There is an old saying that buying lottery tickets is a “tax on the stupid”, and although it may be technically correct, I am here to offer you an alternative perspective.
The modern lottery system evolved in the 1960s as a means for governments to raise revenue, without raising taxes, for public projects such as schools, hospitals and community centres. In essence, lotteries pool monies from the general population and reinvest them back into the economy strategically and with purpose. Like any business, there are different margins on the products the lottery sells. Modern gaming corporations charge a percentage of all gaming revenue generated at casinos, sports betting, lotteries, and scratch cards. The Ontario Gaming Corporation generated $147 for every citizen in Ontario during 2015. For interest’s sake, Nevada generated about $3,010 per person. If it wasn’t for gaming, the government would likely have to cut services elsewhere or raise taxes.
By its nature, an average person who engages in the lottery loses money, as every $1 purchase of lottery tickets will recover only $0.15. However, there is another way of looking at this equation. By way of living our everyday lives, we expose ourselves to events with unknown outcomes. These outcomes can be categorized on a scale from positive to negative, with the middle point being neutral or uneventful. When placing these events on a distribution table, we would expect the following:
This scale has both negative and positive extremes. The extreme outcomes are called ‘tail events’ because they occur at the tail end of the distribution, and are very rare as highlighted by their lower frequency. These rare events are often occurrences that are out of our control, such as acts of nature, illness or accidents. This phenomenon has birthed the insurance industry, which attempts to quantify these risks using predictive analytics to price insurance against your home, car, or state of health. In exchange for a monetary premium, by obtaining insurance we effectively “transfer” the risk. Similarly to the lottery ticket example above, the expected value of purchasing insurance is negative; otherwise insurance companies would be out of business. It is important to remember that there are many risky outcomes that the insurance industry hasn’t yet priced. Thus, individuals continue to bear the risk of these events.
In absence of a marketplace where that risk can be transferred, it can theoratically be offset with an equally rare positive outcome. Some of the many ways to fatten your right-tail outcomes include spontaneous interactions, reinforcing friendships, exposure to new environments (such as traveling) and on the far right-end, buying lottery tickets. Apart from allowing our imagination to fantasize about large jackpots, the reason I personally invest in lottery-like outcomes is to expose myself to infrequent, but extremely positive outcomes. It is important to note that with the right financial advice, Northland’s financial planning expertise can ensure that winning the lottery could in fact be categorized as a positive outcome.