The Real Value Of A Powerball Ticket
Submitted by Matt McCaffrey via The Mises Institute,
Alex Tabarrok has a fun post calculating the monetary value of a Powerball ticket. He estimates that, as of the most recent drawing, each $2 ticket carries an expected monetary value of roughly $2.73. Superficially then, it’s worthwhile to buy one. However, Tabarrok also points out this is only true for a simple expected value calculation; after accounting for taxes and the possibility of a shared prize, a ticket’s monetary value is actually substantially lower (around $.75), making it a poor investment.
So why do people buy them? Are consumers hapless rubes throwing away their hard-earned money in exchange for nothing? Not necessarily.
The reason is simple: there’s much more to valuation and choice than expected monetary value. In fact, I suspect almost no one buys a ticket with any such calculation in mind. Rather than a cold estimate of the probability of future returns, the Powerball actually illustrates the subjective theory of value.
There are many ways for people find value in the Powerball beyond its expected monetary payoffs. Tabarrok observes, for example, that people find pleasure in anticipating the drawing. Such excitement is actually a major attraction of games of chance, where players have no control over the outcome.
In fact, I doubt most people playing the Powerball seriously believe they’ll win. Instead, people treat a ticket as the price of daydreaming about what they’d do with an enormous pile of cash. You can’t win without playing, so people pay a small amount as a way to justify spending their scarce time imagining their own Scrooge McDuck scenarios. For these people, the benefit of the ticket is greater than its cost.
These are just two reasons people might find value in lottery tickets, but there are countless others. Incidentally, value subjectivity doesn’t imply anything about whether the values people actually hold are morally acceptable or even economically sensible; just because our values are subjective, doesn’t mean they’re above criticism. But it does mean they’re about more than a simple expected monetary return.
My point is that although it may be convenient to reduce value to a simple, objective measure, doing so can never capture the complexity of what, how, and why people value the things they do.
By the way, I don’t have a problem with the idea of calculating expected value, as it’s a useful way of thinking about how to place present monetary value on a contingent event. I do, however, take issue with the idea that expected value calculus is the way for an economist to think about these problems. Focusing too much on objective calculations of worth drains the richness from economics and helps turn it into a mechanical exercise inapplicable to actual human behavior.
If anything, the economic way of thinking should stress the diversity and complexity of human values. Economists would be better off taking a humble approach, acknowledging that we can’t always fit human decisions into neat little boxes for economists to analyze, much less to build policy proposals on.
Public policy is actually one important reason these seemingly simple examples matter quite a bit. It’s a short few steps, for example, from defining value as the expected monetary return of a ticket, to claiming that buying a ticket is irrational, and finally, to insisting consumers not be given a choice to buy one at all. (As a side note, this isn’t an endorsement of public lotteries.) Although it might seem odd, this kind of argument is increasingly common among behavioral economists. Human errors and biases are open doors waiting for paternalism to rush through. Subjectivity is a way to slam them shut.
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wouldn't it be depressing for Americans if a Canadian won the Powerball, all the hopes of getting a chance at an enriched pot only to see it disappear altogether
(rioting on the streets? armed escort for the Canadian winner or a lynching?)
(it would be like allowing the Blue Jays to win the World Series)
If I buy ten tickets then I have ten times the chances of winning.
/sarc
why stop there, mortgage your house, it's a sure bet
we've all blown $100 on stupid things, sometimes more than that, Hell, I wish I had 1/2 the money I pissed away in the 1980's when I was young, dumb and single. I probably put a few strippers through college.
Its a slip of paper with numbers on it... therefore.. intrinsic value.
I don't like the way the writer elides from expected monetary value to asserting that the expected value calculus is not useful. It's the sort of half-understood shit that is spouted by the fucktards who arb from other disciplines (mainly Psych - you've never seen real charlatanry until you've seen psychology).
You know the type - they've made their name by a series of small-N, badly-structured "gotcha, Economics!" studies: people like Ariely and Kahnemann who think their sub-first year understanding of consumer rationality enables them to sneer at the discipline they arbed into. Folks like that make their living conducting a series of unbelievably badly designed rejections of 'rationality' based on precisely this sort of shibboleth: e.g., calling it 'a rejection of the hypothesis of consumer rationality' when 15 white college students don't make the 'right' decision under a scenario where the expected gain is less than the cost of the time taken to do the calculation (I fucking HATE the 'behavioural economics' crowd - they are psychologists first, almost to a man - which means their first discipline is innumerate charlatanry with the added hubris of pretending to understand how humans think).
I dunno what it is about second-rate Yank pedagogy in economics, but it's literally ONLY Yanks (and mostly Yanks from second-tier institutions) who think that the consumer problem is framed in dollars. Anyone whose training in economics lasted more than six weeks, and who got their training in economics from somewhere worth talking about, knows that economic decisions proceed from an allocation problem that involves partitioning a scarce budget among alternatives based on their expected utility. The expected cash payoff is only part of the utility flows from an allocation (in fact even that is not true generally: the cash payoff has value only because cash enables the purchase of goods and services that yield utility... including abstract goods like the acquisition of political and social influence) .
To understand why this is important and should be absolutely obvious to anyone who purports to have any expertise in economics (which does not include any economics journalist, anywhere on this planet): consider any good or service that has no cash return. Food, for example: no competent economist would argue that the expected value of a food purchase was zero simply because it had zero cash yield - to say that would be to assert that purchasing food violated consumer rationality - but it would not surprise me in the least for some behavioural fuckwad to make that assertion.
The expected utility from a lottery ticket is greater than the alternative use of the price of the ticket, given what the purchaser knows about the state of nature (probabilities of outcomes and their associated utility payoffs) and their preferences. It's really that simple.
That said, it is absolutely the case that the behavioural economics shitheads will preen and bray and cheer and clap if government decided to ban things that they (the behavioural economics shitheads) think are signs of 'irrationality'.
Oh - I mustn't forget the mandatory inb4:
inb4 any retard suggests that utilitarianism "can't" work because value is subjective. That's horse-shit, and conflates two issues.
Issue 1 is that utility comparisons can't be made between individuals at present, because we have no valid interpersonal utility measure. That's absolutely true, but is not relevant except when making forced transfers between individuals (which no competent economist should ever suggest).
Issue 2 is the idea that people don't make decisions based on the highest expected utility: that is, they don't try to allocate their budget (including their time) in such a way as to get the most out of it, given what they know about the world (current and future information about the costs and benefits of their decisions). That's another way that smart-asses like to pretend that other people are stupid and need the State's tentacles in their lives, nudging them to make 'better' decisions ('better' by what metric?).
Everyone is a utilitarian if they believe that policy can make the system 'better' - because to assert that, they have to have an idea what 'better' means.
Wow. You've really got an axe to grind, there. Makes me think that you're being irrational, probably due to competition with said "fucktards". Did one beat you out for an academic position? Or simply reject one of your papers due to its lack of reality-testing?
Mind you, as a witch I play with ideas that turn psychologists green with the terror of the Unquantifiable. I deal with utilities that are measured by races, worlds, and aeons rather than individual advantage. And I absolutely reject Externalities, as when you consider advantage from the perspective of the Whole, nothing at all is external, nor can it be.
Next time, please try not to run your lack of intellectual discipline up a flagpole expecting others to salute. Surely as a student of economics, you are aware that forced transfers are the rule rather than the exception any time a State exists. States come into being to regularize the process of coercive value extraction from "subjects" of those monopolizing coercive force. Surely as a human being, you are aware that "expected utility" includes so many non-economic values as to be a meaningless concept. If you want to play with the grownups, please at least learn the rules of the game.
Most people on ZH don't have to worry about this, as the lottery is a special tax on thick people.
i spent a hundred dollars on tickets and won the lotto this Saturday coming up. strange after taxes it is only like $400 million. oh well I am trying to figure out what to buy and I get to about $100 million worth of shit to buy and donations to make and I run out of ideas.
ok, budget for my celebration party in Aberdeen is $500K. one of my mates said it is ghost town there so we should be able to get a table at Fusion for 20 30 of us. Then, since I am flying you out on a first class BA flight we may as well go salmon fishing...and fuck it, I will rent a castle somewhere in Perth for a week so make sure you chaps can take time off from work and get your fly fishing kit ready. Passport is neccessary to leave the US for those of you who don't have one you can order an expedited passport from the DOS.
(Haters, ask your mom if you can stay up late to watch the web feed that ZH will have.)
I still have not received any seat requests. If enough people register I will just charter a G5.
When a mocha crappa bs latte from starbux costs 4 bucks (sure you stay pretty jacked up for a few hours)- I can skip one and buy 2 chances at TOTAL MONETARY FREEDOM and all that that entails, What would you due without freedom??
If I win I'm going to buy all the gold futures contracts from the COMEX that I can...
and take delivery.