February 21, 2015

The Economic Case for Playing the Lottery

I always joke with friends that I’m going to make my fortune by winning the lottery someday. I’ve yet to actually purchase a ticket because I can’t get the meme that only people bad at math play the lottery. It’s rather unfortunate meme because I don’t actually think anyone is bad at math, just lacking in practice, confidence and/or good teaching. Besides, as much as us number crunchers like to put down the lottery, there is a sound economical case for playing with it.

Let’s get one thing off the bat. Clearly using the lottery as an investment strategy is a terrible idea. No one should ever play the lottery with money they can’t afford to lose. But there are other reasons to play the lottery other than to get rich quick – namely to have fun!

In economic terms, a lottery ticket is a consumption good, meaning it is used (consumed) once, as opposed to durable goods such as cars which are usable over a long period of time. A lottery ticket lets you play one lottery. A movie ticket would be a similar consumable good because it lets you into the theater exactly once. So in economic terms, a lottery ticket is a better buy than a movie ticket if it provides more utility per price.

Let’s assume we can quantize fun. It’s not a completely unreasonable assumption. A trip to the beach is certainty more fun than a root canal.

Let’s say that going to the Movies cost $10 (we don’t get out much now that we’re parents, can you tell?) and gives you 10 units of total fun. We consider total units of fun, those aquired before the event, during and after. Maybe 8 of those units are from watching the movie itself, one comes from the joy of looking forward to the movies, and another from repeating favorite lines with friends in the following days. In contrast, a lottery ticket may only cost $2. The fun units come before the lottery drawing, while you imagine you’re self a millionaire, and during the drawing when you eagerly scan your ticket for those winning numbers. There likely won’t be any additional fun units after the drawing. If you get more than 2 units of fun from a lottery ticket, the per fun unit price is lower than then movie ticket. Even if the movie ticket gives you more total fun units, the lottery ticket may be the better value.

There’s a diminishing rate of return on fun units, however. You probably don’t get twice the enjoyment out of two lottery tickets for the same drawing than you would with one. Similarly, you may enjoy the same movie as much seeing it the second time. Which is the better deal for you will depend on what you enjoy doing more.

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