Why Lotteries are Bad – The Third Reason

There is a pretty obvious reason why buying lottery tickets is a bad idea. You will lose money. The odds are usually just awful. Casino gambling is, in comparison, a comparatively sound investment.

Casino_slots And, of course, casino gambling is not a wise thing to do with your savings. You would have to be off the deep end of "positive thinking" to believe anything other than it was, for some, an amusing way to waste money.

That objection to gambling, and lotteries, is today so pervasive that we have all but forgotten another traditional objection. A hundred years ago, at least as common as the argument that you would probably lose was the one that you might win. Back in the almost forgotten era when gambling of all kinds was illegal throughout the country, it was argued that gambling undermined the work ethic, allowing some to become rich without appropriate effort. And that was immoral.

The idea of wealth without work has, to say the least, lost much of its stigma. Which has left the moral rectitude camp with only one defense against the swelling tide of lotteries and other forms of legalized gambling, the bad bet argument. And that has been, manifestly, not very persuasive.

State lotteries as we know them date only to 1964, when the Live Free or Die gang in New Hampshire came up with a new way to raise money without raising taxes. Today 43 states have lotteries. (One of the seven holdouts is Nevada. I don’t think that’s on moral grounds.) My own state of Massachusetts leads with the highest per capita annual spending, at $700. Nationally, we spend more on lotteries than we do on movies.

The problem with arguing against lotteries on the basis that they are a losing proposition is that it boils down to an argument that the government should prohibit people from doing foolish things with their money. That goes against what most of us think governments should do, and if the alternative is taxing us not-quite-so-foolish types more, then there is really nothing left to discuss.

Enter the brand new third argument against lotteries. Even if you win, you will become unhappy and broke.  It is basically a fraud argument. Never mind the poor odds that make it a waste of money, the promised prize is far less desirable than advertized.

The lottery winners turning out poor theme has been rattling around the blogosphere for the past few months. Our old friend Dave Ramsey in June shared some statistics on the subject

Did you know the divorce rate among Lotto winners is four-fold the national average? Also, 65% of Lotto winners are bankrupt within 15 years.

Shockingly, Ramsey did not cite sources for this data.

Several other blogs and newspapers have picked up this story line lately, all with anecdotal tales and some with statistics from unnamed sources. The Consumerist carried a post headlined 1 in 3 Lottery Winners Broke Within 5 Years but not only was that number unsubstantiated, other than a 32 word introduction, the entire post was a quote from an article from the Eagle-Tribune (Lawrence, MA). Nothing wrong with that article. It has stories of local people who have won lottery prizes and quotes from financial planners saying the first thing a new lottery winner should do is to hire a financial planner.

Indeed, the fact that many, if not most, lottery winners wind up penniless is accepted so broadly that it is simply assumed in most discussions. Free Money Finance had a post in October Another Broke and Unhappy Lottery Winner quoting an obit from 2006 of one William "Bud" Post III. Post is often cited in these discussions.  Although he died at only 66, he lived a full life, including a $16.2 Million lottery prize, seven wives, ten children (nine with wife #2, another with an unmarried companion), jail time for writing bad checks and assault, and a brother who hired a hit man to rub him out. I guess we always knew winning the lottery brought excitement into your life.

A few weeks ago The Digerati Life brought us a post Why Lottery Winners Go Broke: Prospect Theory At Work, which tried to explain this phenomenon we all now understand to be true. And earlier this month the Detroit Free Press ran a heart warming story of lottery winners who did not go broke, something that would be too dog-bites-man to publish if it were not for the general assumption that winning the lottery is actually a curse.

Personally, I am an agnostic when it comes to the question of what generally happens to the wealth of lottery winners.  I am willing to assume that a person who has won $1 million in the lottery will, on average, act more foolishly with it than a person who has saved $1M carefully over many years. But until somebody can send me a link to a bone fide study of lottery winners I will presume that the X% go bankrupt stats are numerical fiction.

When you get down to it, our readiness to believe that lottery winners soon go broke is based on the same sense of morality that was behind the objection to gambling that wealth without effort was wrong. Deep inside our national psyche is the background hum of the Protestant Work Ethic, the idea that material wealth is the divine reward for hard work and clean living. Vast riches given to somebody stupid enough to buy a lottery ticket upsets the natural order of things. So of course they have to blow it all soon enough.

36 Comments

  • By chris, November 30, 2009 @ 2:24 pm

    I just read about one such study. In “The Ticket To Easy Street?”, researchers from Vanderbilt studied the correlation between Florida lottery winners and bankruptcy filings, and found that for individuals who won more than $150,000, bankruptcy filings occurred at 4x the normal rate. Winners of lesser amounts filed nearly twice as much as the general population.

    http://www.aeaweb.org/annual_mtg_papers/2009/retrieve.php?pdfid=158

  • By Greg, November 30, 2009 @ 3:51 pm

    Two things: If the divorce rate is FOUR times 1 out of 2, what is it then? 4 out of 2? How is that possible?

    Second thing, define bankrupt. We all think of it as penniless and destitute, but there are tons of people who’ve “gone bankrupt” and still kept their mansions, their casinos, their G-20′s, their yachts, even their cash (if safely squirreled away in some offshore account).

  • By KC, November 30, 2009 @ 3:52 pm

    There is a show on TV about lottery winners. I think its titled “I won the lottery”, but it’s about people who came into sudden wealth. I watched about 6 strait episodes of this (hey, it was Friday night and I have no life). But I was glued to it. It seemed that more than half of the people were pretty pleased with the way things turned out. Most of them now lived an easy (or at least easier) life. Many of them sought some financial advice and were into annuities or had even invested their money well and were doing really good things with it. A few had been divorced because of the money or suffered other problems. Only one had really screwed up his life – but on the whole he was broke but still had his wife and kids (which has to count for something).

    So I have a hard time believing undocumented statements like over half of lottery winners go broke or statements to that effect.

  • By Jim, November 30, 2009 @ 4:04 pm

    Yeah I think this is another ‘numerical fiction’ example.

    After seeing the stories about high bankruptcy rates for lottery winners I had tried to find legitimate sources of information on the topic myself. But the best I could find is that article that Chris points to. Otherwise all I found were references to statistics but no real data or solid sources to back it.

    I do think that bankruptcy rates for lottery winners is probably “high”. How high it is exactly is unclear.

    I’d also be curious to see data on the bankruptcy rates of self made millionaires. I’m sure some of them go bankrupt. How does the ‘normal’ bankruptcy rate for ‘normal’ millionaires compare to lottery winners? Is bankruptcy among millionaires really that uncommon? There are a lot of people in this country that live beyond their means including self made millionaires. Plus I bet that high flying lifestyle leads people to take stupid risks with their money as they don’t imagine it can run out.

  • By Stephen, November 30, 2009 @ 5:08 pm

    It may be a bad investment, but in reality, why are we concerning ourselves about $1-$5/week in lottery tickets, when we spend much more on worthless investments like expensive cars, coffee, etc?

    The lottery, like all things, is perfectly fine in moderation. Even if the chances are small, there’s no harm in having a little hope from a cheap game. On the other hand, when you can measure your lottery investments in percentages of your income (instead of fractions), you might have a problem.

  • By Kathy Franklin, November 30, 2009 @ 5:09 pm

    I don’t know about the statistics on financial outcomes of lottery winners, but from various articles I have read, it seems those lottery winners who did not manage their financial life well before they won the lottery did not manage it any better after winning.

  • By bex, November 30, 2009 @ 5:54 pm

    I looked around for lottery stats, but its damn difficult to find something from a reputable source…

    Overall, I think you’re right. People who win $1 million will spend it less wisely than those who saved up $1 million.

    The Freakonomics guys took on this one when they asked, why do so many rock stars and sports stars go bankrupt? The answer is that the skills that allowed them to GET money were completely different than the skills that allow them to GROW money.

    Add on the social pressure to be a spendthrift for friends and family, I see a strong reason why lottery winners would go broke just as often.

    But hard statistics? I haven’t seen them…

  • By Adam, November 30, 2009 @ 6:15 pm

    About once a year it seems, the mega millions payout exceeds the odds of winning (1 in 176m). Interestingly, to me, none of the PFs advise people to run out and play, even though it is a fair bet at that point, possibly because of the morality issue.

  • By Neil, November 30, 2009 @ 7:05 pm

    Even if bankruptcy rates are higher, you can’t really compare them to the general population…you have to compare lottery winners to lottery players (and even then, since winners are at least somewhat more likely to be big spending players, not your $5 or less per week types, you may need to narrow the comparison even further to be meaningful).

    But whatever. I’ll still buy the occasional ticket and hope.

    As for casino gambling – in moderation it can actual be a pretty inexpensive form of entertainment. Small bet tables for poker and blackjack can give you a fun night for less money than a hockey game, symphony tickets or other similar entertainment. More social, too. It’s only people who get trapped in the “win back what I lost” mentality (or who put too much down on every hand) that it becomes a bad investment.

  • By Patrick, November 30, 2009 @ 7:51 pm

    “The problem with arguing against lotteries on the basis that they are a losing proposition is that it boils down to an argument that the government should prohibit people from doing foolish things with their money.”

    No it boils down to an argument that government should not encourage foolish behavior. Just remain nuetral on the issue. We’ll find our way to perdition on our own.

  • By Jason, November 30, 2009 @ 8:21 pm

    What!? You mean we should pick apart the ridiculous executive bonuses, but lottery wins are perfectly acceptable. I just think every time someone says executive bonuses should be restricted we should be pointing to the lottery system and say – “hey – if we can have lottery winners, then surely we can have executive bonuses – at least they actually did something supposedly smart to get their “winnings”".

  • By kosmo @ The Casual Observer, December 1, 2009 @ 11:57 am

    “Two things: If the divorce rate is FOUR times 1 out of 2, what is it then? 4 out of 2? How is that possible?”

    Yeah, that was my thought, too :)

    Although, to get picky, I believe that it’s half of marriages that end in divorce, not that half of the people who get married end up divorced.

    This sounds like semantics, but it’s not.

    Let’s say you have 4 friends. You get married and divorced 4 times. Your 4 friends stay happily married. Half the marriages ended in divorce (your 4, out of 8 total marriages in the group), but only 20% of the people in the group got divorced (you).

    Basically, the fact that people can get multiple divorces creates a difference in the rates.

    Anyway, if the average person has 0.5 divorces, and a lottery winner has 2.0 on average, you could say that their divorce rate was 4 times the average.

    But I don’t believe this without some actual facts behind it.

  • By Frank Curmudgeon, December 1, 2009 @ 1:02 pm

    Just to be clear, I meant that arguing against lotteries because it is such a bad proposition for the players doesn’t work because that arguement has little appeal to the masses, not that it is not a perfectly rational and cogent position. It might also be pointed out that one of the (secondary) arguments for starting state lotteries in the 1960s and 70s was that there were already illegal and untaxed private lotteries on which people foolishly wasted money. At least with a state run lottery the government gets the profits, rather than organized crime.

  • By Andrew Stevens, December 2, 2009 @ 2:04 pm

    Kosmo, you’re correct about the multiple marriage thing. This is especially important since remarriages are much more likely to end in (another) divorce than first marriages are. Moreover, the divorce rate is not 50% and never has been. The 50% figure came about because somebody around 1980 (the divorce rate peaked between 1975 and 1980) noticed that there were half as many divorces that year as there were marriages and it quickly became conventional wisdom that 50% of all marriages end in divorce. Now there are many different ways to calculate the divorce rate, none of them great, but that way simply has to be the worst. For one thing, it is, quite obviously, a projection. If the 1975-1980 figures had stabilized and we had gone 60 years with half as many divorces every year as marriages, obviously we would have gotten to a 50% divorce rate. But that number did not stabilize. It declined and the Census Bureau revised the projection down to 40%. Even this is still just a projection. We have no idea what the future will actually bring. In fact, no age cohort has yet experienced a first marriage divorce rate even as high as 40%, though the older Baby Boomers are very close and probably will hit it before they’re all dead.

    Having said all that, four-fold is still obvious nonsense. Whatever the underlying divorce rate is, it’s surely somewhere between 20% and 50%. It’s impossible to imagine that lottery winners are four times any of those numbers.

  • By Nick, December 3, 2009 @ 7:12 am

    It’s been awhile since my days in Stats class, but some of the math examples in the ‘comments’ are not correct. It’s not as simple as taking ½ times fifty percent. It’s about probabilities.

    If you watch TV for two seconds you are constantly bombarded with stories like if you do this you are 8 times more likely to die from cancer, 6 times more likely to get in a car accident or 20 times more likely to receive a bite from a rabid squirrel. According to some of the logic in here, none of these scenarios would be possible.

    I don’t recall enough to explain it, but it’s all about probabilities. To Frank’s point, I don’t know where the data comes from, but is possible to be 4 times more likely to get a divorce compared to the normal population.

  • By Andrew Stevens, December 3, 2009 @ 12:35 pm

    Nick, I am an expert in statistics (I’m an actuary) and the commenters are correct. When they say, “smokers are 12 times more likely to get lung cancer,” they literally mean it. The chance of a non-smoking man getting lung cancer is 1.3% and the chance of a man who smokes developing lung cancer is 17.2%. (For women, it’s 1.4% and 11.6%.)

    If the chance of developing lung cancer for a non-smoker was greater than 8.5%, they wouldn’t be able to say that smokers are 12 times more likely to get it because it couldn’t possibly be true. The reason why they can say the things you hear is because the percentages are so low if you don’t indulge in whatever risky behavior they’re warning you against, that you can massively amplify it by engaging in that behavior. Sometimes it could get pretty silly. I’d guess that your chances of death from dropping from an airplane must be very tiny and is probably hundreds or thousands of times greater if one is a skydiver.

  • By Andrew Stevens, December 3, 2009 @ 12:58 pm

    By the way, Nick’s comment gives me an opportunity to make an important point. Be very skeptical of claims that “doing X makes you 6 times more likely to get Y.” As my comment above can tell you, without the underlying numbers, these claims don’t mean much. Is your chance rising from 0.1% to 0.6% (a negligible chance to a somewhat less negligible chance) or from 10% to 60% (a decent chance to very likely)? In the first case, maybe you don’t care that much. In the second, you might care massively. But without the underlying numbers, these comparisons aren’t very helpful.

  • By kosmo @ The Casual Observer, December 3, 2009 @ 3:51 pm

    @ Andrew – very valid point about how using the ratio of marriages to divorces in a particular years is a bad way to determine divorce rate. It’s far easier than using the rate among cohorts (because you’d have to wait for everyone in that group to die before getting the numbers), but it’s definitely not as accurate.

    This ratio can be affected by a lot of things. For example, a small baby boom (or baby bust) could increase/decrease the population of the age group that typically marries, pushing the raw numbers up or down for a few year. The year 2000 might have been a bit weird, too, because of people possibly delaying/accelerating marriage plans in order to get married in a “cool” year – pushes marriages for 2000 up (and marriages for 1999 and 2001 down), resulting in a lower divorce:marriage ratio (because of a higher denominator) than you might expect based on data from the surrounding years.

  • By Andrew Stevens, December 3, 2009 @ 4:27 pm

    Curiously I was married in 2000, but it had nothing to do with wanting to be married in a “cool” year. It does make it handy for calculating anniversaries though, but it never really occurred to me that people would target marriage in that year. I’m sure some people did, though.

    The 50% divorce statistic is a perfect example of numerical fiction. I suspect that the “divorce rate” (divorces in a given year divided by marriages in the same year) hit 50% in the 1975-1980 period both because more divorces were occurring and because fewer marriages were occurring than had previously been the case. The Baby Boomers had generally gotten married by then (the mammoth 1946 cohort had turned 29 in 1975) so there were fewer marriages and many of them were probably getting their first divorces, undoing their “starter marriages.” There was no reason to predict that 50% of all marriages would end in divorce, but it quickly became conventional wisdom and the figure is now so fixed in the culture that it’s impossible to change. (The Census Bureau has revised the projection down to 40% and nobody has taken any notice at all.)

  • By Andrew Stevens, December 3, 2009 @ 5:02 pm

    By the way, talking about all this, I understand where the “four-fold” divorce rate figure might come from. If we track lottery winners versus non-lottery winners over a very limited time (say, five years), it might well be the case that lottery winners are four times more likely to get divorced in a small time window.

  • By CalLadyQED, December 3, 2009 @ 5:26 pm

    Frank, my initial reaction to your last paragraph was to think you had it exactly right. But as I started to write a comment saying you’d hit the nail on the head, I realized a another huge, but subtle factor: envy. We may claim that they don’t deserve it because they didn’t work for it, but in reality we are simply upset that we didn’t get it instead.

    This post reminds me of a conversation I had with a classmate back in college (2 yr ago). He said he’d quit school if he won the lottery. I said I wouldn’t. My reasoning was that since lottery winnings aren’t big enough to live off of, I’d have to get a job of some sort, so I might as well finish my last year of school and obtain my degree. While he wasn’t a senior and may have had worthwhile entrepreneurial ideas for the money, I can’t help but wonder how common an idea of not having to work (much) again is among lottery winners. (Note: I’ve never played the lottery, so I don’t know much about it.)

    Mr. Stevens, I’m a student actuary and am by no means an expert in stats, but I wonder if, tracked over several years, # of divorces and # of marriages could be useful data. Perhaps one could examine and compare the data with 5-, 10-, 20-, and 30-year lags.

  • By Andrew Stevens, December 3, 2009 @ 6:42 pm

    Of course number of marriages and number of divorces is useful data if compiled over a number of years. It’s just that comparing marriages that took place in 1995 with divorces that took place in 1995 doesn’t tell us much of anything.

    The problem with trying to figure out the divorce rate is that we can’t know that a marriage didn’t end in divorce until one of the partners is dead. We can know the divorce rates of, for example, all people born before 1900, since they’re all pretty much dead now. (And their divorce rate was far smaller than 50%.) But this doesn’t tell us much about the divorce rate of people born in, say, 1946, since times have changed and their divorce rate will be much higher. Thus, any claim you hear about current divorce rates are extrapolations based on the data we have, not facts.

    Best of luck with your exams, CalLadyQED.

  • By Kosmo @ The Casual Observer, December 3, 2009 @ 10:00 pm

    “My reasoning was that since lottery winnings aren’t big enough to live off of”

    Powerball is currently 40M (a somewhat typical jackpot). Up front cash (as opposed to take the yearly installments) is probably 20ish, 10M after taxes.

    I could live off that :) If you earn 4%, you have 400K per year in income, without touching the principal.

  • By CalLadyQED, December 3, 2009 @ 11:59 pm

    @Kosmo: Like I said, I don’t know much about lotteries. :) However, I thought that there is often more than one winner, like in the Nicholas Cage movie _It Could Happen to You_. So if that $10M is split 5 ways, it’s only $2M. And maybe you only get 2%. Hmmm…that’d be $40k/yr. I guess you caught me not doing the math!

    But you know, I was in my senior year and having a great time. (As a math major!) I still think I would have finished school anyway. :)

    @Andrew Stevens: Thanks, I need it!

  • By Kosmo @ The Casual Observer, December 4, 2009 @ 1:44 am

    @ CalLadyQED: Multiple winning tickets are the exception, rather than the rule (although I don’t have the exact stats on this). The likelihood does increase as the jackpot does, of course – as more people buy tickets when jackpots go very high (100M+). I’m not sure I’ve ever seen a situation with as many as 5 winning tickets. The odds against that would be pretty incredible.

    You might be thinking of situations where a bunch of co-workers pooled money to buy tickets? They win a jackpot and split it 20 ways. This happens fairly frequently. But it’s still just one winning ticket.

    If you’re only getting 2% from your money over the long term, you might want to find a different financial advisor :) Heck, if you’re only getting 2%, you’d be better off taking the annual payments rather than the lump sum.

  • By getagrip, March 5, 2010 @ 3:55 pm

    What I’ve seen is that if someone doesn’t have it together prior to winning the lottery, they’re not likely to get it together after they win either. The pressures come from family, friends, associates, and even strangers who all suddenly look upon the winner as their way to wealth and fully expect the winner to fund their dreams and their desires, becoming unbelievably indignant when the winner hesitates or balks. I think most winners end up moving away, to a new locale, just to escape the pressure of people feeling they have a right to the lottery winnings because the winner didn’t “earn” it.

  • By Boston Steve, April 7, 2010 @ 11:13 am

    The reason there’s not a lot of data on this is that the people running the lotteries don’t want objective information about how bad the lottery is for you. How about the cost of taking this huge amount of money out of our economy and diverting into the lottery system for our politicians to take a cut.

    Also what about the social costs of degenerative gamblers. Maybe our government shouldn’t be in the business of protecting us from ourselves but they shouldn’t be enabling us in our bad behavior.

    And every holiday season we have a news story on some poor sap who was down to his last $ 5.00 and bought a lottery ticket and won big and saved his house, life, marriage, etc.

    How about some statistics about how many poor saps were down to their last $ 5.00 because they spend all their money on the lottery to begin with…..

    One more thought. Some religious types believe that the reason that lottery winners (and in fact all people who get rich easily) lose all their money is that they didn’t earn it, that the money came from someone else’s misfortune and therefore the money is tainted. This is also brought up in the classic financial book The Richest Man in Babylon – Gold flees the man who would force it to impossible earning or who followeth the alluring advice of tricksters and schemers or who trusts it to his own inexperience and romantic desires in investment.

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