When they’re less confident about retiring comfortably, Americans buy more lottery tickets.
The rational person’s case for playing the lottery
As much of the country was shivering through a cold spell, the Tallahassee studios of the Florida Lottery were a comparatively toasty 50 degrees on February 11 as evening newscasts around the country came to an end. In short order, the staff would get to their bi-weekly task of pulling six numbered balls out of a machine in hopes of turning at least one resident of one of 47 participating U.S. jurisdictions into a Powerball millionaire.
An unusually large number of eyeballs would be watching tonight befitting the unusually large prize being offered; at $564 million,the jackpot had grown to the fifth-largest in lottery history.
A couple days back, Neil Irwin of the New York Times offered an explanation toward why a rational consumer might still buy a lottery ticket that, even with a jackpot of more than half-a-billion dollars, still has a negative expected value — that is, a ticket whose cost is less than the prize payout adjusted for the small probability of winning. His reasoning was fairly simple –the $2 you spend on a lottery ticket doesn’t just buy you a (very small) chance at winning a huge cash prize; it also buys you the opportunity to dream about having real wealth and what you might do with it when you have it.
Though both involve money, many would consider it a stretch to treat lottery tickets as legitimate personal finance tools to use toward wealth building and in the same breath as making regular deposits into a retirement account. After all, lottery tickets requires a whole lot of luck to get rich quickly and the other requires a whole lot of planning, work, and patience (and yes, a little bit of luck) to get rich very, very slowly.
On building “wealth”
Wealth is a tricky, ambiguous word.
To me, it simply means having enough money to comfortably live out the rest of my days. Using that definition paired with Irwin’s reasoning, it makes sense, then, why I’m never tempted to buy lottery tickets; folks with my socio-economics don’t need the lottery to dream of some day arriving at that sort of wealth. Yes, there will be hurdles along the way — big ones, perhaps — but I don’t have too much doubt that I’ll get to a comfortable amount by the time I’m ready to settle down.
Certainly, many Americans aren’t so lucky. As of last year, when asked by the public opinion polling firm Gallup, 45 percent of respondents said, “No,” when asked if they think they’ll have enough money to live comfortably when they retire.
As high as 45 percent is, it’s lower than it has been in many years since Gallup started asking this question in 2002:
All of this led me to hypothesize this question: Do Americans buy more lottery tickets when they’re less confident they’ll have enough money to live comfortably through retirement?
The data analysis
With a bit of thought, the question is not nearly as ridiculous as it may seem on the surface. The majority of studies — including many summarized by the St. Louis Fed — have already estimated the income elasticity of demand for lottery tickets to be less than one. In other words, as someone’s income decreases, their demand for lottery tickets increases. Because lottery ticket revenue is generally earmarked for government programs, some have gone so far as to call the lottery a “tax on the poor.”
Thus, because we can intuit that the poor are more likely to lack confidence about their retirement savings, it should follow that people who are less confident are more likely to buy lottery tickets.
To examine this question, I put that Gallup data in a table alongside the lottery ticket sales for each year taken from the Census, which I translated into base-year 2013 dollars using the Consumer Price Index taken from FRED as follows:
As a scatter plot, the data looks like this:
After regression testing the data, we find a statistically significant relationship between people lacking confidence about their retirement savings and lottery ticket sales, at a 99% level of confidence. At 0.75, the correlation is a strong one.
In other words, when they’re less confident about retiring comfortably, Americans buy more lottery tickets.
If this trend were to hold, we could predict that with every percentage increase in the number of Americans who say they’re not confident about retiring comfortably, there will be $271 million more worth of lottery tickets sold that year.
- Rebecca Riffkin. “More Americans Think They Will Retire Comfortably.”
Gallup, 9 May 2014.
- United States Census Bureau. “Income and Apportionment of State-Administered Lottery Funds.” 2002-2013.
- FRED. “Consumer Price Index for All Urban Consumers: All Items.” 2002-2014.