The UK Lottery: charity, investment, or scam?
The UK National Lottery operator Camelot have just renewed their license for another 10 years. With over two thirds of the UK (or ~70% of the UK adult population) now played the National Lottery regularly spending an average of £3 a week, that's a pretty nice contract for a business with a licence to print money.
Surveys have concluded that during an economic recession, sales of lottery tickets go up. But what they didn't anticipate, is that what goes up, must come down. Camelot released figures showing that lottery spending was up by £180 million in the six months following to the new year, only to decline in recently months. Charities who count on funds from the lottery are feeling squeezed. Perhaps this may have something to do with Camelot's 4 of 5 current shareholders looking to sell their bids to potential new owners, for whatever reason.
Tough economic times can be a boon for modern day fairy tale entertainment. See film Slumdog Millionaire. So what effect does an economic downturn have on people's tendencies to participate in games of chance like lottery games?
Every type of theory has been used to explain the 'roller coaster effect', ranging from natural disaster preventing people buying tickets to the recession making people hold onto cash for things like canned food and emergency flash lights. Of course, we all know the real reason is because the moon rising in the seventh house to Jupiter, and aligns with Mars, et cetera.
Here is another theory: a recent study concluded that the poorer people think they are, the more likely they are to purchase lottery tickets on a regular basis. This sets off a viscious downward spiral by exploiting poor people's desire to escape from poverty while also preventing them from improving their finances by saving. Perhaps this discretionary spending is a lagging indicator of the economic cycle.
But... of course, somebody has to win, right? Theoretically, of course. When the Euromillions rolled over for a cool £52m over the weekend, you might have even thought to yourself, "someone's got to win, right? It could have been me". Are thoughts like that rational or irrational? Here's a few thoughts on the psychology and economics of playing the lottery:
1. Making sense of things that don't: According to Nassim Nicholas Taleb, author of Fooled by Randomness: The Hidden Role of Chance in Life and the Markets, human beings have some sort of inner need to make sense of things that don't . Taleb calls these events that blindside us "Black Swans". In history, Black Swans are stock crashes, terrorist attacks, or unforseen technological innovations. When one of these events occurs, one of the first things people do is try to make sense of it. This can be a protective, or an opportunistic act. Mistaking Black Swans as controllable events has made some eBay sellers of lottery 'systems' very rich people. This continues even to this very day.
2. Hacking the game: Though the odds of winning the UK lottery are 14,000,000 to 1, people tend to examine the stories of the winners, hoping to "learn" how it was that they won. Was it a one-off thing, or had they been buying tickets for years? Did they push small winnings into "investing" in more lottery tickets, or did they only buy chances on big draws? Sometimes no winning ticket is sold, and so the money is shoveled into an ever-expanding jackpot which will eventually match numbers with one or more winning tickets, like the Euromillions. The problem with the "somebody has to win" philosophy is that it attempts to impose order on an amazingly random process (and also makes money for the increasing number of ebay hawkers on 'lottery systems'. And Nigerian scammers.)
3. Looking at the truth: With the lottery, unfortunately, the only real stories to be told are by the numbers, and not just the staggering odds. For example, simple arithmetic on data gathered from the UK Lottery web site and press releases indicates that 28% of lottery revenues go to charitable causes. And yet, the actual percentage for 2007-2008 was 27.2% , and for the six months leading up to this February, the percentage was 26.9%. Is this a big deal? Well, it represents a cool £66.3 million, more than the winning jackpot size of the recently rolled over Euromillions this weekend. The question is then whether over time the percentage really is 28% or not.
4. Strategizing through backward rationalisations: Take the example of a child who dies in a freak accident. Parents everywhere try to somehow "learn" from it, because they feel like if they can somehow logically trace the events leading up to it, they can keep the same from happening to their child. Likewise, if some ordinary person wins big in the lottery, people want to know that person's strategy, when in fact there can be so little strategy when playing the lottery that any effect would be negligible. Bottom line: we almost desperately want to know "what happened" any time a random or near-random event confounds our expectations.
5. But it's for charity: Well, if you want to look at it as 28 pence per pound of lottery revenue going to charitable organizations, then you are committing a charitable act (or perhaps 28% of a charitable act) by purchasing a £1 ticket. Another round of arithmetic on press releases and website figures shows that Camelot advertises £6.4 million to an average Match 6 game, while the averages calculated after the fact show an average of £5.0 million on average per jackpot. While not an out and out lie, this does tend to inflate perceived number of winners in any given draw. Charitable organizations are feeling squeezed lately, and every fraction of a percentage point shaved off their share of lottery money is felt acutely. Also, there is some question about the number of "winners" versus the number of "winning tickets" sold. For example, a husband-wife duo who hits a lottery jackpot will be described as "two winners," even though only one ticket was bought between the two of them.
So does this mean that syndicates are a scam, and is the UK Lottery itself a scam? No and no. While there is the question of percentages given to charitable organizations and average jackpot size, people do buy winning tickets (whether alone or in a syndicate), and they do occasionally win a lot of money. But it would be an enormous stretch to think of the lottery as an "investment." With 52 pence for every pound spent on lottery tickets going toward the Match 6 numbers, there are a whole lot of losers for every one winner. No serious investor would touch a lottery draw except as entertainment, and that is how everyone should look at it.
So is the average person completely helpless to better their odds of winning in the UK Lottery? It depends on how you define "better."
Take Lottery syndicates. They will often guarantee that one of the six numbers will match with the winning number. They do this by pooling lottery players in groups playing numbers where five of them remain constant while the sixth ranges from 6 to 49. With 44 combinations, that means that the sixth number will match at some point. What that does is increase your odds from 14 million to 1 to 1.9 million to 1 of matching the six numbers. Of course, there are smaller prizes for matching three, four, or five numbers as well, and the syndicates increase those odds
Is the lottery an "investment"? If so, it's got pretty poor returns with massive entertainment value, funded largely by people whose money situations are bad to begin with, and there is just as much of a chance of an already well-off person matching six numbers as there is for someone who is poor. The ads all say that the lottery is for entertainment purposes, and yet the ads do everything they can to entice people into playing, so we need to all understand just how overwhelming the odds are against winning the Match 6 draw, or Euromillions.
Put simply, the probability of being dealt a royal flush in any five-card hand is roughly 1 in 650,000. Your probability of being struck by lightning is 1 in 500,000. Your probability of hitting it big on a three-reel slot machine is roughly 1 in 262,000. Your probability of winning a standard 6/49 lottery ticket on all six numbers is 1 in 14,000,000, while your probability of matching five numbers is 1 in 1,900,000. But cheer up! Your probability of dying from a coconut falling on your head is only 1 in 250,000,000, so there's still a chance.
What are your thoughts on playing the lottery? Do you play/not play, and why?