The central purpose of this paper is to show that lottery play is not economically irrational and uninformed. The paper presents a theory of lottery tickets not as misguided inputs into wealth production as some critics believe but as valuable inputs in creating a sense of open-ended possibility, specifically the possibility of escaping one’s current life by acquiring great wealth.
Cohen has some interesting ideas surrounding the idea that lotteries are a regressive tax:
The regressivity or progressivity of the tax implicit in the monopoly rents collected by the state turns on the question of whether it is the universe of lottery players who pay the tax or just the winners. Imagine that $10,000,000 is wagered at $10 a person from 1,000,000 people and a single winner is paid $4,000,000 and the state keeps $6,000,000 as a tax/rent. Who has paid this $6,000,000, the 1,000,000 purchasers or the one winner?
It’s certainly true that people who play the lottery are almost certain to lose money. But Cohen’s insight is that playing the lottery is not therefore automatically irrational. People like me love to calculate the expected gain or loss from buying a lottery ticket: back in 2005 I wrote a little post on the subject at MemeFirst. A commenter then came along:
Personally, I can afford a dollar (or equivalent) every now and then to keep the dream of international playboyery alive.
In other words, as Carey puts it:
Like a throwaway lifestyle magazine, lottery tickets engage transforming fantasies: a wine cellar, a pool, a vision of tropical blues and white sand.
People don’t invest the money they spend on lottery tickets. They spend it, and get those transforming fantasies in return. Cohen even manages to put this in economic terms:
In all things economic, there is a diminishing marginal something. In the case of ” belief in possibilities,” the most initially steeply diminishing marginal utility is that of probability. That is, one requires some real finite probability to support a belief in the possibility of escape, and while the more the better, the falloff in gain from additional probability is precipitous. On the other hand what is indispensable is a scenario that could conceivably be realized that satisfies the conditions of the hoped for fundamental transformation of one’s life.
Cohen even manages to use his theory to explain not only why one would expect the poor to play the lottery more than the rich, but also why one would expect the middle-aged to play the lottery more than the young, and so on. It’s all rather appealing — as a work of theory.
Does Cohen’s argument stand up against the kind of people who would abolish lotteries? It’s certainly true that those people rarely stop to spend much time considering the real benefit that lottery-players obtain from merely buying tickets even if they don’t win the lottery. Economists, who like to assume that individuals are economically rational (more or less), will move quickly to the conclusion that playing the lottery can therefore be a rational thing to do. Such a conclusion has the pleasant side effect of avoiding the opposite conclusion, which is that poor people are stupid and should be protected from themselves.
On the other hand, the money which poor people lose spend on playing the lottery is large enough to really make a difference to the communities in which that money is lost spent. Maybe the solution is for local lotteries to be set up, with the help of insurance companies who will insure against a tiny chance of an enormous payout. Lotteries have historically been organised on a statewide or nationwide basis because they payouts have historically had to come directly from ticket sales. But it’s very easy to envisage a lottery with an enormous jackpot ($100 million, say) which never generates anywhere near that amount of money in revenues. If such a lottery spent all its profits in the neighborhoods where the lottery tickets were bought, lotteries would be more defensible.