An analysis of the role of lottery in a nation’s economic

One thing that surprised me recently is the amount of lottery sellers in Vietnam, which is extremely crowed. It maybe because the number arose due to the impact of the Covid-19, or it has been like that and but it’s me who have not been noticed. What is the role of lottery in the economic wheel? I wonder.

The nature of economic is complicated but not unpredictable. What make the economic so unpredictable is human’s behaviour, optimism vs pessimism, fear vs hope, conservative vs innovative,.. which create a sort of Butterfly Effect. What I am trying to say is the way that lottery affect the economic can be different from a nation to others, and there is hardly an absolute answer for this question. Anyway, here is what I found and thought.

The nature of lottery

Lotteries have a long story, which can be traced back to the Chinese Han Dynasty. These lotteries are believed to have helped to finance major government projects like the Great Wall of China. This phenomenon remains til today, lotteries represent an important source of government revenues in many states and countries.

However, the actual number could be much higher. Due to the fact that 95% of lottery sales come from the South and the form of lottery in the North is lotto, which are formed by smaller organisations and individuals.

So there is an enormous amount of money that government can collect from people to support public programs such as infrastructure development, public safety, public health and education. On the other hand, lottery is often believed to be a “hidden” tax for low income population.

Why?

Because lotteries sell the hope of winning huge sums of money with astronomically high odds against winning. For your information, it extremely low, you are expecting to lose 50% of your money (the lowest winning chance in casino is the slot machine, which are 95-97%). Furthermore, people who do not have much money are more likely to buy tickets with hope of a better life. Therefore, people needing their hard earned money the most are more likely to buy tickets. Raising revenues from those with the least amount of money is a very regressive way to collect taxes on the low income population. This is sad since playing the lottery is on average a massively losing proposition.

One can argue that people know what is the best for them, and that they are better off if government allow them to spend their money on what they value the most. While this argument hold some values, I believe government can encourage or discourage consumer’s attitude toward things by changing taxes, regulations. Even changing the prize structure, the distribution of payouts among different size prizes can affect the demand for tickets as well. But making it harder for consumer to buy lottery also have some negative impacts, which we will discuss in the next part.

Demand of lottery

Why people demand on lottery in the first place?

The answer are the combination of the Availability Bias, which means people are often over estimated their change of winning (This video here explains the phenomenon in a great detail), Unrealistic Optimism. Friedman and Savage (1948) (and subsequently Markowitz (1952)) suggest that the curvature of individuals’ utility functions changes as they get richer (or move away from their “normal” income) providing a theory for why individuals exhibit risky behavior through their participation in lottery markets at the same time that they exhibit risk averse behavior elsewhere.

An example of Unrealistic Optimism:

“I have a small chance to win the grand price”. This must be the line everyone thinking of when they buying a ticket. Although this statement is somewhat true, “a small chance” is ridiculously low.

But clearly they are getting something out of it, otherwise they wouldn’t keep playing right?

The answer here is a bit complicated. For those who have some basic understanding of probability, it would be irrational of participate it in the first place. However, for those who don’t and for those who are influenced by social factors, things get more trickier. After you buy tickets a couple times, your brain used to with the dopamine that is released everything you excited to check the result. Then you are hooked. And it is hard to reset your dopamine level, which explain why people cannot change their behaviour at ease. Also, I believe the Diminishing Marginal Utility also play important role here, which often be used to explain why people are often addict to gambling.

The role of lottery on Economic

Lottery is also known as one of the ‘Tax for the poor’. Ironically, I found it quite accurate. Most First, the cost of lottery, of course have a larger impact on the financial bottom line in comparison with the more wealthier. Secondly, it is a ‘tax’, and every government replies on it. And I believe this is one of the critical reason on why governments allows lottery.

In most countries (Vietnam included), all lotteries are run by state government. And its profits are a significant contributor to government’s finance. Unlike other tax collection, revenue maximization is an explicitly stated goal of lottery organization and in that, participation is voluntary. While the government can spend that money for public welfare, the true cost of lottery are far more complicated.

Rodgers and Stuart (1995) stated that the creation of a new good should raise welfare even if dead-weight loss is created. But is the lottery increase the well-being of the population? In my opinion, NO. It kinda likes selling fail hopes for people who are looking at the wrong place. For many people, gambling maybe just another form of entertainment. But for others it is a very destructive compulsion.

(To be continued)