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Wednesday, January 16, 2008

Minor Musings On Gambling, Government And Greed

[Ed. note: This is way off topic, dry and not all that interesting. Reader discretion advised.]

I was at the gas station the other day and the clerk, who knows my buying habits quite well, asked if I wanted a Mega Millions lottery ticket for that evening's drawing. She looked surprised when I told her no, so I figured I owed her an explanation. It's sort of a New Year's resolution, I said. No more lottery tickets.

I've never been much of a lottery player. About all I do is plunk down a dollar pretty regularly on the super-hyper-gigantic multistate lotto. I might make it $2 if the advertised "jackpot" - which I always divide by at least 4 to get the real prize after taxes - climbs well into nine figures. We're talking Happy Meal level (legal) gambling here.

I was cleaning up my home office and I came across a stack of tickets from last year. I'm terrible about checking numbers - I usually don't bother unless I note that someone won. Instead, I stack up the tickets and check them in a batch whenever I think of it which ends up being about twice a year. This time, I had probably forty or fifty tickets to check. You can win matching as little as one number if it's the Mega ball or with at least three regular numbers. On those forty or fifty tickets, I "won" a total of ... zero dollars.

So rigged.

I think everyone who plays the lottery knows that it has an incredibly poor payout. "A tax on stupid people"* is how money management gurus refer to it. I've never had any trouble justifying the odd dollar - it's entertainment. It's cheaper than going to the movies.

Still, the lack of even a single one dollar winner in that stack made me curious. Just how bad a deal is the lottery?

As it turns out, pretty darned bad.

I visited the website of the Michigan Lottery. As always, I tend to use Michigan as my example because (a) it's where I grew up and (b) it's not hard to find the information. The state lottery has a comprehensive financial report right there on their website.

In fiscal 2007, lottery sales hit $2.36 billion. Of that amount, $1.33 billion was paid out in prizes, for a payout percentage of 56.4%. Over 43% is retained - think about that the next time you're unhappy with the juice at a poker tournament. Unclaimed prizes were a relatively small $26.2 million, which may be partially explained by the fact that unclaimed prizes are forfeited to the government if unclaimed after a year.

Also in 2007, the lottery had $281 million in operating expenses. Throw in some insignificant investment gains and losses and a total of $759.7 million in profit went into government coffers - a net profit margin of 32.1%.

Is it any wonder that government wants to keep much of gambling to itself?

For those areas not run directly by our friends in power, there is always taxation. Michigan is home to three casinos located in Detroit. If the arrangement is still the same as it was in mid-2007, the state and the city of Detroit roughly split 24% of the gross win (gaming revenues minus payouts). In June 2007 - which appears to be an average month - the city and state each received more than $13 million in tax revenue from the casino tax. If that amount can be extrapolated over a year - in fairness, I do not know, although it appears to be so for the first six months of 2007 - that's over $150 million each, nearly $320 million in total.

Between the state lottery and the Detroit casino tax, that's $1 billion plus per year in revenue for politicians to disburse. It's no wonder why they're so afraid of online gaming.

* I don't have a cite for this, but I've seen it multiple times. It could be Suze Orman. Could be Dave Ramsey. Could be the guy that wrote Freakonomics. I forget. I should also mention that there appears to be no shortage of stupid people - according to this interesting study, 59% of eligible Minnesotans purchased a lottery ticket in 2003.


The repressed economist in me wonders what would happen if the government offered "fair" (or at least fairer) lottery games.

I noted the following statement in the Michigan Lottery's annual financial report:
"The Michigan Lottery's first goal is to maximize net revenues to supplement education programs."
(emphasis added)

In theory, the Lottery could offer a rate of return to players of anywhere from 0% to more than 100%. If you plotted revenue - and I'm simplifying here - on a vertical axis against rate of return on the horizontal axis, you would get a curve of some sort. At close to a 0% rate of return, you'd have close to zero revenue because nobody with any sense would play**. At close to a 100% rate of return, there would be zero revenue as the lottery would have no incentive to continue. At every point in between, there is a positive net revenue for the state which, all things being equal, should rise until it reaches a point where improved payouts no longer prompt players to spend more money on lottery tickets.

The question is where is the optimum point on this curve?

You would think that this idea would be studied to death, and I'm sure it has been. Unfortunately, I didn't find anything relevant by doing a cursory internet search and I don't have access to any serious gambling-related academic resources.

Just a subject that I find interesting and that one day maybe I'll look into further.

** Of course there are always idiots and those who see the lottery as altruistic.


If you've read this far, my apologies. I'm just in full work avoidance mode at the moment (which is stupid) and don't have anything poker-related going on. I missed last night's tournaments and probably won't be awake for the Mookie tonight (10 pm ET, Full Tilt).

I did note that Blinders is thinking about setting up a West Coast-friendly blogger event (9:30 pm PT), which made me feel really old. I hate 9:30 starts and envy left coasters who get to play events that start at 6:00 or 7:00 pm (9:00 or 10:00 pm ET). But then again I don't have kids or all that many other evening obligations. Everybody is different, which may help explain why there are now 9,000 different blonkaments every week, NTTAWWT.

The solution, as always, remains the same: Free us from the tyranny of Mountain Time! Three times zones is enough. Eastern, Central, Western. Think of how much your life would improve if this happened.


Okay, I'm going to go now. Sorry again.

1 comment:

TenMile said...

You didn't mention if the State allows the sales of tickets to continue AFTER the major advertised prizes have been awarded - on scratch tickets, like my State.