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Lotteries - High stakes

2016-01-21 09:32:36

Lotteries pull in punters by making it harder to win

Jan 16th 2016

THE billboards advertising Powerball, an American lottery, were not big enough

to display the size of the jackpot in the draw that took place on the evening

of January 13th: $1.6 billion. That prize will be split among the three

winners, who bought their tickets in California, Florida and Tennessee. For

several days beforehand, Lotto fever gripped the nation: long queues formed

outside shops selling tickets and on the day of the draw sales were ringing up

at a rate of $787,000 per minute. Powerball s website had some advice for its

frantic customers: Swinging a live chicken above your head while wishing for

the future numbers does NOT work.

A more useful bit of counsel would have been that buying a lottery ticket is

fun but financially foolish. A punter buying a Powerball ticket has a 1 in 292m

chance of winning the jackpot. Buyers are around four times more likely to be

killed by an asteroid impact this year. Lotteries are designed to be a bad

deal, hoovering up participants money in order to plug state budgets and fund

good causes.

What s more, the designers are getting better at their jobs. Victor Matheson,

professor of economics at the College of the Holy Cross in Massachusetts,

explains that sales are much more sensitive to the size of the jackpots than to

the likelihood of winning. After a particularly big prize is won, there is a

halo effect, whereby ticket sales remain high even though the jackpot has

reverted to the norm. So lottery designers go to great lengths to boost the

size of the big prize.

One easy trick is to make the jackpot seem bigger than it is. The sums

advertised by Powerball represented the pre-tax value over 29 years of an

annuity that winners can opt to receive. If the winners choose a lump sum

instead, they get just over 60% of that, on which they would have to pay tax of

at least 40%.

Another approach is to boost the jackpot by expanding a lottery s geographic

scope, and thus its potential pool of participants. Powerball and Mega

Millions, the two largest American lotteries, have both taken this tack. By

forging alliances among state lotteries, they are both now available to

residents of 44 of America s 50 states. Similarly, EuroMillions, a lottery that

covers nine European countries, has twice offered a jackpot of 190m ($206m).

Powerball s record-breaking jackpot stems mainly from a riskier strategy,

however. If the chances of winning become so slim that no one guesses the right

combination of numbers, the prize rolls over, growing to a vast sum. Both

Powerball and the British national lottery changed their rules to this effect

in October, by increasing the number of balls in the draw. In Britain the

change slashed the chance of a winning guess from 1 in 14m to 1 in 45m. In

America it fell from 1 in 175m to 1 in 292m.

There is a catch: make it too hard to win a lottery, and punters will lose

interest. So even as lottery designers have been lowering the chances of

winning the jackpot, they have been boosting the chances of winning lesser

prizes, notes David Spiegelhalter of the University of Cambridge.

As larger jackpots draw more customers, the chance that someone will win shoots

up. But so does the chance of multiple winners, which lowers the expected value

of a ticket. In the run-up to this week s draw, Powerball s organisers expected

that roughly 86% of all possible numerical combinations would have been bought,

suggesting sales of some 570m tickets. With that many tickets sold, the chance

of a winner having to share the pot with others (as indeed happened) was around

68%, compared with just 4% for more typical sales of 25m tickets.

Only very rarely have so many players piled in that the expected value of the

jackpot has fallen, and mostly when there are huge jackpots on offer. But the

affliction is set to become more common. Britain s National Lottery enjoyed

unprecedented demand in the run-up to the record 66m ($95m) jackpot won on

January 9th. Sales for the 28 Powerball draws since its rule change in October

(excluding the draw on January 13th) were 134% higher than for the 28 preceding

draws. According to Mr Matheson, the customers who are drawn in by higher

jackpots tend to be richer than the average. So while lotteries may be

snaffling ever more money for an ever smaller chance of striking it rich, at

least the burden is tilting away from the very poorest.