A good that is consumed more when budgets are tighter

When gasoline prices shot up this year, Peggy Seemann thought about saving the $10 she spends weekly on lottery tickets. But the prospect that the $10 could become $100 million or more was too appealing. So rather than stop buying Mega Millions tickets, Ms. Seemann, 50, who lives in suburban Chicago and works in advertising sales for a financial Web site, saved money instead by packing her lunch a few days a week, keeping alive her dreams of hitting a jackpot and retiring as a multimillionaire.

“With companies tightening and not giving cost-of-living increases, you have to try to make money elsewhere,” she said, though conceding, “It might be convoluted logic.”

From Sweet Dreams in Hard Times Add to Lottery Sales. Sigh…

Why don’t people cut back on lottery tickets? Proposition #1: People see the lottery as a means to equaling or surpassing the incomes of those around them. Read recent behavioral economics paper “Subjective Relative Income and Lottery Ticket Purchases” (here) for more on lottery ticket purchases, especially by the poor.

Low-income individuals may be particularly drawn to purchasing lottery tickets because lotteries afford them an equal opportunity of winning. They are likely to perceive the lottery as a rare opportunity to compete on equal footing with people who are more affluent.

Proposition #2: Lottery ticket sales don’t account for a large part of household budgets. A few bucks a week on Powerball tickets seems inconsequential. But people cut back on specialty coffee. Why not lotto tix? Specialty coffee and lottery tickets should be treated as goods consumed primarily by different social classes. So we’re back to Proposition #1. Continued lottery ticket purchases by people, especially low-income people, are not due to ignorance or cognitive errors. They are most likely due to factors underlying their economic status.

People with low incomes play the lottery, which amounts to effectively burning $.47 on every dollar spent, in part because the cognitions associated with poverty increase the appeal of playing. This creates a vicious cycle. The subjective feeling of poverty leads people to take actions that effectively exacerbate the financial condition which led to the actions in the first place. The cost is not insubstantial.

There have been policy proposals for encouraging savings by linking lottery tickets to bank accounts. Under these lottery-linked savings accounts, which are found most prevalently in Latin America, monthly drawings for cash and prizes are held for account-holding customers, who also get one lottery ticket for every $X they currently have on deposit.

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3 Responses to “A good that is consumed more when budgets are tighter”

  1. Maria Says:

    Excellent, I was wondering whether lottery ticket sales would be affected by a downturn so this article was very interesting, thank you!

  2. ChurchyLeFemme Says:

    I’ve always viewed buying lottery tickets as “buying hope”. Holding a lottery ticket allows me to imagine what they can do with the possible winnings. I understand the odds mean that my chances of just finding money on the street are greater, but I enjoy the fantasy provided by holding the lotto ticket for a while.

    On a larger scale I realize that people do not really understand the implications of the odds (see everything ever written about people’s misconceptions about probability). This means the the amount of hope per dollar spent goes up the less people realize that there is no real chance of winning.

    A frou-frou cup of coffee does not provide me with hope, so this luxury does not gain value in an economic downturn.

    Lottery-linked savings accounts allow me to have my hope and eat it too…seems like a great solution.

    Related to proposition #1, consider the situation of an office lottery pool. If everyone in the office is pooling money to play on the lottery I am “forced” to play for fear of all my office mates winning without me. In this situation I am not hoping to get competitive equality over my peers, instead I am acting out of fear of the outside chance loosing equality. Now fear is forcing me to purchase hope.

  3. Dave Comerford Says:

    Proposition #3: You’re unlikely to feel regret at having given up a takeaway sandwich and a coffee but there is a lifetime of regret in seeing your regular numbers come up the week after you have given up playing the lottery.

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