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The lottery. The lottery in the United States is a total ripoff. The expected value of a lottery ticket of every dollar you spend on the lottery in the US is 50 cents. It's a massively unfair bet. Yet, it's also massively popular and a major source of revenue for states is state lotteryies. Why is that? How can you have a situation where you have um a popular unfair bet? Now there's four theories for why this is. Theory one is people are risk loving.
They play the lottery because they're riskloving. How can you use something I just talked about 37 seconds ago disprove that theory? How can you disprove the fact that people are risk loving? How can you say Americans are clearly not risk loving? They spend 1.5, they spend $2 trillion on insurance. They're clearly not risk loving. So that theory goes out the window. Okay, the second theory is a little more subtle which is that people are both risk averse and risk loving. And to see this we go to figure 20-4 of what's called Freriedman Savage preferences. You don't need to
know that. That's just what they're called. This is a preference is developed to explain riddles like this. And here those preferences look, they're preferences where they start concave and then become convex. So the way this works is, follow along with me. Imagine is a small 50/50 gamble between W1 and W3. For that small gamble, people clearly don't want to take it. They are worse off with the gamble at point B than the utility of B star. So that same logic before, people won't take that small gamble. Now imagine a giant gamble. Oh, I'm sorry. Now imagine going from W3 to W5. Well, for that gamble, they become risk-loving.
They're h they're more than happy to take that gamble even though it's 50/50. It's above the utility. So now imagine a gamble from W1 to W5. If you do a giant gamble, people might end up risk looking riskloving. So, it could be, yeah, they're risk averse over small things, but they love those big gamles and that's why they play the lottery. Why is that empirically false? Why is an empirically false description of the lottery? Because 99% of the money made in the lottery is not on megaillions. It's on scratch tickets, which are you gamble for $100. Okay? So, people are in the range with at the bottom of this function. If that theory was true, we'd see lotteryies, but only megaillions. You wouldn't see little lotteryies. then you do. So
that's how we empirically prove that this theory isn't right. Okay. The third and fourth theories are in subsets that flip sides of each other. And the third theory is that this is entertainment. And this comes to how we go further in micro 1401. Imagine that I put in utility function not just consumption but the thrill of scratching something off the thrill of seeing gee maybe I won money and maybe it's worth a dollar to you just the th chance even though you know you'll probably lose maybe a utility function is the thrill you get from that there's nothing wrong or illegitim about that it's just the way you write down the utility function so many people just gamble because they find it entertaining and the thrill
is in the utility function the problem is there's another theory which is that people are uninformed or just making mistakes, which is not that they get utility joy from it, they just don't understand what they're doing. They don't understand what a bad deal it is. But if they do understand, they just don't think it through properly and they're making a mistake. Okay. Now, we can't really we both these are true to some extent. Why does it matter which one is true? Well, it matters enormously. If we think the truth is one of these, it matters enormously which one it is primarily. And why is that? Because it drives what
the government should do. If this is the correct view, government should support lotteryies. It's a great way to make money. It's what we call voluntary taxation. If people like gambling, then why let the private sector make the money? The government can make the money by setting up a lottery. So, if that's true, we should be encouraging state lotteryies. If this is true, we should be discouraging them. The government is sanctioning people to make bad decisions. That's not the role of a government is not to set up more opportunities for people to make bad decisions. So it turns out it matters enormously for government policy which of these are
right. matters enormously which of these are right because basically it depends on is this a voluntary tax or government encourage mistakes and we don't know but the stakes are huge in some low-income communities people spend I kid you not up to 20% of their income on the lottery these are huge stakes for many people's lives this is a very important question to be thinking Enough.
