A Lottery-Ticket Solution

A really interesting link on MarginalRevolution.com about a really interesting proposal by Ian Ayres and Barry Nalebuff (authors of Why Not?, a book I liked an awful lot) to send a portion of every lottery ticket purchase to an individual retirement account. This means that all the people who make the poor choice of spending too much money on lottery tickets (salved, perhaps, by the notion that their losings are going to “education”) could be saving some significant coin, just in case they happen not to win millions.


zbicyclist

In the link given, they note "Instead of earmarking lottery revenues to education (which is mostly a charade since money is fungible), why not earmark the revenues to private retirement accounts?"

Well, one reason why not is that the lottery is tolerated / encouraged is because it adds to state tax revenue (those fungible funds). If the money went to private retirement accounts instead, there would be a loss of tax revenue.

If the state couldn't get money from a voluntary lottery tax, they might tax me instead. Hard to feel positively about that.

"Don't tax you,
Don't tax me,
Tax that fellow behind the tree."

(possibly authored by former Senator Russell Long of Louisiana)

tillerman

The lottery is a tax on stupidity. Let's keep it that way.

sophistry

Playing the lottery isn't always dumb.

Someone said to me once that it was worth the money just to have the opportunity to have a conversation with your wife about what you would do with all that money if you won.

aaronescott

A possible compromise is to earmark only a portion of the lottery price for the buyer's retirement fund.

Another thing about lotteries that I have been thinking about is this: Why in the world do we have these $200 million plus lotteries? Why not, instead, have 200 $1 million winners? Or for that matter, 2000 $100,000 winners.

As I'm sure you're aware, lottery purchases increase as the lottery amount increases. And it is likely that some will argue that winning “only” $1 million will not draw enough buyers to fund the thing. But I would counter that when the odds of winning become this much better (or at least perceived to be much better), the purchase of lottery tickets will remain, at the least, steady.

Further, we could also put a ceiling on lottery winnings. That is, if we raise $200 million in lottery purchases, only $50 million is awarded, permitting the other $150 million to be put to actual use.

Read more...

bulletproof

Well, the starting jackpot in California is 7 million dollars, which rolls over each week if there is no winner. After taxes, that's about 2 mil or so.

There's nothing wrong with buying a small number of lottery tickets if the jackpot is large, even though your expected value is negative. Expectations-based pricing is only a guideline for how much you'd pay to play a game with a limited number of plays.

Closet Libertarian

Why tax lotteries specifically for individual retirements? We already pay 15% (employer and employee) for social security. That is plenty of tax.

PS. Occasionally, the lotteries do have a positive expected value (due to rollover).

bulletproof

I would say that lotteries almost never have positive expected dollar value, given that the number of people playing goes up as the jackpot goes up, and therefore that increases the probability of splitting the jackpot with others.

Your best bet at not splitting the jackpot with others is to try to figure out which numbers a person who chooses numbers (as opposed to letting a machine do so) would not choose. One strategy is to use the same exact numbers that came up from the last drawing, since anyone who chooses their numbers would almost surely never choose those numbers due to the fallacy that it's less likely for a set of numbers to repeat, even though the drawings are completely independent.

bulletproof

Plus, people tend the play the same numbers over and over again (their "lucky" numbers", and in the case of a rollover jackpot, you know that there was no winner the previous drawing, so no one used those numbers and probably will not do so for the next drawing.

Closet Libertarian

Yes positive expected value is rare but it has happened several times for some states (accounting for splitting and present value). You are right on about the numbers.

Craig

If instead of buying one $1 lottery ticket per day, you invested it an account earning 7% interest for 43 years (starting with college graduation [22] and continuing to retirement [65])you would have:
$100,558.77.

If you skipped your $3 latte per day: $301,676.31

Not to mention your $400 million retirement package if you're a certain oil company CEO.

zbicyclist

It's likely to be lonely posting this many days later, but Illinois Governor Rod B. has an interesting state lottery twist.

http://www.chicagotribune.com/news/local/chi-0605240150may24,1,5263300.story

He proposes selling the lottery to make more money now for "education" -- but the state would then get no money from the lottery beginning in 2024 (when today's babies graduate high school). Of course, he won't be governor then.

The Tribune editorial notes: "If Illinois schools receive more funding, some of it should go to teaching the rudiments of economics."

http://www.chicagotribune.com/news/opinion/chi-0605240022may24,1,5049536.story

Did I mention it's an election year? The only suspense is whether opponent Judy Topinka can come up with something even dumber.

zbicyclist

In the link given, they note "Instead of earmarking lottery revenues to education (which is mostly a charade since money is fungible), why not earmark the revenues to private retirement accounts?"

Well, one reason why not is that the lottery is tolerated / encouraged is because it adds to state tax revenue (those fungible funds). If the money went to private retirement accounts instead, there would be a loss of tax revenue.

If the state couldn't get money from a voluntary lottery tax, they might tax me instead. Hard to feel positively about that.

"Don't tax you,
Don't tax me,
Tax that fellow behind the tree."

(possibly authored by former Senator Russell Long of Louisiana)

tillerman

The lottery is a tax on stupidity. Let's keep it that way.

sophistry

Playing the lottery isn't always dumb.

Someone said to me once that it was worth the money just to have the opportunity to have a conversation with your wife about what you would do with all that money if you won.

aaronescott

A possible compromise is to earmark only a portion of the lottery price for the buyer's retirement fund.

Another thing about lotteries that I have been thinking about is this: Why in the world do we have these $200 million plus lotteries? Why not, instead, have 200 $1 million winners? Or for that matter, 2000 $100,000 winners.

As I'm sure you're aware, lottery purchases increase as the lottery amount increases. And it is likely that some will argue that winning "only" $1 million will not draw enough buyers to fund the thing. But I would counter that when the odds of winning become this much better (or at least perceived to be much better), the purchase of lottery tickets will remain, at the least, steady.

Further, we could also put a ceiling on lottery winnings. That is, if we raise $200 million in lottery purchases, only $50 million is awarded, permitting the other $150 million to be put to actual use.

Read more...

bulletproof

Well, the starting jackpot in California is 7 million dollars, which rolls over each week if there is no winner. After taxes, that's about 2 mil or so.

There's nothing wrong with buying a small number of lottery tickets if the jackpot is large, even though your expected value is negative. Expectations-based pricing is only a guideline for how much you'd pay to play a game with a limited number of plays.

Closet Libertarian

Why tax lotteries specifically for individual retirements? We already pay 15% (employer and employee) for social security. That is plenty of tax.

PS. Occasionally, the lotteries do have a positive expected value (due to rollover).

bulletproof

I would say that lotteries almost never have positive expected dollar value, given that the number of people playing goes up as the jackpot goes up, and therefore that increases the probability of splitting the jackpot with others.

Your best bet at not splitting the jackpot with others is to try to figure out which numbers a person who chooses numbers (as opposed to letting a machine do so) would not choose. One strategy is to use the same exact numbers that came up from the last drawing, since anyone who chooses their numbers would almost surely never choose those numbers due to the fallacy that it's less likely for a set of numbers to repeat, even though the drawings are completely independent.

bulletproof

Plus, people tend the play the same numbers over and over again (their "lucky" numbers", and in the case of a rollover jackpot, you know that there was no winner the previous drawing, so no one used those numbers and probably will not do so for the next drawing.

Closet Libertarian

Yes positive expected value is rare but it has happened several times for some states (accounting for splitting and present value). You are right on about the numbers.