A Tax on People Who Can’t Do Math

I’m still on hiatus (and still unemployed) but I spent some of what was a glorious holiday weekend in New England indoors, surfing the web and reminding myself why I started Bad Money Advice.Lottery Tickets Crop

WalletPop had a post that caught my eye. Poor people spend 9% of income on lottery tickets; here’s why.  It discusses a theory about why “poor households, with annual take-home incomes under $13,000, on average, spend $645 a year on lottery tickets, which comes to about 9% of their yearly income.”

I am not going to express an opinion on the theory, because I didn’t have the patience to read the whole post. I couldn’t get past the first paragraph. 645 divided by 13,000 is 4.96%. That confused me until I realized the statistic refers to households with incomes of at most $13,000, and not an average of $13,000. It was that phrase “which comes to” that threw me off.

Still, I’m not completely satisfied. Why $13,000? The Census has easy-to-find data on households making under $15,000, a group that accounted for 8% of all American households, and a smaller proportion of total population. (About two thirds of those households consist of only one person. I will speculate that a non-trivial portion are college students.)

It is a reasonably rough guess that under $13,000 is the bottom 5% of households. That is not exactly mainstream America. To put it in perspective, the top 5% of household income starts at $177,000 per annum. So under $13,000 is more than a little poor. And yet, those households actually spend more in absolute terms on lotteries, on average, than households in the richer 95%? (The overall household average is around $514.)

Not being one to overestimate the rationality of the American consumer, I am not about to dismiss the 9% of income figure out of hand. But it is, at the very least, awfully peculiar and the sort of statistic that, if not literally false, is likely to be substantially misleading.

The thing about looking at the very bottom rung of income level is that it includes quite a few people for whom their current income is not indicative of their true economic status: students, the unemployed, retirees, etc. These are people who typically spend more, sometimes a lot more, than they make. So measuring any type of expenditure relative to their income will tend to give you surprisingly large numbers.

That said, let’s track down the 9% number. The WalletPop post refers to a recent item at The Consumerist, one of their quickie posts that slap a few sentences around a paragraph quoted from elsewhere on the web. Their tiny bit of original content tells us that “A recent study found that poor folks – households earning under $13,000 per year – spend about 9% of all their income on lottery tickets.”

The blog post The Consumerist links to, at The Frontal Cortex, starts with the line “Here’s an old post from July 08.” So I guess recent is a relative term.

That post’s author, Jonah Lehrer, a contributing editor at Wired and author of, among other books, Proust Was a Neuroscientist, does indeed give the $13,000/$645/9% tidbit. He implies, possibly inadvertently, that it is from what was back then a recently published paper by three academics on why poor people buy lottery tickets.

It is an interesting paper, although it is not, in fact, about what WalletPop, The Consumerist, or Mr. Lehrer would lead you to believe. It makes the case that poor folks are more likely to play the lottery because they feel poor relative to other members of society, rather than because of some absolute effect of poverty.

It is possible that I just did not read the paper carefully enough, but I could not find the 9% statistic. On the other hand, I did find, in the very first paragraph of the introduction, a reference to another statistic that “households with an income of less than $10 000 spend, on average, approximately 3% of their income on the lottery.”

Given how directly contradictory that statistic is to the one cited by Lehrer in his post, I am going to assume that he did not read the first paragraph of the paper he was writing about. Indeed, I will then go out on a limb and speculate that if he did not read the first paragraph he likely skipped the whole thing. (Other than the abstract, which he quotes and links to.)

So here is what happened. Lehrer sees an interesting abstract of a new paper. He uses it as inspiration for a short riff on how lotteries don’t just appeal to poor folks, they help keep them poor. (Oh so clever! No wonder he has a job and I don’t.) Along the way he tosses out the 9% statistic.

So proud is Lehrer of this post that he re-runs it two years later, when it is noticed by The Consumerist, which knows a buried lead when they see one. Ignoring the fact that the post is actually a bit stale, and reasonably assuming that the academic paper Lehrer refers to must be the source for the statistic, they run a post with 9% of income on lottery tickets as the headline. They do not, evidently, bother to find and read the paper itself.

Which brings us back to WalletPop, where author Geoff Williams spends Memorial Day Weekend explaining to readers why it is that poor people spend 9% of their income on the lottery. He knows that they do because The Consumerist, arguably the #1 personal finance blog on the planet, says so.

This is where urban legends come from.

And from where, after all, did the 9% actually originate? This interview at Time.com (from 2009) mentions it and cites a study by something called the Commission on Thrift. I found their website. It seems to be a project of the Templeton Center for Thrift and Generosity at the Institute for American Values. (And from the Institute for American Values website, I learn it is a think tank concerned with the importance of marriage as an institution and the war on Islamic terror, as well as thrift.)

The sole output of the Commission on Thrift appears to be a report called “For A New Thrift: Confronting the Debt Culture.” The 9% is probably in there somewhere, but to find out I would have to order the book, and it costs $7. That wouldn’t be very thrifty of me, now would it?