care and education. Host local governments received $84.0 million, and governments were not restricted in using these funds. When one considers the lottery winnings from the other 9 provinces and three territories, the potential benefits to society are in the billions of dollars. In fiscal year 2008/09, 6,800 charitable and community organizations in Canada received a total of $156.3 million in gaming grants administered by Gaming Policy and Enforcement Branch. Significant income was also generated for these family stores, shops, pubs, corporate accounts and gaming facility service providers. In 2008/09, BC's lottery commission paid $578.6 million in commissions to private sector service partners, and an estimated 26,000 people in B.C. were directly and indirectly employed in gaming operations, related government agencies and charities as well as services that support the gaming and lottery industry. Using British Columbia as one small case study, it is easy to see that the number of organizations benefiting from lottery funding globally is substantial!

At the end of the day, is playing the lottery an investment, risk, or gratuitous gamble? If you play for the psychological thrill, but expect rationally no financial reward, then perhaps playing the lottery is an investment in your psychological well being. If you are one of those players that plays with your friends at work, perhaps playing the lottery is a gateway to social acceptance, career development, and employment related wealth. Finally, if on the other hand you are one of those players that spends $20, $30, or $40+ per week on the lottery simply because of the thrill, chasing the altruistic dream of wealthy life, perhaps you should stop (if you can), and ask yourself what it is that motivates you each week to look past the incredibly low odds?