The Lottery And Your Money
As the Powerball lottery surpasses $400 million, it again becomes a popular news story and topic at the water cooler. We want to take the opportunity to say that it’s our hope that our clients aren’t playing the lottery.
Let’s make one point very clear: we aren’t afraid that our clients will go broke playing the lottery. This isn’t a post talking about budgets and skipping a Starbucks run to justify spending a few dollars on the Powerball lottery. No, this is much more than that.
To start, let’s bring the lottery into perspective with this stunning statistic: in 2014, Americans spent $70 billion on lottery tickets1. That’s over $600 per household. That’s more than was spent on books, video games, movie tickets, and sports tickets combined2. Imagine the economic growth if that money was spent well. If you’re tempted to think the government spends the tax revenue generated by the lottery well (which we doubt you are thinking), the lottery is insanely inefficient and does not add money to public education, as often is promised3. But that’s a discussion for another day.
You may be wondering how $600 per household can be correct. After all, you’re only playing when the jackpot is extremely large. You would be considered an occasional player, like 80% of all lottery players. However, only 18% of the money spent on tickets come from occasional players. 28% of sales come from frequent players (15% of all players) while a whopping 54% of sales come from heavy players (5% of players)4.
Keep this in mind while you consider that lottery sales outlets (along with the actual sales received) are heavily focused in the most economically disadvantaged neighborhoods in America5. This reality is clearly exploiting the economic despair felt by many in those communities. It is no wonder the lottery is often called a tax on the poor.
In early 2016 the Powerball jackpot was $1.5 billion and the odds of winning were 1 in 292 million. To illustrate those odds, imagine you were given a penny and told to place it somewhere on a football field. Then a second person is told to do exactly the same. The odds of those pennies placed on the exact same spot is 15 times more likely than winning the Powerball6. With such ridiculous odds, why do we play? Daniel Kahneman, a Nobel Prize-winning psychologist, explains that “for emotionally significant events, the size of the probability simply doesn’t matter. What matters is the possibility of winning. People are excited by the image in their mind. The excitement grows with the size of the prize, but it doesn’t diminish with the size of the probability.”7
If that statement isn’t counterintuitive enough, consider this: lottery winners are often less happy than non-winners with everyday events8 and usually end up broke. In fact, according to the National Endowment for Financial Education, 70% of people who suddenly receive a cash windfall lose it all within a few years. While we certainly think that with a strong relationship with your financial advisor you could certainly wind up like the remaining 30%, we think the real lesson from these statistic ties in with one of our core values: “practice stewardship – embrace contentment.” It is stewardship and contentment that would preserve the sudden windfall of cash and it is the understanding that wealth is a tool and not an end goal that would deal with the happiness issue.
Playing the lottery to get the “bigger and better” items will not lead to happiness. That, along with that fact that it supports a system that is so damaging to low-income families, is why we hope our clients are not playing the lottery.
1 Source: NASPL Sales Data
2 Source: The Atlantic, Lotteries: America’s $70 billion shame
3 Source: ABC News, Where Does Lottery Revenue Go?
4 Source: Huffington Post, The Lottery is a Tax – An Inefficient, Regressive and Exploitative Tax
5 Source: National Gambling Impact Study Commission
6 Source: Phys.org, Mathematician calculates the real chance of winning Powerball’s largest jackpot
7 Source: New York Times, Win a lottery jackpot? Not much chance of that
8 Source: Journal of Personality and Social Psychology: Lottery Winners and Accident Victims: Is Happiness Relative?