Lottery Profits and Expected Value Maximization

The modern state lottery was introduced in New Hampshire in 1964. State governments quickly came to rely on lottery revenues, which provide an alternative to taxes on gambling and other forms of entertainment. This has created a classic problem with public policy: the initial decisions about introducing a lottery are relatively straightforward, but the ongoing evolution of a lottery’s operations creates extensive and fragmented constituencies that exert pressure on officials to increase revenues.

Lottery profits are used for a variety of purposes, including prizes, administrative costs, and vendor payments. The amount of the prize money varies by state. Some of the money is paid out in lump sum, while others are distributed as an annuity over a number of years. A portion of the winnings may be subject to income tax, depending on where the winner resides.

People buy tickets for the lottery because they want to win, but not just any money. They want the thrill and fantasy of wealth, and if these non-monetary rewards are incorporated into their expected utility, then ticket purchases can be rational according to the principles of expected value maximization.

However, many of the psychological and behavioral factors that lead people to purchase lottery tickets are not accounted for by this model. For example, people are willing to pay a large percentage of their income for the chance to become wealthy, even though the likelihood of winning is quite low. This is likely due to the fact that lottery advertising promotes a message of instant wealth, which appeals to our desire for prestige and wealth.