Why The Powerball Jackpot Is Nothing But Another Tax On America's Poor

Tyler Durden's picture

Now that the Powerball Jackpot has just hit a record $1.4 billion, people, mostly those in the lower and middle classes, are coming out in droves and buying lottery tickets with hopes of striking it rich.

After all, with $1.4 billion one can even afford enough shares of Apple stock to become a bigger holder than the Swiss National Bank (alterantively, one can buy a whole lot of VXX).

Naturally, we wish the lucky winner all the (non-diluted) best. There is, however, a small problem here when one steps back from the trees. As ConvergEx' Nicholas Colas previously explained, "Lotteries essentially target and encourage lower-income individuals into a cycle that directly prevents them from improving their financial status and leverages their desire to escape poverty.  Yes, that’s a bit harsh, and yes, people have the right to make their own decisions.  Even bad ones…  Also, many people tend to significantly overestimate the odds of winning because we tend to assess the likelihood of an event occurring based on how frequently we hear about it happening.  The technical name for this is the Availability Heuristic, which means the more we hear about big winners in the press, the less uncommon a big payday begins to seem." Call it that, or call it what one wishes, the end result is that the lottery is nothing but society's perfectly efficient way of, to use a term from the vernacular, keeping the poor man down while dangling hopes and dreams of escaping into the world of the loathsome and oh so very detested "1% ers". Alas, the probability of the latter happening to "you" is virtually non-existant.

Full explanation from Convergex' Nick Colas on how and why Americans are lining up in lines around the block to... pay more taxes.

What Seems To Be Is Always Better than Nothing

Summary: American adults spent an average of $251 on lottery tickets.  With a return of 53 cents on the dollar, this means the average person threw away $118 on unsuccessful lotto tickets – not a great investment.  So why are we spending so much?  Well, lotteries are a fun, cheap opportunity to daydream about the possibility of becoming an overnight millionaire (or in this case billionaire), but on the flip side people tend to overestimate the odds of winning.  Lower-income demographics spend a much greater portion of their annual earnings on lottery tickets than do wealthier ones

Since lotteries are state-run, that effectively means that the less affluent pay more in taxes (albeit by choice) than broadly appreciated.  And even winning the lottery doesn’t guarantee financial success.  More than 5% of lottery winners declare bankruptcy within 5 years of taking home the jackpot.  Despite their drawbacks, though, lotteries are no doubt here for the long haul – in states that have lotteries, an average of 11% of their total revenues come from lottery ticket sales, and the number is even as high as 36% in 2 states (West Virginia and Michigan).
 
Consider the following credit-card-advertisement style sequence of statistics:

  • Lottery ticket sales in the US in 2010:  $59 billion
  • Average spending per person:  $191
  • Average spending per adult:  $251
  • Chance at hitting the jackpot:  (Apparently) priceless.

I have never bought a lottery ticket and honestly don’t even know how.  And as far as I’m aware, I don’t know anyone who spends north of 200 bucks a year playing the lotto.  The only lottery my friends play is the NYC marathon lottery, where they’re gambling for maybe a 1 in 13 chance to fork over $255 for the privilege of slugging out 26 miles through the city’s streets.  Not quite hitting the jackpot in most people’s minds. 
 
But someone, somewhere is buying all those tickets.  In Massachusetts, where the lottery is more popular than in any other state, people spend an average of $634 a year on Mega Millions, Powerball and the like.  Delaware comes in at number 2 with $504 spent per person, while Rhode Island ($469), West Virginia ($388) and New York ($357) round out the top 5.  North Dakota brings up the rear with per capita lottery spending of $34.  You can see the full list in the table following the text. 
 
It’s difficult to pinpoint exactly who is investing so much money in a product that provides poor returns, but numerous studies show that lower-income people spend a much greater proportion of their earnings on lotteries than do wealthier people.  One figure suggests that households making less than $13,000 a year spend a full 9 percent of their income on lotteries.  This of course makes no sense – poor people should be the least willing to waste their hard-earned cash on games with such terrible odds of winning. (http://www.dailyfinance.com/2010/05/31/poor-people-spend-9-of-income-on-...).
 
Why bother?  Well, one answer is obvious enough and applies to just about everyone who plays.  For a buck (now $2 for Powerball) we have a cheap opportunity to daydream what could happen if we suddenly won millions of dollars.  But lotteries return 53 cents to the dollar.  So why are poor people irrationally buying tickets when the probability of winning is so slim?  One study by a team of Carnegie Mellon University behavioral economists (Haisley, Mostafa and Loewenstein) suggests it isn’t being poor but rather feeling poor that compels people to purchase lotto tickets.
 
By influencing participants’ perceptions of their relative wealth, the researchers found that people who felt poor bought almost two times as many lottery tickets as those who were made to feel more affluent.  Here’s how they did it:

  • Participants were asked to complete a survey that included an item on annual income.  One group was asked to provide its income on a scale that began at “less than $100,000” and went up from there in increments of $100,000.  It was designed so that most respondents would be in the lowest category and therefore feel poor. 
  • The other group, made to feel subjectively wealthier, was asked to report income on a scale that began with “less than $10,000” and increased in $10,000 increments.  Therefore most participants were in a middle or upper tier.
  • All participants were paid $5 for participating in the survey and given the chance to buy up to 5 $1 scratch-off lottery tickets.  The group who felt wealthier bought 0.67 tickets on average, compared with 1.27 tickets for the group who felt poor.

Lotteries essentially target and encourage lower-income individuals into a cycle that directly prevents them from improving their financial status and leverages their desire to escape poverty.  Yes, that’s a bit harsh, and yes, people have the right to make their own decisions.  Even bad ones…  Also, many people tend to significantly overestimate the odds of winning because we tend to assess the likelihood of an event occurring based on how frequently we hear about it happening.  The technical name for this is the Availability Heuristic, which means the more we hear about big winners in the press, the less uncommon a big payday begins to seem.   
 
Not that hitting the jackpot is guaranteed to substantially improve the winner’s life.  Economists at the University of Kentucky, University of Pittsburgh and Vanderbilt University collected data from 35,000 lottery winners of up to $150,000 in Florida’s Fantasy 5 lottery from 1993 to 2002.  Their findings are as follows:

  • More than 1,900 winners declared bankruptcy within 5 years, implying that 1% of Florida lottery players (both winners and losers) go bankrupt in any given year, which is about twice the rate for the broader population.
  • “Big” lottery winners, those awarded between $50,000 and $150,000 were half as likely as smaller winners to go bankrupt within 2 years of their win, however equally likely to go bankrupt 3 to 5 years after.
  • 5.5% of lottery winners declared bankruptcy within 5 years of bringing home the jackpot.
  • The average award for the big winners was $65,000 – more than enough to pay off the $49,000 in unsecured debt of the most financially distressed winners.

Lottery players tend to have below-average incomes, so they are probably less accustomed to budgeting when they receive a windfall.  There’s also a psychological term called Mental Accounting that explains how people might treat their winnings less cautiously than money they’ve worked for.  Money has come into their possession through luck, which similar to bonus payments, often induces an urge to purchase unnecessary items.
 
But whether you think state lotteries are awful or great, there’s another word for them: essentialIn both West Virginia and Michigan, for example, lottery sales accounted for 36% of total state revenues in fiscal year 2010, and on average state with lotteries take in 11% of total revenues in the form of lotto ticket sales.  We’ve included the full list in a table following the text.  There are still 7 states that don’t have their own lottery systems, so the national average would be lower. 
 
A couple of closing thoughts on what this all means:

  • Don’t make investment decisions when you are feeling poor.  The study we cited earlier clearly shows that you are likely to buy more “lottery tickets” (think of that as a metaphor for any long shot investment) when you feel less affluent than those around you.
  • Lower income individuals likely pay more in “Taxes” than most economic commentators realize.  Assuming that the 80/20 rule applies to lottery participation, the bulk of that $59 billion in annual receipts likely comes from 20-25 million less affluent households.  That would be about $47 billion from this demographic, or roughly $2,400 per household.  Yes, I get the notion that this money is handed over in the hope of a payoff.  An ill-advised and mathematically unlikely hope, as it turns out.  But does that mean it doesn’t count as a societal contribution?
  • Maybe the U.S. needs a national lottery.  Yes, these games don’t necessarily encourage the best financial planning among the less affluent.  But there is no denying that playing the lottery is entirely voluntary.  There are probably some anti-gaming factions in government who wouldn’t like this approach, to be sure.  But there’s also no doubt that the Federal budget could use the money.  And, hey, you never know…

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Yes We Can. But Lets Not.'s picture

A wholly voluntary tax.

People should be free to be stupid, free to pay extra taxes, free to smoke, etc.

old naughty's picture

HOPE,

may be some CASH,

but still no JOBS.

Yes We Can. But Lets Not.'s picture

Free to believe that only 5.5% cannot find work, free to believe that more gubmint is a good thing, free to believe that Alabama gonna beat Clemson tonight...

New England Patriot's picture

Win $60,000 per year for life!

 

Quit your job, have five kids, and move to California. 

CrazyCooter's picture

The lottery is a game for people who are bad at math.

Regards,

Cooter

johngaltfla's picture

ZH, you do realize that 1 Powerball ticket is like buying a $40 put on Apple.

Of course if you miss on the Powerball you're not as fucked so.......

nink's picture

The Powerball rigging scam with their friends and family plan must be over since no one is guessing the numbers.  

 

http://www.blacklistednews.com/Jackpot-fixing_investigation_expands_to_m...

 

Mr. Magoo's picture

The real question is in this age of pure propaganda, matrix type reality and pure manipulation

Is there Really a winner??

A Nanny Moose's picture

Yes. Government.

Do I have to pay taxes now, if my winnings are in the form of an interest free IOU?

Theosebes Goodfellow's picture

~"With a return of 53 cents on the dollar, this means the average person threw away $118 on unsuccessful lotto tickets – not a great investment."~

I pay for mine with casino winnings. Seriously. To me it's just a tax deduction, (presuming I lose). If I win, my taxes on the $1.4 billion winnings alone will buy me Nicaragua. What's the downside?

N2OJoe's picture

Hey, at least there's a chance of receiving some benefit for your tax dollars.

A FAR better chance than your forced taxation dollars, I might add.

TerminalDebt's picture

The same can be said of insurance, yet nobody says that's stupid. You pay a little and if you hit big life changes. Insurance you pay a little so that if you get hit big life doesn't change.

Realname's picture

Maybe lottery tickets should be renamed 'Powerball Shares'...I hear Bernie Madoff and Jon Corzine are being considered for CEO of said IPO.

Qynsen Choc Chip Cookie's picture

But when you can win $1.4bn, with odds of 1:300mln and $2 per ticket, doesn't that give you +EV? :D

City_Of_Champyinz's picture

Keep this in mind, you should only ever buy one powerball ticket.  For every other ticket you buy to 'increase your odds of winning', you only 'increase' the odds of winning by .000000000000000000000000001. (thats 26 zeros in case you were wondering).  Now I can't for the life of me remember where or when I read this fact, but it is in the vault regardless.

TerminalDebt's picture

that is complete bullshit. The odds are 292million to 1. That means there are 292milliom permutations. So if you buy 292milliom tickets that are all different you have 100% chance of winning. 

War_is_Peace's picture

It's also (mostly) a game for people already living on gov't handouts.  As the owner of a grocey store, I see it daily.  Spend 15 EBT dollars on food, $60 cash on lottery.  It's very difficult holding one's tongue when witnessing that.

cynicalskeptic's picture

Think of it as a recycling program for government $$$$.   Gov is getting back 80% of the money they're paying out.   Same with gambling.  All those state casionos filled with brokew seniors spending their Social Security money.  

You have to wonder though.... how much have 'aid' benefits been increased BECAUSE so much of it has been wasted?  People are going hungry not because they aren't getting aid but because they're sqwuandering the aid they DO get.  All the 'cponcerned' peopel see only the hunger, not the misallocation of aid BY the poor.

I worked in the South Bronx for years.  You had both the working poor and unemployed making very BAD choices in life which only compounded their difficulties.  Yes, they were stuck in a bad place, facing very real barriers BUT they often made their lot worse.  Not sure how - or if - you can change that.

RiverDrifter's picture

Truth!  I worked at a convenience store in high school back in the 80's when food stamps were still distributed in paper form like fake money is still today & every 1st week of the month, there would be a convoy of folks on food stamps who would come in, buy a penny candy to get 99 cents in change..."real money" LOL...and then add a penny of their own so they could buy scratch off tickets.  

 

They would spend nearly all their food stamp money this way, or at least the stack of food stamp bills they brought in with them.  They'd come in with $50 worth of stamps, win perhaps $30 on scratch offs...spend $30 in scratch offs and win $20....spend $20 in scratch offs and win $5....spend $5 and lose it all....see you next month, Debbie!

Tall Tom's picture

Actually it is an advantage play when the jackpot is this elevated.

 

I will not count on winning it as I am roughly 260 times more likely to be struck by lightning in any given year.

 

And I am not concerned about thunderstorms as I consider that likelihood to be not worthy of taking any precaution.

 

I will play this one for the cheap entertainment and the daydream...

 

Now just what lake am I going to use to have that boating accident with all of that Gold which I will buy???

 

Enjoy yourself Cooter. It is only fiatskis and Bernanke Bux anyways.

divingengineer's picture

It's $2 for a chance to be a billionaire. A 1:285,000,000 chance. 

But what are your chances of becoming a billionaire without winning the Powerball?

NONE.

So for $2, I'll give it a try. WTF else you gonna do with $2 you dumb f*cks. It's a rounding error in my monthly expenses. 

83_vf_1100_c's picture

  I was really interested til I read 5 kids. I'd rather live in the van down by the river. Still waiting for the 4th and last kid to grow up and leave.

NoDecaf's picture

Jim Cramer - Boo-Ya! for Powerball.

wizteknet's picture

If u don't play u don't WIN! 1 ticket cash 1billion probably cash pay out. Atleast one attempt fk the rest... yes a tax but we all can DREAM! Instead of them printing bastards who do it out of THIN AIR!

Gambit's picture

Speaking of the poor.  Here is a riddle:

 

What has 6 balls and rapes the poor?

xythras's picture

Who cares.

Only Barry Soetoro's relatives in the line.  Wait to see them when the gumbint will bring SoylentBlack on the market.

Yummy yummy ... soup kitchen food in this nigger's tummy.

MrCrackerJack's picture

3 Swedish/German Muzzies?

Tall Tom's picture

What has 6 balls and rapes the poor?

And I thought that Obama did not have balls. Silly me.

divingengineer's picture

The Wookie, not the Salad Tosser. 

Somewhat Evolved Monkey's picture
Somewhat Evolved Monkey (not verified) Yes We Can. But Lets Not. Jan 11, 2016 8:12 PM

My only problem is that the lottery is a government enforced cartel-like monopoly.

 

Why no I can start lottery?

Beam Me Up Scotty's picture

Yup, and they don't like anyone elbowing in on their cartel.  Fan Duel anyone??  New York has already outlawed them IIRC.

cynicalskeptic's picture

The illegal 'Numbers' have better odds.

DCFusor's picture

You might as well make people free to be stupid, they will be regardless...

I admit that I always thought the lottery was a tax on those who are statistically challenged, but I re-thought that one.

It would be true for me, as I have much higher probability ways to get ahead, and in fact, at this end of life, I'm there already.  Most of us who scoff at ticket buyers are in that place, or somewhere nearby.

Now, put yourself in a place where otherwise, you have NO chance at all, and don't say there aren't a lot of people in that position - their other chances are also miniscule - make it into the NBA, NFL, become a popular musician - all very low probabiility, and tend to require much more discipline than those folks tend to have, along with the right genes and some luck.

For those people - hey, a buck here and there - it'd go up in smoke anyway, but the difference between a zero chance of doing well - and any chance whatever - that's something even if that chance is tiny.

Anything divided by zero is huge.  I think I get it now.  But I'm also glad I'm not there.

Tallest Skil's picture

Gotta disagree with you on the smoking part. 1. They don't have the right to muck up my air. 2. They don't have the right to kick my insurance premiums through the roof because they need more medical attention.

If you want to commit suicide, (don't, first of all) put a fucking bullet in your head. It's cheaper than smoking and forcing your loved ones to watch you slowly die.

i_call_you_my_base's picture

My grandmother smoked non-filter cigarettes and drank until she died at 87, and she was healthy until the last year.

DCFusor's picture

A: It's not your air unless (and that's doubtful) I'm on "your turf".  You didn't make that air!

B:  It's my smoke, I paid high for that in more ways than one.  Who said you could have it free?

C:  I'm not running up your insurance, I'm self-insured and even pay the frigging "tax" to remain so.

My "loved ones" were younger and with no bad habits, have already "pre-deceased" me.  i'm allowed to be an outlier.

Urban Redneck's picture

In addition getting over the notion of "your air" you might want to take a look at your fellow 'muricans... obesity costs drives health insurance premiums far more than cigarettes.

Skateboarder's picture

The "truth" advertisement with the cigarette that turns into a human-brains-hungry alien monster (which threatens the skoolkids and retreats back into the mothership, i.e. the cigarette box) is always on teevee and it's a striking reminder of the intensity of the propaganda, especially that against smoking.

Socratic Dog's picture

Overweight people actually live longer than normal-weight people.  Disturbing, but true.  And the morbidly obese live longer than thin people.  Now that is REALLY fucked up.

stacking12321's picture

doesn't sound right - got a link?

Socratic Dog's picture

Got that from a book by Malcolm Kendrick called Doctoring Data.  Can't find my copy to provide you the reference, sorry.  But two quotes:

“The older you get, the more beneficial it is to be overweight.”

“The majority of studies (Framingham aside) find that those with a BMI in the overweight category have the longest life span.”

I know they're not references.

 

divingengineer's picture

I read a study a year or two ago about thigh diameter and longevity of women. 

Basically, the chicks with bird legs can expect to die much sooner than a big meaty chick.

It sounded paradoxical to me too at the time, but we are so steeped with BS from the medical "experts" that don't have any clue what they are doing that we now don't know what we are doing.

My great grandfather lived to 93, lived on bacon, hot dogs and saurkraut, drank whiskey and dipped Coppenhagen since he was a teen. Broke his back in a shipyard for 30 years and must have inhaled enough asbestos to insulate a powerplant. Panned gold in Alaska, pulled his own teeth with pliers,  Muffuga died of old age, just wore out, no disease. How many doctors today would tell you that you'd probably live to 93 if you lived like that?

Tall Tom's picture

If you want to commit suicide, (don't, first of all) put a fucking bullet in your head. It's cheaper than smoking and forcing your loved ones to watch you slowly die.

 

 

Has it ever occurred to you that I am out to ruin your economy and if you suffer, as a result, then that is too fucking bad...for you? 

 

Your economy is built upon the foundation of fraud and corruption. I will do my best to destroy it and any faith and confidence that you have misplaced within it.

 

You must understand that I also want Obamacare to bankrupt your ass. I want to see you living in want, need, famine and squalor because you have placed your faith and confdence into the psychopathic hands of the Government.

 

So why don't you stop mucking up my air with your incessant farts? I do not want your fecal matter inside of my nose.

 

(After all...When you smell a fart you can be certain that the air which you just breathed was just inside someone else's asshole. Think about it.)

.

FreedomGuy's picture

It makes a horrendous mess. Overdose on opiods. Peaceful, painless and neat.

August's picture

Dying younger, smokers typically cost "the system" less than non-smokers.

Smokers are paying your way more than you are paying theirs.

We need more heavy smokers!  And heavy drinkers!  And Muslim migrants!  Boom times, indeed.

Refuse-Resist's picture

And Muslim migrants!  Boom times, indeed.

 

ISWYDT

wtf1369's picture

Jesus Christ, preach much? I don't smoke myself but I don't give a fuck if anyone else does as long as it's not in my truck or my house. You do know your insurance company is going to fuck you regardless right? Oh and here's a newsflash sweetheart, life is a terminal condition...no one here gets out alive. Have a nice day.

i_call_you_my_base's picture

ZHers get confused and mistakenly support a government run, for-profit, vice enterprise. Don't get sidetracked by personal responsibility.