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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.