Tuesday, May 11, 2010

Legal Thievery

The devious slogan for the New York State lottery is "All you need is a dollar and a dream." Such state lotteries are a regressive form of taxation, since the vast majority of lottery consumers are low-income. The statistics are bleak: Twenty percent of Americans are frequent players, spending about $60 billion a year. The spending is also starkly regressive, with lower income households being much more likely to play. A household with income under $13,000 spends, on average, $645 a year on lottery tickets, or about 9 percent of all income.

A new study by Emily Haisley, Romel Mostafa and George Loewenstein explored some of the reasons why low-income people spend so much money on a product that only returns fifty three cents on the dollar. (Lotteries are such a bad deal that they make slot machines look good.) Here's the abstract:

In two experiments conducted with low-income participants, we examine how implicit comparisons with other income classes increase low-income individuals' desire to play the lottery. In Experiment 1, participants were more likely to purchase lottery tickets when they were primed to perceive that their own income was low relative to an implicit standard. In Experiment 2, participants purchased more tickets when they considered situations in which rich people or poor people receive advantages, implicitly highlighting the fact that everyone has an equal chance of winning the lottery.

The study neatly illuminates the sad positive feedback loop of lotteries. The games naturally appeal to poor people, which causes them to spend disproportionate amounts of their income on lotteries, which helps keep them poor, which keeps them buying tickets. The saddest part is that these destructive games are run by the government.