01:22 - Source: CNN
What happens when you win the lottery?

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This week's estimated Powerball jackpot of $800 million is biggest U.S. jackpot ever

George Loewenstein: But buying a Powerball ticket is, as most people realize, a terrible deal

Editor’s Note: George Loewenstein is the Herbert A. Simon University Professor of Economics and Psychology at Carnegie Mellon University and co-director of the Center for Behavioral Decision Research at CMU. The views expressed are the writer’s own.

CNN —  

In “Austin Powers,” Dr. Evil, unfrozen after 30 years, schemes to steal a nuclear warhead and hold the world ransom for … ONE MILLION DOLLARS! His subordinate delicately informs him that “a million dollars isn’t exactly a lot of money these days.”

One billion dollars is, to use an overused cliché, the new one million dollars. Indeed, with all the (deserved) attention on income and wealth inequality – and the almost daily minting of new billionaires even as the average wage earner’s pay stagnates – one billion dollars is what it now takes to really grab people’s attention. Just look at the headlines this Saturday’s near-billion dollar Powerball jackpot is getting.

George Loewenstein

Of course, buying a Powerball ticket is, as most people realize, a terrible deal – and extremely unlikely to help land them in the billionaire club. In fact, from an actuarial perspective you would have done better to put your hard-earned money into the plummeting stock market at the beginning of the year than to spend it all on Powerball tickets, which, despite the enormity of the jackpot prize, is anyway a less attractive deal once you take into account the huge tax hit, the fact that you will probably be splitting it with other winners, and the loss of 30-40% if you choose to take it all immediately instead of in payments over time.

But this economic analysis misses the point.

Buying a Powerball ticket isn’t really about obtaining an infinitesimal chance to win a huge amount of money. Instead, as the advertisements that cajole you to “buy a dream” understand perfectly, buying a Powerball ticket is a license to fantasize – to dream. Such dreams are especially attractive in these days of limited income mobility, when buying a ticket for many people is their only possible (if not particularly realistic) ticket to easy street.

This reality was underscored by research I undertook with Emily Haisley and Romel Mostafa (both then graduate students at Carnegie Mellon University), in which we studied how feelings of poverty affect lottery ticket purchases.

We approached travelers at the Pittsburgh Greyhound station (a national hub) and asked them to complete a survey on their attitudes toward Pittsburgh, for which we paid them $5. Then, we gave them the option of purchasing from zero to five one-dollar lottery tickets with their earnings.

Before giving them this decision, however, we asked them about their income, using a question designed to deliberately make half feel rich (“What is your yearly income:” with responses that began at “less than $10,000” and topped out at “more than $60,000”) and the other half of respondents to feel poor (replacing the income question with responses that began at “less than $100,000” and topped out at “more than $1 million”).

The results were dramatic. Those made to feel that their income was low, purchased about twice as many lottery tickets, and were three times as likely to purchase the maximum of five tickets. People buy lottery tickets, the research suggested, in part to alleviate their feelings of poverty, of hopelessness.

In a second study reported in the same paper, we reasoned that lottery tickets might be attractive to people with low incomes because, unlike in so many other situations they face in life, people with low incomes have the same opportunity to win as people with higher incomes.

We reminded half of the respondents of this fact by asking them a series of questions about whether a rich person, middle-class person or poor person would have an advantage or an equal chance when it came to eight different outcomes.

The outcomes were: 1) being awarded a scholarship; 2) winning when playing a slot machine; 3) being elected mayor; 4) finding $100 on the ground; 5) becoming a superstar singer; 6) being a victim of identity theft; 7) getting a promotion; 8) getting discounted housing.

These events were deliberately chosen so that some would favor rich people (e.g. being elected mayor), some poor people (e.g. getting discounted housing), and some neither (e.g. winning when playing a slot machine). Those reminded that gambling (playing a slot machine) gives everyone similar odds of winning, once again bought almost twice as many tickets as those not given such a reminder.

So, is it a mistake to play the Powerball?

In the grand scheme of things, it’s a lot less harmful than many other self-destructive things that people living on the edge often do, like running up credit card debt, exceeding their bank overdraft limit or taking out loans from payday lenders. If you don’t buy too many tickets, and it gives you some pleasure, it seems fairly harmless

And, when you lose, you can always console yourself with the thought that winning probably wouldn’t really be all that great: if you won, worries about lack of money would be instantly replaced with worries about how to spend and invest your new wealth, you would suddenly find yourself with a lot of new “friends” and relatives you hadn’t realized that you had, and you might even start to harbor doubts about the motives of long-term friends.

I probably won’t buy a ticket – it would conflict too much with my self-image. But I have to admit that I’m tempted – that London condo that I’ve long fantasized about would be awfully nice …

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