Lottery Basics
Many of us have probably heard the phrase that you’re more likely to get struck by
lightning than you are to win the lottery in your lifetime.
And it’s completely true.
The odds of getting hit by lightning in our lifetimes are roughly 1 in 15,300.
This is according to the most recent data from the National Weather Service.
And according to Mega Millions, the odds of winning that jackpot are one in 302.5 MILLION.
But so many people still are lured with the temptation of spending money on lottery tickets
hoping to get that jackpot.
The slim chances of winning the lottery doesn’t stop people from playing.
And it’s hard to blame anyone that plays the lottery.
It’s a serious dopamine hit.
Earliest Lotteries
Lotteries are something that’s deeply ingrained in many cultures.
The first recorded lotteries date back to the Chinese Han Dynasty between 205 and 187
BC.
The proceeds were believed to have helped finance major government projects, such as
the Great Wall of China.
As for the US, King James created a lottery to help establish settlers in the first permanent
English colony in Jamestown, Virginia, way back in 1612.
Even Benjamin Franklin organized a lottery to raise money to purchase cannons for the
defense of Philadelphia!
It really does seem like the lottery is the “fun” version of taxing citizens.
Throughout history, people have continued contributing because drawing a lucky number
is alluring and tempting.
Overall, approximately half of Americans play lotteries.
And among the Americans that play, the average person spends a little over $1,000 a year
on lotto tickets.
But what are some of the unsavory secrets of lotteries?
Target Class
Anyone that needs money dreams of becoming rich.
And the government isn't exactly innocent in feeding people this type of dream.
In fact, one past study done by Duke University showed that ads for lotteries were more actively
advertised in poor communities.
Obviously, while no is forced to buy a ticket, running more advertisements means more awareness,
and that meant more ticket sales.
That study showed that the poorest third of households bought roughly half of all lotto
tickets!
In 2014, lotteries in 43 states generated roughly 70 BILLION dollars on lottery ticket
sales.
What’s most interesting to notice is that the spending wasn't distributed equally through
income levels.
For example, in North Carolina, the data showed that their poorest counties had the highest
lottery sales.
Eighteen out of their 20 counties with a poverty rate that was higher than 20% had spent more
than the statewide average of $200 a year per person.
A 2011 study from the Journal of Gambling Studies showed that poor people are the leading
participants of lottery games in the US.
And these are the exact areas where more ads for lotteries are run by state governments.
Is actively advertising and relying on this demographic for state lottery revenue something
that’s ethical?
A portion of state lottery profits do go to government services to benefit citizens.
But some researchers speculate that this is actually a way to tax people that pay very
little or no tax at all.
The Lottery Tax
Needless to say, lotteries are a great way for the government to bring in revenue.
In 2009, 11 states made more money from their state lotteries than what their corporate
income taxes brought in!
For example, the lottery made more than twice as much as corporate taxes in Rhode Island
that year.
Of course, the vast majority of the money is made up of people that didn’t win the
lottery.
But the irony is, winners of course end up paying a lot of their prize money back to
the government.
How does that even make sense?
Needless to say, jackpots are never as big as they seem.
The advertised amount is what’s paid out as an annuity.
If a winner chooses to take the lump sum, they’ll get only about 60 percent of the
advertised prize.
They’ll end up paying between 39 to a whopping 60 percent of their winnings in taxes depending
on the state and the winner’s social security status.
Education
The lottery has been played up to be a great way to fund a state through a game.
The money spent is supposed to go to public services to benefit citizens, such as in education.
It’s said that most lottery money goes to education.
But does it really?
Lottery money often goes into the general state fund.
And from there, the money can be used for something else.
Let’s go back to North Carolina and use them as an example again.
They started their lottery in 2005 with the intention of giving 100% of its proceeds to
North Carolina’s public education budget.
In fact, they even called it the North Carolina Education Lottery.
But in 2009, North Carolina actually cut its education funding by 12%!
Because the lottery was created, the state now allocates a smaller percentage of its
budget to education than it did when the lottery started.
Other states such as California, Florida and Michigan also have reduced spending on education.
So really, creating a lottery doesn’t actually mean more government money is spent on education.
It had the unintended effect of giving the responsibility of how much money is spent
on education to lottery players.
Scratch Offs
Let’s go ahead and talk about scratch-off tickets.
Did you know that the most popular scratch offs actually have the worst return?
Scratch offs are a HUGE business.
Many people assume that since payouts on scratch off tickets are much smaller, the chances
of winning are better.
But, the fact is, they’re not.
Obviously, it goes without saying, every single lottery ticket has an expected payout that’s
lower than what’s paid.
But, expected payouts vary very differently depending on the game.
The cost to play lottery scratch off tickets can range from one dollar to thirty dollars
per game.
The $1 scratch off ticket seems like the safe pick just because of the low cost.
But the classic recommendation from lottery purists is to go with the highest priced tickets.
These typically have the highest expected rates of return.
For example, New York’s $30 dollar "Win $1 Million a Year for Life" ticket has an
average expected payout of 88 cents per dollar spent.
That means an average loss of about $3.60 per ticket purchase.
Then there’s the "Lucky Tripler", which is only a dollar a ticket.
This has an expected payout of only 59 cents on the dollar.
But it’s not always the case.
New York’s "INSTANT TAKE 5" has a payout of 84 cents per dollar, and this ticket only
costs $1 to buy.
But that’s an exception.
Most of the scratch off tickets from the New York lottery in the $1-$10 dollar range pay
off roughly 61 cents per dollar.
Retail Incentives
We know that a lot of money is made from various lotteries around the country.
But how do retailers benefit as ticket sellers?
Well, lottery sales make up roughly 30 to 40 percent of the revenue for convenience
stores!
For each dollar spent, they earn seven percent.
And because lottery tickets are always so popular, what retailers earn from lottery
tickets adds up a pretty big commission.
According to the North Carolina Education Lottery, their retailers earned $181 million
dollars in commissions in 2018.
Retailers are incentivized to sell more tickets with lottery commissions.
And we can’t forget about the bonus they get when the jackpot is won from them selling
a winning ticket.
A retailer who sells a winning jackpot ticket in North Carolina’s Powerball or Mega Millions
games earns an extra $50,000 dollars!
And a store that sells a scratch-off ticket with a $1 million prize or larger, they get
a $10,000 dollar prize.
But if that wasn’t enough, many store clerks have another way of earning money from the
lottery.
The answer is as simple as telling someone that they didn’t win, when in fact, they
really did.
There have been cases where lottery retailers scam people, and when it happens, most people
believe them.
It’s as simple as the retailer keeping the ticket and cashing in on the winnings themselves.
This is actually a pretty common issue that has led to lotteries employing their own law
enforcement to prevent this type of fraud!
In Michigan, state auditors found 37 store owners turning in winning tickets worth about
$3.6 million dollars in 2012 and 2013.
One retailer in particular collected 107 winning tickets worth around $346,000 dollars in 2013!
Was that fraud?
Maybe, maybe not.
It’s hard to prove.
Lottery officials also find retailers who are cashing in winning tickets for a fee.
They do it for people who don't want to collect their winnings personally.
The reasons why range from owing back taxes, child support payments, or other debts that
states generally just withhold from lottery winnings.
However California is one state that’s cracking down on the corruption.
Authorities have been doing sting operations to protect lottery winners from the scams
that a lot of retailers run.
Financial Troubles
In a 2006 survey by the Consumer Federation of America, they found that a fifth of Americans
believe that winning the lottery is the best way for them to accumulate large savings.
And in a 2019 survey by the investment app Stash, researchers found that about 40 percent
of respondents, including 59 percent of millennials, believe that winning the lottery is a good
way to fund their retirement.
Despite the astronomically low chances of winning the lottery, it’s obviously a giant
misconception for people to actually rely on winning the lottery to fund their futures.
But even if people do win, it’s most likely NOT the golden ticket to a trouble free life.
A whopping 70% of people who win a big lottery actually go broke within a few years.
This is a figure according to the National Endowment for Financial Education.
But wait.
How true is this fact?
Actually, this is a made up statistic that’s lived on the internet for a long time.
In fact, the organization themselves addressed this statistic.
However, what can’t be denied is just the sheer number of lottery winners that have
won millions that HAVE gone broke.
Whether that percentage is high or low, it doesn’t matter.
The truth is that that number can be zero if winners of giant jackpots just don’t
engage in wealth destroying behavior.
However, lottery winners today do seem to be more financially savvy and seem to be much
more educated because of more resources on the internet.
Lottery Happiness
Let’s finally talk about happiness.
Does winning the lottery actually make people happier in the long run?
Does it really change lives for the better?
Well, let’s face it.
Winning the lottery can definitely solve most of our financial problems and therefore, make
us happier, right?
The truth is, having a lot of money simply solves money problems.
But it doesn’t cure people of any underlying issues that they have had.
Jack Whittaker was the famous 2002 Powerball winner.
Despite actually NOT going broke, he’s said before that he wished he had torn his ticket
up.
He felt that the powerball win brought too much publicity and brought out the worst in
people.
In 2009, an article in the International Journal of Psychiatry in Clinical Practice reported
two German patients who were hospitalized for depression after they each won almost
half a million dollars in the lottery.
In a classic 1978 study, the happiness levels of 22 lottery winners were compared with 22
people who didn’t win any money.
Their happiness levels were also studied with the happiness levels of 29 people who were
paralyzed in accidents.
The results?
Researchers found that winning the lottery didn’t increase long-term happiness.
The happiness of lottery winners spiked just after winning, but returned to pre-winning
levels within a few months.
In fact, the lottery winners weren’t significantly happier than the people who didn’t win any
money.
And the most amazing thing?
They found that people that became paralyzed in an accident didn’t have decreased long-term
happiness either!
The study showed that most people have a set level of happiness within.
And no matter even after life-changing events, people still return to that set point.
The truth is, the thrill of winning the lottery eventually wears off.
Here’s what’s next!