What Goes Wrong With a Lottery?


The casting of lots to determine fates and fortunes has a long record in human history, including several references in the Bible. But lotteries as material enterprises have a much more recent origin, with the first public lottery recorded in the West occurring during the reign of Augustus Caesar for municipal repairs in Rome and the first lottery to distribute prize money held in 1466 in Bruges, Belgium. Throughout modern times, growth in lottery revenues has encouraged expansion into new forms such as keno and video poker, along with greater emphasis on marketing through advertising.

In a world of increasing income inequality and limited social mobility, the lure of big jackpots can be powerful indeed. But the lottery is also a classic example of what economists call “moral hazard,” in which players can be pulled into a risky activity that produces small returns with a large risk-to-reward ratio. This can lead to gambling addiction, which is now the most prevalent form of problem gambling in the United States.

One of the fundamental issues with state-sponsored lotteries is that they encourage people to gamble away the modest earnings that could be invested in a variety of other ways, such as retirement savings or college tuition for children. In addition, lottery proceeds erode state budgets by replacing tax revenue that might otherwise be used for more pressing needs.

The establishment of state lotteries has followed remarkably similar patterns in every state that has adopted them. Once a lottery is in place, debates and criticisms shift to specific features of the lottery’s operations. Some critics allege that lotteries promote false or misleading information about the odds of winning the top prize, inflate the value of money won (most jackpot prizes are paid in installments over 20 years, with inflation and taxes dramatically eroding the current value) and so on.

Whether the prize is $1 billion or $10,000, there are many things that can go wrong with a lottery, especially if it is not well run. The most common mistake is to create a structure that does not produce sufficient profits to cover all the costs of operating and promoting it. In addition, the decision of how to allocate a portion of the pool for prizes can be problematic.

In order for a lottery to work, there must be some mechanism for recording the identities of bettors and the amount they stake. In addition, there must be a system for determining the frequency and size of the prizes, a percentage of which must be set aside to cover costs and to generate revenue for the lottery organizers and sponsors. A percentage of the remaining prize pool must be awarded to winners, with a balance between few very large prizes and many smaller ones. In most cases, the latter option offers a lower winning rate, but it can attract more bettors because they feel that there is always the chance of hitting it big.