Why Lotteries are Bad – The Third Reason

[Today’s Thursday re-run first ran on November 30, 2009.]

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 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.

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