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December 02, 2012 8:31 AM State lotteries and the winner’s curse

By Kathleen Geier

In auction theory, economists have studied a phenomenon they call the “winner’s curse.” This occurs when, in common value auctions (auctions in which the item is of approximately the same value to every participant) where there is incomplete information (each player knows only her own strategy and no one else’s), the winner of the auction tends to overpay. She is likely to have overestimated the real value of the item, either in absolute terms, or at least relative to the other players: thus the “curse.”

In an excellent column in yesterday’s New York Times, Joe Nocera (who btw you all should be reading — he’s turned into a fine columnist, the best thing by far to happen to the Times op-ed page since Paul Krugman) writes about another kind of winner’s curse. This is the curse that, with frightening regularity, seems to fall on the heads of the winners of state lotteries. Nocera notes that, troublingly, winners of huge state lotteries “rarely know how to handle their new circumstances.” He quotes Don McNay, a journalist who recently authored an e-book about lottery winners. McNay says of these cursed winners, “The money just overwhelms them… It just causes them to lose their sense of values.”

Nocera cites this tragic case:

There is, to take one of the most prominent examples, the story of Jack Whittaker, a West Virginia businessman who won a $315 million Powerball jackpot in 2002. A decade later, his daughter and granddaughter had died of drug overdoses, his wife had divorced him, and he had been sued numerous times. Once, when he was at a strip club, someone drugged his drink and took $545,000 in cash that had been sitting in his car. He later sobbed to reporters, “I wish I’d torn that ticket up.”

But the problem with state lotteries is not only that the riches they bring to the winners so often cause misery. It’s that they are simply horrible public policy, period. Nocera again:

[L]otteries may well be the single most insidious way that state governments raise money. Many of the people who buy lottery tickets are poor; lotteries are essentially a form of regressive taxation. The odds against winning a big jackpot are astronomical — far worse than the odds at an Atlantic City slot machine. The get-rich-quick marketing — by government, let’s not forget — is offensive. One New York Powerball ad shows a private jet emblazoned with the words “Kevin’s Airline.” The tag line reads: “Yeah, that kind of rich.”

Lotteries are a symbol of our completely dysfunctional fiscal policies, writ large. They’re a regressive tax that rob from the poor and redistribute the wealth to a tiny minority. And even that minority often does not truly benefit; they tend to be morally corrupted by the sudden infusion of obscene wealth. The entire lottery system serves the ideological function of strengthening and perpetuating an ideology of greed and grotesque economic inequality.

Sadly, I don’t see us getting rid of state lotteries any time soon. The monies earned from these insidious schemes are far too vital to the coffers of state governments. So long as American public policy remains so destructively and dysfunctionally tax-phobic, we will probably continue to have lotteries.

But is it too much to ask that we at least have sane lotteries? Nocera writes that the couple who recently won the Powerball lottery will be receiving over $293 million. Why couldn’t that sum have been broken down into smaller amounts, of, say, no more than half a million dollars? A smaller amount of money which would be enough for a family to perhaps buy a home, pay off some debts, build a nest egg, or send a child to college, would provide welcome financial relief and stability, but it would be unlikely to wreck lives. And of course the great advantage to doling out smaller amounts of money would be that many more people could benefit. Such a system would be far healthier for our society. The one we have now is nothing less than an abomination.

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

Comments

  • Mikhail on December 02, 2012 9:56 AM:

    I find there to be something ironic in the fact that our society, in particular those moralistic anti-tax crusaders, would prefer to fund itself with gambling than with straight-up taxes.

  • Neildsmith on December 02, 2012 10:04 AM:

    I don't know... there are plenty of successful wealthy business people who don't "lose their values" and screw up their lives with strippers, drugs, and stupidity. Certainly there are those do. I tend to think the problem is in the character of the individual. If some lottery winners lose their values, it might be because they didn't really have them to begin with.

    Some people make bad decisions. Heck, we all do at one time or another. We have to resist the temptation to make those bad decisions and we also must resist the temptation to take choices away from people because we know better. The lottery may be an abomination to you and me, but it is entertainment to others. To each his own.

  • T-Rex on December 02, 2012 10:06 AM:

    Mikhail, the anti-tax crusaders know that they themselves would never buy lottery tickets, because they're already comfortably set. Let the losers who won't take personal responsibility for their lives finance government, it's only fair, since they're "takers," rather than "makers" who employ them as minimum wage labor in Wal-Marts and fast food franchises. And hit 'em up for income tax while we're at it, because it's not fair that they shouldn't pay just because they don't earn enough income.

    As for the harmful effects of lotteries, the sad part is that all this has been common knowledge for decades. Of course the suicide and drug o.d. rates are higher among lottery winners than the rest of society. Of course the lottery is an unfair, regressive tax. Of course the taxpayer-funded ads promoting the lottery encourage irrational, superstitious thinking. There was an add for the Massachusetts lottery back in the '80s that begins "Do you ever have a day when you feel lucky? You just wake up feeling like everything you do would come out right? Well, when you have one of those days, here's a way to test it . . . " There was another that said "Do you have ESP? I'm thinking of a number from one to five." Then, after a pause, "That's right, it was seven. Now, all you have to do to win the lottery is guess three numbers. . . " Anyone who passed high school math with a C should know why that's a crock (permutations, permutations!!!) but apparently some ad firm thought that fraudulent advertising was okay to encourage state-sponsored gambling. The one consolation is that we're not alone; every European country has lotteries, and they used to be especially popular in the old USSR. Put THAT in your opium pipe and smoke it, Grover Norquist!

  • T-Rex on December 02, 2012 10:10 AM:

    ARRRGH! Of COURSE I meant "a number one to ten." The Massachusetts lottery didn't think we were quite THAT stupid! I blame it all on Craptcha, which distracted me from proper proofreading ;-)

  • c u n d gulag on December 02, 2012 10:25 AM:

    if ah wur evah to win 1 o dem big 1z, i'd by me a manshon wid a big ol' CEEEEEEEEEEEEEEEEEEment pond!

    On a serious note, I agree with Kathleen - instead of 1 winner of bazillions, why not several hundred or thousand smaller winners?

    I always joke that I don't want to win one of those Powerball lotteries, with hundreds of millions of dollars.
    I just want to win a couple of million, and move to a civilized country, like Germany, France, Italy, or Spain. Maybe even Southwestern Canada.

  • MuddyLee on December 02, 2012 10:28 AM:

    Great post. I've often said that people who believe in funding government through a lottery should be willing to participate in a reverse lottery - once a year some names are chosen randomly and all their assets are seized by the government and sold off. BUT if we are going to have lotteries, make the maximum payout "only" a million dollars or a half-million and let more people win - as you stated, the way it works now is just crazy.

  • kevo on December 02, 2012 10:31 AM:

    Yes, lotteries are abominations - all the way back to the ones that eliminated one or two mouths to feed during times of scarcity. (Beware the black spot!)

    A poor man's dollar-dream today, lotteries serve some benefit for us at the bottom as it draws currency from our meager moneyed pockets:

    We are all merely one winning lottery ticket from retirement - and that is what keeps the poor man dreaming! -Kevo

  • wvmcl on December 02, 2012 10:38 AM:

    I kind of like the reverse lottery idea. It's similar to an idea I heard once long ago when we still had a military draft. Somebody proposed that we also have a "money draft" in which the winners (losers) would have to fork out a year's worth of income in order to help finance the war.

    Makes sense, really. If we can use a draft lottery to determine who will live or die in a war, certainly we can use a lottery to determine who will pay for it.

  • greennotGreen on December 02, 2012 10:45 AM:

    Unfortunately, at least some of the poor people who now spend too much of their meager incomes on lottery tickets used to spend too much of their meager incomes on the numbers game. I'd rather see at least some of the money go into public schools rather than all of it go into organized crime.

    OTOH, having smaller and more jackpots is a perfectly sane idea.

  • jomo on December 02, 2012 10:45 AM:

    I agree as public policy a lottery broken down into half million dollar payoffs would be a lot better. As a way of making money it doesn't work. Consumers really only get excited when a pot is eight or nine figures. Those are the points when sales of lottery tickets skyrocket - to many multiples of the sales at lower jackpots.

  • beep52 on December 02, 2012 10:59 AM:

    "Why couldn’t that sum have been broken down into smaller amounts, of, say, no more than half a million dollars?"

    This is something I've often wondered about. Who decided to set the odds of winning so low? Has anyone modeled ticket sales based on lower payouts to more winners?

  • berttheclock on December 02, 2012 11:19 AM:

    One of the only positive aspects of state lotteries I have read about happened in California, where before sending out checks to the winners, the agency, first, checks to see if back taxes and/or back child support is due. In this case, a winner was supposed to receive a check for over $30,000, but, he owed that much in child support, so, the check was never awarded and the child support was paid for that amount. The comment from the fellow was, "Well, at least, I'm clear".

  • Gandalf on December 02, 2012 11:21 AM:

    Being a liberal I want to puke when I read a piece by a liberal that stinks of elitism. The examples of lottery winners going broke or messing up their lives are glaring but let's not be blinded by letting facts get in the way of a good screed.
    Read the stories that you site and there's no real evidence that the MAJORITY of lottery winners become screw ups and just becaause you say so Kathleen doesn't make it so. It just sounds like your pontificating that those poor people are incapable of handling money or their lives.

  • RSA on December 02, 2012 11:39 AM:

    One of the most ironic aspects of state lotteries is that they're often used for education funding--and among the things that we should be teaching kids is how lotteries are a bad idea in general.

  • Steve on December 02, 2012 11:57 AM:

    Lotteries are a tax on people who can't do math.

  • DKDC on December 02, 2012 11:58 AM:

    I'll have to admit I'm a bit conflicted. As a professional in natural resource management, I happen to benefit directly from lottery sales in that it funds efforts to protect natural resources in my state. So I believe the proceeds are being put to good use.

    On the other hand, it would be better if we could fund these things in a different manner. I'm sympathetic to the idea that lotteries perpetuate an ideology of greed.

    I have heard it said that lotteries are a tax on stupidity. People are funny creatures. Logic and reason are often trumped by emotion and base instinct.

    As for the idea of having lotteries with better odds and lower payouts, they have them already.

  • Bob Munck on December 02, 2012 12:02 PM:

    An important thing to remember about large lotteries:

    Your odds of winning are not significantly increased by actually buying a ticket.
  • Wayne on December 02, 2012 12:28 PM:

    I buy a ticket once in a while. For me, most of the "entertainment" value is thinking about what I'd do Chamniwith the money if I won.

    Oh sure, I know that the odds of winning is minimal (there has to be a chance because someone does win) but it doesn't hurt to be able to daydream once in a while.

  • Wayne on December 02, 2012 12:31 PM:

    Darn captcha. eliminate the Chamni from my last post

  • Serge - House Cleaning Fort Lauderdale on December 02, 2012 12:32 PM:

    The lottery is the most unfair gambling game the odds are 1 in 23 billion for it to be a fair game they would have a to give a $23 billion payout. House Cleaning Fort Lauderdale

  • N.Wells on December 02, 2012 1:00 PM:

    Lotteries are seductive (particularly to people who have no other hope of success) and are indeed both a tax on stupidity and a dance with the devil. Illegal numbers rackets were a blight on society, so the argument for allowing state lotteries was to undercut the rackets, decriminalize the gamblers, and cut the state in on a lucrative deal, all of which has happened and are good outcomes. However, for states to promote gambling in their lotteries is a decidedly unethical practice (unfortunately, we didn't find a halting point between "illegal" and "marketing the heck out of it"). In most states, lotteries were sold as "profits go to education", without mentioning that the normal education budgets would be cut by equivalent amounts so that it education would stay even while states became richer.

    In short, legal gambling causes social ills, with no overall benefit, except that illegal gambling is even worse.

    (I've wondered what would happen to tax receipts if tax payments were turned into a lottery, if every April 14th, a few taxpayers were picked to win substantially, as long as their return passed a tax audit.)


  • exlibra on December 02, 2012 1:08 PM:

    [...] Joe Nocera (who btw you all should be reading — he’s turned into a fine columnist, [...] -- Kathleen Geier

    He hasn't "turned into a fine columnist", Kathleen; he's always been one, all those years he'd been writing for the Business section of the NYTimes.

    The Business section of the Times has always had some very thoughtful and literate writers and still does. Eduardo Porter is one that's worth following (very lefty, too. Sometimes also appears in the Op-Ed section, usually under the editorials), as are Annie Lowrey (more middle of the road, like Nocera had been) and Floyd Norris (definitely more to the right, but one needs to know more than one's own set of beliefs, to stay informed and to hear the other side's arguments, to be able to form one's counter ones).

    I'm not saying that one should dispense with opinion writers -- I avidly read them myself -- but reading business news and commentary is even better in some ways; it gets one a bit closer to the raw source of information than an opinion piece does. It's a bit like the difference between a highly processed, bleached, enriched and presifted white flour, and the stone-ground whole wheat...

  • Citizen Alan on December 02, 2012 2:52 PM:

    Well, the money is distributed randomly among a self-selected group of people dumb enough to waste money on lottery tickets. Of course, a disproportionate number of lottery winners are going to be spendthrift morons! I mean, Jesus H. Christ, how stupid do you have to be to leave over half a million dollars in CASH sitting in your car while you get drunk at a strip club?!?

  • Francis Volpe on December 02, 2012 3:55 PM:

    While I'm sympathetic to the idea that the lottery is, at heart, a regressive tax, that assessment does not take into account the history of lotteries and the reasons why legalized lotteries came into being. Two factors are important:

    1. The innate drive a significant segment of the population has to engage in gambling, whether for the gamesmanship or the simple, if misdirected, desire to get something for next to nothing.

    2. The fact that this segment of consumer demand was satisfied, in the days before state-sponsored lotteries, entirely by organized crime.

    You can't do anything about the first factor, but legalized lotteries have made quite a dent in the second. Of course, the lotteries turned out to be a gateway drug for politicians, which contributes to the spread of legalized blackjack and poker betting.

    But the high-minded concern about regressive taxation kind of misses the point in regard to how ordinary people view life. They voluntarily submit to this "taxation." They see a benefit even if you don't. It's not extracted from them under threat of sanction.

    The lottery issue that concerns me is that in my home state of Pennsylvania, Gov. Corbett, a Republican, wants to privatize the operation of the lottery, thereby creating a new way for corporate interests to exploit the taxpayers, not to mention a new base of campaign contribution to Republicans in state races.

  • rayspace on December 02, 2012 4:30 PM:

    Kathleen, you can't be serious. Nobody plays the lottery so that they can "perhaps buy a home, pay off some debts, build a nest egg, or send a child to college." They do it primarily so that they can quit their lousy job, with its stagnant wages, no hope for advancement, insecurity about outsourcing, and lousy benefits. One plays the lottery to be able to say "I'm leaving this job, where you are constantly treating me like garbage and I have no recourse against you, and nothing you can say will get me to stay." I'm sure many lottery winners do the other things you mention, but the primary motivation is to get out of the current labor market, where the employer always wins and there's no security.

    Try selling a lottery where the tag line is "Play the state lottery. You could pay off some bills!" As they say when you buy a ticket, good luck.

  • jhm on December 03, 2012 6:13 AM:

    I hope anyone interested in this has a chance to check out Lucky

  • grandpa john on December 03, 2012 1:23 PM:

    But what you are overlooking is the greed factor that lotteries are built on, Smaller payouts result in fewer players and thus an even more diminishing effect on the payout size.
    Follow the growth of a lottery pot, it is not linear. the larger the pot becomes, the faster it grows. the greed factor, people who will not buy a ticket for a 5 million dollar pot, will buy tickets for a 200 million pot.

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