A competition based on chance, in which numbered tickets are sold and prizes, usually cash, are awarded to the holders of numbers drawn at random. Lotteries are a form of gambling and are often regulated by government agencies to ensure fairness and legality. They are also used to raise money for various public causes and, occasionally, as a tax alternative.
In the United States, state lotteries bring in billions of dollars each year. Many people play for the entertainment value, but others believe that winning a lottery ticket will bring them a better life. In order for an individual to make a rational decision to purchase a lottery ticket, the expected utility of monetary and non-monetary gains must exceed the disutility of losing money.
Historically, lottery revenues expand rapidly upon introduction and then level off or decline over time. To maintain or increase revenue, state lotteries must continually introduce new games to attract and retain customers. This process is reminiscent of the classic dynamic described by the term “the law of diminishing marginal returns.”
Lottery players must balance the enjoyment of playing the game with the realization that their odds of winning are quite low. Some individuals are unable to do this and continue to purchase tickets. Such players are making irrational decisions in the hope that they will win, even though the chances of winning are extremely small.
For those who are able to make the proper trade-offs, buying a ticket can provide them with a small amount of entertainment and some relief from their economic problems. This value, however, is typically outweighed by the monetary cost of the ticket and any fees associated with the purchase.
While a small percentage of lottery revenues go to charities, the majority is consumed by organizing and running the event, promoting it, paying prize winners, deducting costs and profits, and determining how frequently and large prizes should be. In addition, some portion of the proceeds is normally reserved for future draws.
State officials have a difficult task in balancing these competing goals. The process by which a lottery is established is similar to that of many other types of public policy: an agency or public corporation is legislated to be in charge; it begins with a modest number of relatively simple games; and, due to pressure for additional revenues, progressively adds new games over time. As a result, few state lotteries have a clearly defined public policy. Instead, the development of lottery policies is made piecemeal, with authority fragmented between executive and legislative branches. As a result, little, if any, attention is paid to the overall impact of the lottery on society. This has become a major problem in the United States, where the lottery is increasingly seen as a source of social problems. This article originally appeared in the July/August issue of The Atlantic magazine. It is reproduced here as part of the Atlantic Wire’s continuing commitment to long-form journalism.