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January 23, 2006

Lotteries as regressive taxes

Abbas has an interesting post at 3Quarks about the ethics of gambling.

Abbas argues that is gambling is morally problematic because it exploits near-universal human weaknesses in probabilistic reasoning. He thinks its bad enough when private businesses sponsor gaming for consenting adult customers. State-sponsored gambling he thinks is really beyond the pale.

State lotteries are often justified on the grounds that they raise money for social programs, especially those that target the neediest members of society. However, the poorest members of society tend to spend (and, by design lose) the most on lottery tickets. Some state lottery proceeds fund programs that benefit everyone, not just the poor. Often state lottery money is being systematically redistributed upwards--from lotto players to suburban schools, for example.

I'm ambivalent about state lotteries (and I don't know enough about the economics of state-sponsored casinos to have an opinion on those). I agree that state lotteries are unseemly for the reasons that Abbas points out. On the other hand, maybe the fun of playing the lottery combined with the revenue for social programs justifies their existence on the whole.

I know, lotteries exploit human weakness. Admittedly, I'm somewhat hostile towards people who buy lottery tickets. Or at least towards people who buy lots of lottery tickets. I can sort of see the entertainment value of an occasional Mega Millions ticket. But playing the lottery heavily is just stupid. I'm not saying that these feelings are morally or rationally justified. Really, I shouldn't care what consenting adults do with their pocket money.

I've always subscribed to the maxim that a lottery is a tax on idiocy. If people think it's fun to give their money to the government, I don't know why they should be stopped. People aren't going to stop gambling if the State gets out of the business. They'll just spend their money in the underground economy, or through private gambling establishments that will pay back a much smaller percentage of that money in taxes. I realize that this argument might be motivated by my aforementioned morally indefensible feelings of hostility, so feel free to discount it accordingly.

On the whole, I tend to think that the ethics of a State lottery depend entirely on the empirical details of the lottery in question.

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Majikthise has written a musing on state lotteries, and their exploitation of those who need their pocket money the most. At one point, she mentions the lottery system as being a tax on idiocy. On this, I have been musing. Now, truly, ... [Read More]

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Government should not be in the business of exploiting the cognitive deficiencies of its citizens for monetary gain. Right? But state lotteries do just that, as Abbas at 3 Quarks Daily argues... [Read More]

Comments

I should say that the capacity to enjoy playing the lottery is predicated on magical thinking. If you were rational, you wouldn't enjoy it.

Well, I think that for the world to work, a certain fraction of the population should engage in magical thinking. It is not optimal for everyone to be as rational as you.

Let me give a simplified scenario.

There is a village that is extremely poor. The villagers make $10/week. It is possible to survive on $9/week if you fast for one day a week, but it isn't pleasant to do so, and people rarely do. Now a stranger comes to town and offers to let the villagers pay $1 for a chance to win $1 million. (For definiteness, let's assume that the expected value of the game is slightly less than $1; there is slightly less than 1 in a million chance of winning the prize money.)

Now, the rational thing to do is to say that since the expected value is less than the cost, it doesn't make any sense to gamble. However, what if (as far as the villagers know) that is the only chance to improve their lot in life? Why is it wrong to take the chance?

Imagine thousands of similar villages, scattered throughout the world. Each village is offered the same deal. Some of the villages will be prudent, and not succumb to the temptation to gamble. Those villages will remain at their $10/week subsistence level forever. (I'm simplifying here by assuming that there are no other opportunities for them to invest in a better life---that might not be realistic, but it's my thought experiment.) Other villages will succumb to the temptation to gamble, and in most of these villages, the villagers will be more miserable than ever. But in a few of the villages, somebody will strike it rich. Those villages will have the opportunity to live much better lives, to have some leisure time, to study science, to invent things, etc., etc.

In such a scenario, would it really be better if everybody were stuck at $10/week forever? I don't think so.

Now, I know that realistically, there may be ways for a village to pull themselves out of poverty that doesn't involve gambling. But that's a contingent fact, not a necessary fact. So the judgement as to whether taking a gamble is "irrational" or not cannot be made without actually knowing what the options are. But if knowing about options is essential, then it's ignorance at work, not irrationality.

I actually think that evolution is something like the scenario I gave. Mutations are like the game of chance that the organism plays (not they get to choose whether to play or not). Although most mutations are neutral or harmful, every once in a while, perhaps one out of a billion times, the mutation is slightly advantageous. Would it be better if there were no mutations, since the odds are strongly against mutations being beneficial?

What you're stating seems like the obviously sensible general strategy. What I'm having trouble recognizing is how you reconcile the idea that it shouldn't have exceptions with your statement, earlier, that you agree that lapses of the lottery magical thinking type are often well-compartmentalized.

I'm thinking of two hypothetical people. A follows your strategy exactly with no exceptions. B follows your strategy exactly except for once a week, when she allows herself to buy a lottery ticket by the terms of the psychological model I suggested - exploiting out-of-proportion excitement for entertainment purposes.

It seems like hypothetical person A is having a more fulfilling life, because she's living exactly the same life, but with an extra nugget or two of personal pleasure. It seems to me that the appropriate model is this:

It is wise to eliminate 'irrational' fears.

It is wise to eliminate 'irrational' attractions when the damage caused by pursuing the object or activity pursued outweighs the pleasure of the act or experience of wanting in the first place.

It is not wise to eliminate 'irrational' attractions when the cost of pursuing the attraction is less than the pleasure of the act or experience of pursuing it.

If the zone in which attraction/excitement are out of synch can be compartmentalized so as to only reach low-cost activities like buying losing lottery tickets, I just don't understand why one would want to wipe that feature out for the sake of a global strategy for global strategy's sake. So if there should be no exceptions, it must have something to do with us not trusting ourselves to make them. But, at least as far as the lottery goes, it seems to me that many people have identified the safezone and compartmentalized quite well.

And that probably just about exhausts my insight on the subject. I'll think harder to see if I can better understand why your strategy might be superior.

Today is typo day for me. B is having a more fulfilling life, not A.

Okay, jumping the shark:

On 9/11 (groan), the thing that made me most cry was the brilliant, blinding, irrational hope of all those who jumped.

To me, lottery tickets are jumping. At some point in most people's lives, they have the very clear idea of where they're destined to end up. You can crisp, or you can try to learn to fly.

Is it rational? Not particularly. Is it idiotic? Absolutely not. To me, it's beautiful. I wouldn't stay in the burning building. I'd jump. I'd hope for deus ex machina, and I'd know I was going to die, but I'd jump.

It's the small purchase of control. A small possibility of changing your destiny.

I would agree with you, Lindsay, if there were NO chance. But there's not no chance. There's an infintesamal chance. In a life with literally no other choices, the lottery is absolutely rational.

Arwen, the 9/11 jumpers really touched me, too. It's interesting how we interpret these kinds of incidents. I read their behavior as a triumph of rationality and self-posession. If I were stranded in a burning building, I hope I'd jump because it would hurt less to die by hitting the pavement than it would to burn to death. My fear is that I'd end up waiting too long and burning to death because I couldn't steel myself to make the rational choice in time.

I think it's worth cultivating the disposition towards matching emotions and judgments. So, there's no normative imperative to be 100% perfect. Obviously, you can cheat a certain percentage of the time and still be generally self-posessed, but happier for having broken the rules. However, as George Ainslie argues in "Breakdown of the Will", it's always a little bit risky to cheat because you're may also be undermining your faith in your own ability to exercise self-discipline. So, a rational person who values their own rationality will think long and hard before they allow themselves to deviate from their overall self-management program.

I would agree with that. It's always good to be careful about deviating from the safer norm.

It's interesting to see what a Rorschach test the WTC jumpers were. Neither hope nor rationality even occurred to me. All I could think about was how quickly every fact of a person's life and identity could be erased and replaced with overriding, abject horror, followed by death.

I just want to first re-iterate and cop to the fact that the 9/11 comparison was based on some large amount of emotion: it's a huge rhetorical flourish, and I'm not conflating the two. And you're right, Eli, there's definitely a Rorschach quality to the whole event.

I'm not sure I disagree with your beautiful brain, Lindsay: but it's a beautiful brain. Manufacturing hope out of hopelessness when you've got less of a beautiful brain to work with lets people go on living. I don't think they're idiots, though - just folks with a little less on the left brain and a little more on the emotions. Dunno if most people buying the lottery are rigorously applying logic to their desires. For some of them, that might be quite dismal. If they were quite so logical, they may very well be able to become less poor - even if it were through means less than traditional.

Just because a 60 year old checkout woman would like to take a fling at the possibility she might someday go to France doesn't make her an idiot. There's no other cost-benefit option she's got, no ROI other than lotto that she can make to get there. And she will dream of something.

It feels to me like calling her an idiot is kicking them when they're down. That's all I'm saying, albeit emotionally.

On the subject of WTC casualty Rorschachs: this Ward Sutton piece is one of my favorite short comics of the last several years. Anyone who hasn't read it should.

For example, I want to feel scared in direct proportion to my intellectual belief about the severity of the threat.

Posted by: Lindsay Beyerstein | January 25, 2006 at 05:53 PM

Then you are just translating your 'desire' into a series of 'intellectual belief'.

(ie. I am pretty sure noone is going to memorise the entire catalog of spider lethality index, but you make 'good enough' approximation of handling according to your own set of criteria.)

the criteria and goal of certain actions itself is a reflection of desire, It has nothing to do with 'order and rational' when it comes right down to it.

One classic example: how one prepare for end of world scenario? Some people build underground bunker, some people think smoke in the porch and enjoy the scene is the best way, some couldn't careless...

all of them are rational in certain ways, because what is being achieved is beyond 'rationality'. It's far deeper issue than simply how to optimized certain choices in life.

Game of chance exploit this primal instinct.

I teach statistics for a living. One of the truths of life that I really want to impart to my intro students is this: "Lottery tickets are not a retirement plan." I also tell them that lotteries are a tax on innumeracy.

Doing the expected return calculation for a pick-6 game like Powerball is something that any student who passes an intro statistics course ought to be able to do.

Perhaps one of the problems confronting the poor and near-poor who are the targets of lotteries is the lack of appealing investments. If you save $20/week for 10 years at 2.5% ARR, you have about $11,800 at the end of your investment period. Raise that to 5% and the account has a value of $13,500.

You don't make a killing by saving money, but you do have something to show for your effort at the end of the day. And for sure, you are much more likely to come out ahead with the savings than you are with the lottery tickets.

BC

Bargain: There are all sorts of penalties regarding social programs for poor people who have a little money socked by. A poor person isn't going to end up with $13,500: they will not have the choice of that money aggregating if they need handouts at any point. You'll get kicked off of all sorts of programs if someone notices.

(It is true that the poor may be less proficient at hiding money. It is also true that if you're discovered doing it by welfare that you're going to have a hard time getting treated like a person ever again and their livelihood is threatened.)

If you have $50.00 in the bank, you're also not likely to go to the foodbank - pride comes into play.

The money's not going to aggregate. That money will in fact COST you in terms of time justifying yourself to bureaucrats and trying to figure out whose desperation you're going to address with it (Is it your sister? For her abortion? Or is perhaps it's your friend Joe who's fallen off the wagon again?)

The idea that it will aggregate is part of an omnipresent middle class conceptualization of money by people who are used to money representing some form of choice.

A lottery is the best kind of tax, it is a tax on stupid people.

Lotteries have a defensible purpose: they shift the third moment of your income distribution in the desired direction. That makes them the mirror image of insurance, which is also irrational on a monotonic-utility expected value basis. Are we all idiots to blow a couple thou a year to supplement our income in the unlikely event of an accident? The decision about whether to blow money on a lottery depends a bit on how much your life sucks, and on the other wealth-building tools you have to use. Poor people like it, sure. But maybe not solely because they're morons. Maybe they have more to gain from their only shot at 10 or 20K, and less to lose from a little bit more debt.

Government induces you to do irrational things all the time, like sink all your money in undiversified, illiquid, highly-leveraged real-estate assets. Lotteries are nowhere near the biggest screwing you can get.

I completely agree and with the buzz over new winners today, many more will foolishly run to find a short cut to prosperity. I talk about this subject at www.bizplusblog.com. I appreciate your comments as well.

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