Lotteries and Money Advice

Two posts this morning mention lotteries. Jabulani Leffall at WiseBread starts with a great quote “That buck that bought the bottle coulda’ struck the Lotto.” and proceeds with an excellent riff on the snake-oil-salesman aspect of personal finance gurus. Mighty Bargain Hunter then asks “Did Powerball tickets beat the S&P last year?” They didn’t, or at least didn’t on average. Your mileage may vary.

Apparently, a decent slice of Americans believe that winning the lottery is their most likely route to even modest wealth. According to the survey cited by MBH, 21% of them think that winning the lottery is the most practical way they have to accumulate several hundred thousand dollars. To be fair, 55% thought saving over time was the best course. And we don’t know how likely members of the 21% thought winning the lottery was, only that they thought it was their best shot.

People buy lottery tickets and become rich every day. A non-crazy and only modestly stupid person might reasonably conclude that buying a lottery ticket is a good way to become rich. Given ticket sales, the number of possibly sane but at least modestly stupid people must be very large.

I do not know of any personal finance experts who advise buying lottery tickets. Much as they specialize in repeating back what their audience already believes (or wants to believe) this would be a bit much. But the experts often make the same illogical jump as the modestly stupid person. There exist people who got rich by doing X, so doing X is a good way to become rich.

The fallacy is exploded by the great pile of worthless lottery tickets. Doing X may have made a few rich, but it also may have made many poor. If I wasn’t so horribly cynical, I might be surprised at how many people fall for this. The money guru points to the rich people who started their own business or bought real estate with no money down and the audience nods its head and agrees that yes, this is the way to wealth.

It is said that lotteries are a special tax on those who can’t do math. I agree, although I would change “can’t” to “won’t.” Much of the personal finance establishment is built on fees charged to those who can’t or won’t think logically. Even the august Millionaire Next Door spent three years on the bestseller lists and moved close to three million copies without, apparently, anybody noticing that its premise was fundamentally flawed. Just because a characteristic is shared by millionaires it does not follow that adopting that characteristic is likely to make you a millionaire.

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