State lotteries and the winner’s curse

In auction theory, economists have studied a phenomenon they call the “winner’s curse.” This occurs when, in common value auctions (auctions in which the item is of approximately the same value to every participant) where there is incomplete information (each player knows only her own strategy and no one else’s), the winner of the auction tends to overpay. She is likely to have overestimated the real value of the item, either in absolute terms, or at least relative to the other players: thus the “curse.”

In an excellent column in yesterday’s New York Times, Joe Nocera (who btw you all should be reading — he’s turned into a fine columnist, the best thing by far to happen to the Times op-ed page since Paul Krugman) writes about another kind of winner’s curse. This is the curse that, with frightening regularity, seems to fall on the heads of the winners of state lotteries. Nocera notes that, troublingly, winners of huge state lotteries “rarely know how to handle their new circumstances.” He quotes Don McNay, a journalist who recently authored an e-book about lottery winners. McNay says of these cursed winners, “The money just overwhelms them. . . It just causes them to lose their sense of values.”

Nocera cites this tragic case:

There is, to take one of the most prominent examples, the story of Jack Whittaker, a West Virginia businessman who won a $315 million Powerball jackpot in 2002. A decade later, his daughter and granddaughter had died of drug overdoses, his wife had divorced him, and he had been sued numerous times. Once, when he was at a strip club, someone drugged his drink and took $545,000 in cash that had been sitting in his car. He later sobbed to reporters, “I wish I’d torn that ticket up.”

But the problem with state lotteries is not only that the riches they bring to the winners so often cause misery. It’s that they are simply horrible public policy, period. Nocera again:

[L]otteries may well be the single most insidious way that state governments raise money. Many of the people who buy lottery tickets are poor; lotteries are essentially a form of regressive taxation. The odds against winning a big jackpot are astronomical — far worse than the odds at an Atlantic City slot machine. The get-rich-quick marketing — by government, let’s not forget — is offensive. One New York Powerball ad shows a private jet emblazoned with the words “Kevin’s Airline.” The tag line reads: “Yeah, that kind of rich.”

Lotteries are a symbol of our completely dysfunctional fiscal policies, writ large. They’re a regressive tax that rob from the poor and redistribute the wealth to a tiny minority. And even that minority often does not truly benefit; they tend to be morally corrupted by the sudden infusion of obscene wealth. The entire lottery system serves the ideological function of strengthening and perpetuating an ideology of greed and grotesque economic inequality.

Sadly, I don’t see us getting rid of state lotteries any time soon. The monies earned from these insidious schemes are far too vital to the coffers of state governments. So long as American public policy remains so destructively and dysfunctionally tax-phobic, we will probably continue to have lotteries.

But is it too much to ask that we at least have sane lotteries? Nocera writes that the couple who recently won the Powerball lottery will be receiving over $293 million. Why couldn’t that sum have been broken down into smaller amounts, of, say, no more than half a million dollars? A smaller amount of money which would be enough for a family to perhaps buy a home, pay off some debts, build a nest egg, or send a child to college, would provide welcome financial relief and stability, but it would be unlikely to wreck lives. And of course the great advantage to doling out smaller amounts of money would be that many more people could benefit. Such a system would be far healthier for our society. The one we have now is nothing less than an abomination.

Kathleen Geier

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee