published Wednesday, December 5th, 2012

Personal finance: Lottery mania hurts low-income players

Christopher A. Hopkins CFA

You can't win the Powerball if you don't play. But even if you do play, you are more likely to be hit by falling space debris than to hit the jackpot. Nevertheless, a distressingly large number of people practically guarantee they will never escape the cycle of poverty by taking a sucker's bet.

Each of us dreams occasionally of catching lightning in bottle. Unfortunately, a lightning strike is far more likely than winning the lottery. In fact, you are 600 times more likely to be zapped by lightning than to win the Powerball drawing. At 175 million to one, the odds are if you played every hour, around the clock, you would win once in 20,000 years. And you are substantially more likely to die in a car crash on your way to buy the ticket than you are to ever redeem it.

State lotteries are ubiquitous; 42 states in the U.S. operate some type of officially sponsored gambling. Yet they are the least efficient means of generating revenue for government coffers, with just 20 to 30 percent of total revenue going into state treasuries. The rest goes to prizes and administrative and marketing costs.

From the gambler's perspective, payouts on lottery tickets at around 60 percent of gross revenue are decidedly lousy compared to casino games or slots, which range from 80 to 90 percent.

But the worst aspect of government-run gambling is the deleterious impact on low-income players. A state lottery is a regressive tax on the poor, who tend to be the most frequent players and spend the highest proportion of their incomes on the weekly games.

Lured by the siren song of potential riches and prodded by manipulative advertising, the poorest segments of society play the most. Several state-sponsored studies have concluded that the bottom 25 percent of the population in terms of income constitute half of frequent players. And amazingly, estimates of lottery spending among the poorest regular contestants range from 3 to 9 percent of total gross income per year.

Furthermore, according to a lottery industry trade association, 20 percent of players account for over 70 percent of all tickets sold. By one estimate, this 20 percent spends on average over $1,000 per year chasing the brass ring.

The result can be a negative feedback loop whereby the desire to escape poverty leads to chasing lotto riches, which in turn breeds more poverty. Researchers at Cornell University have referred to this phenomenon as the "desperation hypothesis", noting that one quarter of respondents in a Consumer Federation of America survey believe playing the lottery is a legitimate retirement income strategy.

Like check cashing firms and rent-to-own stores, successful lottery games depend to some degree upon the lack of financial sophistication of people with the least capacity for wasting hard-earned dollars. For many working-class folks struggling to get ahead, the lottery is an insidious wealth-sapping tax. Besides, you're 80 times more likely to die falling out of bed.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfreepress.com.

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