Raising Money Through the Lottery


Amid the tidal wave of publicity about the sleazy practices of lotteries, one thing has been overlooked: that the lottery is a very poor way to raise money for public purposes. It’s a classic case of the law of diminishing returns. When the prize pool grows larger, it becomes harder and more expensive to fill it. Eventually, the prize is no longer worth the effort of organizing and marketing the lottery, and it’s all but impossible to attract enough players to make the pool viable.

The story begins in the fourteen-hundreds, when the practice was first introduced to Europe from the Low Countries. People began holding public lotteries to raise funds for town fortifications and, later, to provide charity to the poor. A record from Bruges in 1445 lists ticket prices of ten shillings, a price that would be prohibitive to all but the wealthiest.

By the seventeen-hundreds, America had begun to adopt this method of raising money, and it played a crucial role in funding everything from civil defense to construction of churches. The founding fathers were big into it, and in 1748 Benjamin Franklin ran a lottery to fund a militia for defense against marauding French forces. John Hancock ran a lottery to help build Boston’s Faneuil Hall, and George Washington sponsored one to raise money for a road over a mountain pass in Virginia.

Today, lottery proceeds are used for everything from cancer research to water and sewer systems, with the largest portion going to education and to help the needy. But lottery money is also the subject of a great deal of criticism, particularly from those who think that it encourages bad habits and contributes to inequality. It’s true that lottery winners are poorer than the general population, and people making more than fifty thousand dollars a year spend an average of one per cent of their income on tickets; those who earn less than thirty-thousand do so at thirteen per cent of their income.

In addition, the economics of lotteries are complex. The prize is the sum of all the tickets sold, but costs for organizing and promoting the event must be deducted, as must a profit for the state or sponsor. The remaining sum is available to the winner, and it’s possible that smaller prizes will draw more interest from potential bettors than large ones, although it’s also true that there is no guarantee of winning.

The real issue, Cohen suggests, is that lottery critics have not fully understood how much the odds of winning are a factor in player behavior. They argue that the lottery is a “tax on the stupid,” but they overlook that the smart people are just as likely to play as the dumb. They also fail to realize that the lottery is a classic example of a piecemeal policy, with no overall view, and little pressure from voters or lawmakers.