From time to time I come across a pattern of observed behavior that appears inconsistent with my economist’s model of rational behavior. I look for a way of making sense of it that, contrary to the initial appearance, is consistent with, ideally implied by, my model. If I can’t, I try to find a way to make the behavior consistent with the model by adding an assumption neither implied by nor inconsistent with the model.
I think a simpler explanation is that people like excitement and that scratching a lottery ticket creates some excitement. Thus lotteries are no more mysterious than rollercoasters or scary movies or sports games or whatever. Of course, no one would say that paying for a rollercoaster ride is irrational simply because there is a 100% chance of losing your money.
I know people who buy lottery tickets regularly with a different model behind their decision. They aren't spending money from their credit cards, and they aren't taking cash out at the bank to fund their purchases. If Lottery tickets were more expensive, they wouldn't buy. The purchases comes out of the dregs they have left in their wallets before they visit the cash machine again. If they weren't spending it on tickets, it would go towards another beer when in the pub, or a pastry, or an ice cream. In their minds this 'last little bit' is already spent, already _wasted_ even -- but they are choosing what to waste it on. The lottery ticket, they argue, is the *healthier* choice.
Sort of like how the money one digs out of their couch cushions or under the seats of their car is "free". I can see that, as while I really dislike gambling, back when loose change was a thing I did generally consider whatever was left jangling in my pockets basically zero value extras, even if it was dumped in a jar destined for later agglomeration. Whatever came out of the CoinStar machine when I got it turned into "real money" was just bonus play money. I used it to buy stuff, but if I cared for lotteries (or bars) I would be just as likely to blow it on that as anything, since it was in the windfall category.
The S-shaped utility curve you showed to explain why someone might buy both insurance and lottery tickets does seem arbitrary at first glance. But I think the behavioral-economics people would predict exactly that curve from a general principle about status quo anchoring.
In short, wherever you are right now, your utility curve is fairly flat close to it, and steeper farther away. Or in non-economist language, small (positive or negative) changes from the status quo can be ignored, while larger changes in either direction are worth making decisions about. Which is consistent with common sense.
A variation adds the principle that people are more afraid of losing what they have than interested in gaining what they don’t have — in other words, although the curve is still S-shaped around the status quo, it’s a little steeper to the left. Which would explain why more people buy insurance than lottery tickets.
It also predicts the “coffee mug” experiment: you give half of the study participants a coffee mug, then ask all the participants to put a price on the coffee mugs. If people’s utility for coffee mugs were randomly distributed, you would expect half of the mugs to change hands at the market-clearing price; in practice, almost none of them do, because the people who (randomly) got mugs value them more highly than the people who didn’t.
Simple: the cost of the lottery ticket is in my “flat zone”, trivial, not worth worrying about, while the payoff if I win is well into the “steep zone”. I’m getting something for nothing.
One major reason people buy insurance is because it is required by law or to get financing. Banks require homeowners insurance, and ACA requires health insurance. It is generally illegal to create alternatives to insurance. "Insurance" also means something different now than it once did. Instead of a way to pool risk for rare catastrophic events, insurance is now a funding mechanism for more regular events, such as doctor's visits.
It's odd there aren't more lotteries with, say two winners and one loser.
Sales promotions nowadays may approach this.
Vote for R in hopes lower taxes will cause prosperity to trickle from the rich down to you. If you are comfortable lower taxes might help you personally. Vote D in hopes higher taxes will cause patronage to trickle from bureaucracies to you. If you are politically connected your chances of profitable patronage improve. You get to fantasize about being comfortable or politically connected, as well as fantasizing about an improved economy or a government program that reaches you. Which fantasy is most enjoyable?
There's a Wizenbeak Alexis Gilliland novel where the Wizenbeak wins a battle and gains a captured army and some land. The prisoners are honest enough that if they swear fealty, he can trust them to fight, but they'd rather farm. He has enough land to give two thirds (from memory) of them farms. So he offers a lottery- everyone who takes a ticket swears fealty. Two thirds get farms. The other third join his army.
Insurance and lottery are in my view two very different things.
The insurance is protecting You against an event, that will be fatal for Your economy. Often you cannot borrow money for a house or a car, without insuring the item. And even if You have paid out the loan, the house may represent a large saving for Your retirement! Also the health insurance protects Your ability to work and earn money to provide for Your self!
It is not just uncertainty that an insurance protects against, it is loss of important life functions!
Can't people fantasize about an unexpected windfall with a connection to reality for free? If lotteries haven't been replaced by novels about unexpected inheritances, or discovery of an unlikely talent, perhaps that is not why people engage with them.
If you have a rich uncle you can fantasize about his dying and leaving the money to you, but I think a real world connection makes the fantasy work better than an entirely fictional connection.
There are some popular Victorian era novels about relatives someone didn't know they had dying and leaving things to them. It's also a common scam, indicating some must find the fantasy realistic. Of course, if we're both struggling to come up with concrete windfall fantasies, maybe it's that the lottery has much better marketing.
It is my practice, when I want to fantasize about wealth, to imagine having a fortune equal to the U.S. national debt (of late, the scale of my fantasies has had trouble keeping up!). But I never buy lottery tickets and in fact have returned the ones I was given by an employer.
I'm not sure that's the issue. It's hard to test empirically, though. How much are lottery tickets sold for, anyway? A dollar? Five dollars? My mental model is that they cost a dollar, and California, where I lived then, stated that they paid out 50% of the proceeds of the lottery as winnings. So a lottery ticket had an expected value of negative fifty cents if I bought it, or positive fifty cents if it was a gift. I don't have the impression that more expensive lottery tickets were being sold, and certainly they weren't being given away.
There's an old joke that says the lottery is a tax on lack of mathematical understanding. Taking part in it would be acting in the role of someone who doesn't understand mathematics. That's not a role I care to assume. I don't even want to take the ticket and check whether it's a winning ticket, because that would involve me in the whole social milieu of gambling.
My wife and I went to Las Vegas once, when I was a good friend's best man, and stayed in a hotel there. We visited a hotel that had a Star Trek exhibit, but I placed no bets on anything during the time we were there, not even in an inexpensive slot machine.
I remember a quip by Neil deGrasse Tyson on a roe jogan podcast that the lotteries are conspiring with the public school system to keep statistics out of the common core. It is honestly weird to me that economics and statistics arent required classes in HS.
Part of the story is that people are loss averse. We have a notion of a baseline environment we exist in, and we act very differently about the prospect of going below versus above that baseline.
Having a mental baseline is a both cognitive trick and a survival strategy. It's cognitive, in that we save resources by not considering the possibility that we lose our home, our health, or other big things. We get insurance for those and then put it out of mind. It's a survival strategy in that we work very urgently on having a baseline existence where we are comfortable and reproductive.
For things above the baseline, it's all good, and we don't risk cognitive resources nor survival of our genes. Lottery tickets operate in this realm.
There's a similar phenomenon in business where people work very hard to be adequate and then stop. If you're contracting, then you generally do what was asked for and will work very hard to avoid contingencies where you don't deliver; you are much less aggressive about going above the agreed amount, however. If you're an employee, you work very hard to meet the specific things your boss and stakeholders expect; it's disastrous to be below expectations and merely a nice-to-have if you go above.
There could, of course, also be factors at play that have yet to be discovered by mankind. Subtle influences on the brain stemming from unknown and so far undetected vira, chemicals, external psychological influences not yet identified, temporary magnetic fields, etc, etc. These could also explain apparently irrational behaviour. Or part thereof.
It's possible that people can't perceive very low probabilities. At a certain level people think in terms of "can happen," and "can't happen." If that is true lottery tickets need no explanation, because they "feel" like a positive expected value once the unlikely-but-possible perception saturates at, "probably not (1%)." Most people who don't play the lottery don't have a superhuman ability to perceive micro-risks, they just round it down to 0%, instead of 1%, using rules like "it's bad to gamble," or "I won't win the lottery."
In comparison, once you sum up all the accidents an insurance policy will cover, the odds that you will make a claim rise into the region where people can perceive them sensibly. If there was such a thing as home insurance for that one pipe in your attic which could leak and damage the drywall, you might find that people have a similar degree of difficulty figuring out if they want it in lieu of calculations.
I think that is largely true, and also helps to understand why humans are so susceptible to framing issues, e.g. the difference between "this surgery has a 90% survivability rate" and "10% of patients die during this surgery". 90% registers as "always happens" while 10% registers as "unlikely, but one in ten is still scary".
If this theory is true, it seems to be selectively true. I know plenty of people who will cross the street to buy a Powerball ticket. Their chance of winning the big jackpot is somewhere in the range of 1 in 200 million. Getting killed crossing the street is 1 in 20 million.
A relevant data point is that most lottery winners end up blowing all their winnings within a couple of years and end up poorer than they were before.
I think a simpler explanation is that people like excitement and that scratching a lottery ticket creates some excitement. Thus lotteries are no more mysterious than rollercoasters or scary movies or sports games or whatever. Of course, no one would say that paying for a rollercoaster ride is irrational simply because there is a 100% chance of losing your money.
Fair point. It fits people playing slot machines pretty well.
I know people who buy lottery tickets regularly with a different model behind their decision. They aren't spending money from their credit cards, and they aren't taking cash out at the bank to fund their purchases. If Lottery tickets were more expensive, they wouldn't buy. The purchases comes out of the dregs they have left in their wallets before they visit the cash machine again. If they weren't spending it on tickets, it would go towards another beer when in the pub, or a pastry, or an ice cream. In their minds this 'last little bit' is already spent, already _wasted_ even -- but they are choosing what to waste it on. The lottery ticket, they argue, is the *healthier* choice.
Sort of like how the money one digs out of their couch cushions or under the seats of their car is "free". I can see that, as while I really dislike gambling, back when loose change was a thing I did generally consider whatever was left jangling in my pockets basically zero value extras, even if it was dumped in a jar destined for later agglomeration. Whatever came out of the CoinStar machine when I got it turned into "real money" was just bonus play money. I used it to buy stuff, but if I cared for lotteries (or bars) I would be just as likely to blow it on that as anything, since it was in the windfall category.
The S-shaped utility curve you showed to explain why someone might buy both insurance and lottery tickets does seem arbitrary at first glance. But I think the behavioral-economics people would predict exactly that curve from a general principle about status quo anchoring.
In short, wherever you are right now, your utility curve is fairly flat close to it, and steeper farther away. Or in non-economist language, small (positive or negative) changes from the status quo can be ignored, while larger changes in either direction are worth making decisions about. Which is consistent with common sense.
A variation adds the principle that people are more afraid of losing what they have than interested in gaining what they don’t have — in other words, although the curve is still S-shaped around the status quo, it’s a little steeper to the left. Which would explain why more people buy insurance than lottery tickets.
It also predicts the “coffee mug” experiment: you give half of the study participants a coffee mug, then ask all the participants to put a price on the coffee mugs. If people’s utility for coffee mugs were randomly distributed, you would expect half of the mugs to change hands at the market-clearing price; in practice, almost none of them do, because the people who (randomly) got mugs value them more highly than the people who didn’t.
I don't see how you get from "worth making decisions about" to deciding to buy a lottery ticket.
Simple: the cost of the lottery ticket is in my “flat zone”, trivial, not worth worrying about, while the payoff if I win is well into the “steep zone”. I’m getting something for nothing.
One major reason people buy insurance is because it is required by law or to get financing. Banks require homeowners insurance, and ACA requires health insurance. It is generally illegal to create alternatives to insurance. "Insurance" also means something different now than it once did. Instead of a way to pool risk for rare catastrophic events, insurance is now a funding mechanism for more regular events, such as doctor's visits.
Yes. But that isn't the kind of insurance I am talking about. Lots of people buy real insurance that they don't have to buy.
I don't know for certain that the same people buy that and lottery tickets but my guess is that some do.
It's odd there aren't more lotteries with, say two winners and one loser.
Sales promotions nowadays may approach this.
Vote for R in hopes lower taxes will cause prosperity to trickle from the rich down to you. If you are comfortable lower taxes might help you personally. Vote D in hopes higher taxes will cause patronage to trickle from bureaucracies to you. If you are politically connected your chances of profitable patronage improve. You get to fantasize about being comfortable or politically connected, as well as fantasizing about an improved economy or a government program that reaches you. Which fantasy is most enjoyable?
There's a Wizenbeak Alexis Gilliland novel where the Wizenbeak wins a battle and gains a captured army and some land. The prisoners are honest enough that if they swear fealty, he can trust them to fight, but they'd rather farm. He has enough land to give two thirds (from memory) of them farms. So he offers a lottery- everyone who takes a ticket swears fealty. Two thirds get farms. The other third join his army.
Insurance and lottery are in my view two very different things.
The insurance is protecting You against an event, that will be fatal for Your economy. Often you cannot borrow money for a house or a car, without insuring the item. And even if You have paid out the loan, the house may represent a large saving for Your retirement! Also the health insurance protects Your ability to work and earn money to provide for Your self!
It is not just uncertainty that an insurance protects against, it is loss of important life functions!
Can't people fantasize about an unexpected windfall with a connection to reality for free? If lotteries haven't been replaced by novels about unexpected inheritances, or discovery of an unlikely talent, perhaps that is not why people engage with them.
If you have a rich uncle you can fantasize about his dying and leaving the money to you, but I think a real world connection makes the fantasy work better than an entirely fictional connection.
There are some popular Victorian era novels about relatives someone didn't know they had dying and leaving things to them. It's also a common scam, indicating some must find the fantasy realistic. Of course, if we're both struggling to come up with concrete windfall fantasies, maybe it's that the lottery has much better marketing.
It is my practice, when I want to fantasize about wealth, to imagine having a fortune equal to the U.S. national debt (of late, the scale of my fantasies has had trouble keeping up!). But I never buy lottery tickets and in fact have returned the ones I was given by an employer.
Obviously the payout isn't big enough for you.
I'm not sure that's the issue. It's hard to test empirically, though. How much are lottery tickets sold for, anyway? A dollar? Five dollars? My mental model is that they cost a dollar, and California, where I lived then, stated that they paid out 50% of the proceeds of the lottery as winnings. So a lottery ticket had an expected value of negative fifty cents if I bought it, or positive fifty cents if it was a gift. I don't have the impression that more expensive lottery tickets were being sold, and certainly they weren't being given away.
There's an old joke that says the lottery is a tax on lack of mathematical understanding. Taking part in it would be acting in the role of someone who doesn't understand mathematics. That's not a role I care to assume. I don't even want to take the ticket and check whether it's a winning ticket, because that would involve me in the whole social milieu of gambling.
My wife and I went to Las Vegas once, when I was a good friend's best man, and stayed in a hotel there. We visited a hotel that had a Star Trek exhibit, but I placed no bets on anything during the time we were there, not even in an inexpensive slot machine.
> Probabilistic calculations are hard. Easier to classify all outcomes as certain, possible, or impossible.
I buy the lottery tickets because my understanding is that there’s a 50-50 chance. You either win or you don’t.
I remember a quip by Neil deGrasse Tyson on a roe jogan podcast that the lotteries are conspiring with the public school system to keep statistics out of the common core. It is honestly weird to me that economics and statistics arent required classes in HS.
Part of the story is that people are loss averse. We have a notion of a baseline environment we exist in, and we act very differently about the prospect of going below versus above that baseline.
Having a mental baseline is a both cognitive trick and a survival strategy. It's cognitive, in that we save resources by not considering the possibility that we lose our home, our health, or other big things. We get insurance for those and then put it out of mind. It's a survival strategy in that we work very urgently on having a baseline existence where we are comfortable and reproductive.
For things above the baseline, it's all good, and we don't risk cognitive resources nor survival of our genes. Lottery tickets operate in this realm.
There's a similar phenomenon in business where people work very hard to be adequate and then stop. If you're contracting, then you generally do what was asked for and will work very hard to avoid contingencies where you don't deliver; you are much less aggressive about going above the agreed amount, however. If you're an employee, you work very hard to meet the specific things your boss and stakeholders expect; it's disastrous to be below expectations and merely a nice-to-have if you go above.
There could, of course, also be factors at play that have yet to be discovered by mankind. Subtle influences on the brain stemming from unknown and so far undetected vira, chemicals, external psychological influences not yet identified, temporary magnetic fields, etc, etc. These could also explain apparently irrational behaviour. Or part thereof.
It’s been a few years, but I think Anthony deJasay had an extremely similar explanation of lotteries, etc.
It's possible that people can't perceive very low probabilities. At a certain level people think in terms of "can happen," and "can't happen." If that is true lottery tickets need no explanation, because they "feel" like a positive expected value once the unlikely-but-possible perception saturates at, "probably not (1%)." Most people who don't play the lottery don't have a superhuman ability to perceive micro-risks, they just round it down to 0%, instead of 1%, using rules like "it's bad to gamble," or "I won't win the lottery."
In comparison, once you sum up all the accidents an insurance policy will cover, the odds that you will make a claim rise into the region where people can perceive them sensibly. If there was such a thing as home insurance for that one pipe in your attic which could leak and damage the drywall, you might find that people have a similar degree of difficulty figuring out if they want it in lieu of calculations.
I think that is largely true, and also helps to understand why humans are so susceptible to framing issues, e.g. the difference between "this surgery has a 90% survivability rate" and "10% of patients die during this surgery". 90% registers as "always happens" while 10% registers as "unlikely, but one in ten is still scary".
If this theory is true, it seems to be selectively true. I know plenty of people who will cross the street to buy a Powerball ticket. Their chance of winning the big jackpot is somewhere in the range of 1 in 200 million. Getting killed crossing the street is 1 in 20 million.
If you can't perceive something but are forced to make a decision based on it, you are as likely as anything to choose randomly.
The success of the 'you cannot win if you don't play' campaign of I forget which lottery company, supports this idea.