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An Argument for Buying Lottery Tickets

by Travis Pantin
Thu, 27 Dec 2007 at 12:21 PM

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Buying a lottery ticket can be an economically rational thing to do, finance blogger Felix Salmon writes on Market Movers. He presents two arguments for why we should feel free to "go out and buy a lottery ticket without feeling guilty."

First, Mr. Salmon points his readers to a 2000 paper by a professor of law at George Mason University, Lloyd Cohen, that "presents a theory of lottery tickets not as misguided inputs into wealth production as some critics believe, but as valuable inputs in creating a sense of open-ended possibility, specifically the possibility of escaping one's current life by acquiring great wealth."

Mr. Salmon writes, "People don't invest the money they spend on lottery tickets. They spend it, and get those transforming fantasies in return."

Mr. Cohen puts it in more economic terms: "In all things economic, there is a diminishing marginal something. In the case of 'belief in possibilities,' the most initially steeply diminishing marginal utility is that of probability. That is, one requires some real finite probability to support a belief in the possibility of escape, and while the more the better, the falloff in gain from additional probability is precipitous. On the other hand, what is indispensable is a scenario that could conceivably be realized that satisfies the conditions of the hoped for fundamental transformation of one's life."

Second, Mr. Salmon writes that buying a lottery ticket can be an economically rational choice because "it can help inoculate people against bad investments."

Mr. Salmon relates a story of a friend of his who doesn't have a lot of money to spare, and yet "loves to dream about becoming rich enough not to have to worry about money." She fantasizes about becoming a millionaire through high-return investments like real estate and stocks.

"Now these high-return investments are, of course high-risk investments," Mr. Salmon writes, "and the risk profile of most normal middle-class people who work for a living doesn't really point towards that kind of risk. My friend, certainly, doesn't have a five-figure sum in risk capital which she can afford to lose."

And so Mr. Salmon writes that it makes sense for his friend to buy a lottery ticket every so often. With the lottery, "your total maximum losses are a tiny fraction of the losses you're risking with investments," he writes. "To be sure, the chances of your actually hitting the jackpot are, to all intents and purposes, zero. But if you think of the lottery as your ticket to possible instant wealth, you can stop thinking about your investments that way. And that will make you a better investor — which in turn means you'll be much better off in the long run."

WHY THE SHOP LOCALLY MOVEMENT IS ECONOMIC NONSENSE
A professor of economics at the University of Western Ontario, John Palmer, writes on his blog that the recent push to "shop locally" is economic nonsense.

He writes that he has heard a number of arguments from politicians, the press, and local shopkeepers "telling us we should shop locally and keep our money in the community. It makes me want to drive to Detroit to shop."

If Mr. Palmer decides to buy from Amazon.com when it's cheaper to do so, "I'd be better off, and I would have some money left over," he writes. However, "if I paid the higher price to the local merchant they'd have the extra money instead of me. But they'd be shipping a bunch of the money outside the community, too, to pay for the merchandise they sold and to buy other things for themselves. I don't see much difference except they'd be richer and I'd be poorer."

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