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Read Before Buying Those Lotto Tickets…

March 30th, 2012 · 6 Comments
Behavioral Econ · Buyer Beware

First, a tweet from my mother:

Sigh. So, despite the 50 percent idiot tax* on the lotto, I bought a ticket for the current $640 million Mega Millions jackpot, if for no other reason than appeasing my mother is easily worth a dollar. So is this my potential ticket to a lifetime of happiness? Let’s turn to the economic evidence:

Apouey, Benedicte; Clark, Andrew E., “Winning Big but Feeling no Better? The Effect of Lottery Prizes on Physical and Mental Health”

We use British panel data to explore the exogenous impact of income on a number of individual health outcomes: general health status, mental health, physical health problems, and health behaviours (drinking and smoking). Lottery winnings allow us to make causal statements regarding the effect of income on health, as the amount won is largely exogenous. These positive income shocks have no significant effect on general health, but a large positive effect on mental health. This result seems paradoxical on two levels. First, there is a well-known status gradient in health in cross-section data, and, second, general health should partly reflect mental health, so that we may expect both variables to move in the same direction. We propose a solution to the first apparent paradox by underlining the endogeneity of income. For the second, we show that exogenous income is associated with greater risky health behaviours: lottery winners smoke more and engage in more social drinking. General health will pick up both mental health and the effect of these behaviours, and so may not improve following a positive income shock. This paper presents the first microeconomic analogue of previous work which has highlighted the negative health consequences of good macroeconomic conditions.

Soooo…I’m going to be less depressed but feel like crap. Nice. Moving on…

Larsson, Bengt, “Becoming a Winner but Staying the Same: Identities and Consumption of Lottery Winners”

This article discusses how large lottery winnings are experienced and used by the winners. The study draws on a survey of 420 Swedish winners, which is analyzed against the background of previous research from the USA and Europe. The analyses show that winners are cautious about realizing any dreams of becoming someone else somewhere else. This result contradicts theories suggesting that identities are being liquefied by the commercially driven consumer culture in affluent Western societies. In contrast, the article concludes that winners generally try to stay much the same, but on a somewhat higher level of consumption. The critical situation that large winnings produce is generally met by an attempt to hold on to one’s identity and social relations. In addition, the article shows that lump sum winners tend to save and invest large parts of their winnings, compared with winners of monthly installments who are more likely to spend on leisure and consumption. These results indicate that “wild” lump sums make winners “tame” their winnings more firmly, whereas “domesticated” monthly instalments can be spent more thoughtlessly without changing identity or becoming an unfortunate winner.

So I’m still going to be me but with better toys. Excellent.

Hankins, Scott; Hoekstra, Mark; Skiba, Paige Marta, “The Ticket to Easy Street? The Financial Consequences of Winning the Lottery”

This paper examines whether giving large cash transfers to financially distressed people causes them to avoid bankruptcy. A comparison of Florida Lottery winners who randomly received $50,000 to $150,000 to small winners indicates that such transfers only postpone bankruptcy rather than prevent it, a result inconsistent with the negative shock model of bankruptcy. Furthermore, the large winners who subsequently filed for bankruptcy had similar net assets and unsecured debt as small winners. Thus, our findings suggest that skepticism regarding the long-term impact of cash transfers may be warranted.

One would hope that a payout of some $600 million would postpone bankruptcy for a good long time, no? Last but not least is my personal favorite, on the subject of the hedonic treadmill:

Brickman, Philip; Coates, Dan; Janoff-Bulman, Ronnie, “Lottery winners and accident victims: Is happiness relative?”

Adaptation level theory suggests that both contrast and habituation will operate to prevent the winning of a fortune from elevating happiness as much as might be expected. Contrast with the peak experience of winning should lessen the impact of ordinary pleasures, while habituation should eventually reduce the value of new pleasures made possible by winning. Study 1 compared a sample of 22 major lottery winners with 22 controls and also with a group of 29 paralyzed accident victims who had been previously interviewed. As predicted, lottery winners were not happier than controls and took significantly less pleasure from a series of mundane events. Study 2, using 86 Ss who lived close to past lottery winners, indicated that these effects were not due to preexisting differences between people who buy or do not buy lottery tickets or between interviews that made or did not make the lottery salient. Paraplegics also demonstrated a contrast effect, not by enhancing minor pleasures but by idealizing their past, which did not help their present happiness.

So even if won the lottery I would be roughly as cranky as I am now…good thing the ticket is for my mother I suppose. 🙂

* Mathematically speaking, it’s possible for a lotto to have a positive expected value if the jackpot held over from the last period is large relative to the number of new tickets sold. For example, consider a case where the previous jackpot was $500 million and 100 million new tickets were sold. Since the odds of winning are one in a hundred and some odd million, the expected number of winners is approximately one, which implies an expected payout of $550 million with a greater than 1 in 550 million chance of winning, or an expected value of greater than a dollar. In other words, given that I already bought a ticket, don’t you dare go and do the same.

Tags: Behavioral Econ · Buyer Beware

6 responses so far ↓

  • 1 J.D. Montgomery // Mar 30, 2012 at 3:01 pm

    I question the assumption that the expected number of winners is one. The number of winners is a function of the number of tickets sold. Odds are that as the jackpot increases, the number of new tickets sold increases, and thus the number of expected jackpot winners increases (which means the expected payout of a winning ticket should have an asymptotic upper bound, right?).

  • 2 Gabriel Rega // Mar 30, 2012 at 3:12 pm

    What I remember about the lottery literature when I was graduating is that the odds and prizes are so large that people can’t really work around the calculation problem. That and that holding the ticket had some entertainment effect, for seeing the draw and dreaming how to spend the prize. These papers about what happens after you win are new to me.

  • 3 econgirl // Mar 30, 2012 at 3:33 pm

    @ J.D. You’re not wrong, but in my example I fixed the number of new tickets at 100 million, which could represent a situation where people don’t know about the high expected value or something. Theoretically, the number of tickets sold should increase until the expected value is back to $1 and then stop, but people aren’t really rational in that way or the lotto wouldn’t exist in the first place.

  • 4 J.D. // Mar 30, 2012 at 3:54 pm

    So, in conclusion, I just need to get into the lottery business and just rake it in. You with me, Jodi? 🙂

  • 5 aptweacher // Mar 31, 2012 at 9:08 am

    So for $1, I provide fodder for your ranting and your blog provides entertainment/instruction for us all. I’d rate that a good value. 🙂

  • 6 Anne Ominous // Apr 7, 2012 at 4:54 pm

    @econgirl Agreed, to that extent. If people were rational, many would not buy lottery tickets in the first place because of negative expectations.

    Take the (regular) lottery in my state, for instance. The payout is $1M, while the odds of winning are about 1 in 3.5M (actually 2 in 7M, which is not EXACTLY the same, but close enough). So the expected rate of return is 1/3.5 … definitely a sucker bet. So if people were rational, they’d never buy enough tickets for the jackpot to bring the expected return up to 1 in the first place.

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