Friday, November 28, 2008

Lotteries may be recession-proof but they are not banking-crisis proof

Anecdotal evidence on state lottery sales suggests that consumers are becoming more risk averse, i.e., they are less inclined to purchase lottery tickets because the expected winnings (assume that has not changed) are now not high enough to offset the perceived risk of playing the lottery. If they were willing to gamble before, they they are even less willing to gamble now.

This increased aversion to risk can be tied to consumer saving behavior. As consumers reduce the riskiness of their behavior (more risk averse), they are less inclined to borrow against future income, and hence saving rises. This is the worst-case scenario for some - a permanent increase saving - because it could mean a prolonged recession.

Here is the article from Reuters that illustrates a change in consumer behavior may be on the underway:
Lottery tickets are proving not to be the big business they're cracked up to be in times of financial crisis.

Reuters contacted all 42 state lotteries. Of the 27 that responded, 14 said sales were down from last year, 9 said sales were steady and 4 reported an increase.

"It's been kind of an industry notion that lotteries are recession-proof, but I think what we're experiencing right now is a little bit harsher than slow economies in the past," said Chuck Baumann of the Oregon Lottery.

"People are just counting their dollars and cents," he said in a state where sales are down some 2 percent from last year.

Lotteries are the most common form of gambling in the United States, Gallup opinion polls regularly find, showing that almost 50 percent of Americans buy lottery tickets.

Sales have fallen as much as 10 percent in some states -- a reflection of the economic downturn and lack of a big jackpot in the two main games, Powerball and Mega Millions.

"What we have found with lotto tickets is that they are heavily dependent on the jackpots offered," said Mike Mueller of the South Dakota Lottery, where sales are down 6 percent.


By this time last year jackpots of several hundred million dollars had already been won in Mega Millions, played in 12 states, and Powerball, played in 31 states. The biggest Powerball win was $365 million in 2006, while Mega Millions paid out a record jackpot of $390 million in 2007.

In Kansas, lottery ticket sales are down about 4 percent in the last few months, spokeswoman Sally Lunsford said.

One reason is that convenience stores have gone out of business, meaning fewer places selling tickets, she said.

The most recent North American Association of State and Provincial Lotteries data show that more than $57 billion in tickets were sold in the United States in fiscal year 2006, which for most states ended on June 30, 2006.

Nickie Andrews, 30, who recently returned home to Hoboken, New Jersey, after traveling overseas and is looking for a job, bought a Mega Millions ticket at New York City's Port Authority bus station for the chance to win $86 million.

"When it gets big I usually play," she said. "I don't have a job right now and I have been playing the lottery more ... it's hard and I need money. I used to play every couple of months, now I have been playing it every other week or so."

Pennsylvania lottery spokeswoman Stephanie Weyant said economic uncertainty was holding many players back.

"In general, our players have told us that they are spending less on tickets because they are concerned about the economy," Weyant said.
RW: Reuters blames the declining sales on the economic downturn (the bolded portions). But it seems to me that this may be more indicative of a change in consumer behavior - i.e., increasing risk aversion - rather than the recession.

Amid a banking crisis that heightens uncertainty in almost every U.S. market - labor, housing, credit - consumers are tolerating-less the probability of losing and stepping back from the lottery.

I am still not convinced that consumer behavior has changed fully to incorporate a sharp downturn in the toleration for risk (stronger risk aversion) and surge in the marginal propensity to save. However, the anecdotal evidence - such as states selling fewer lottery tickets - is building. States like California depend on lottery sales for budgetary expenses; a permanent decline in sales would seriously impair fiscal budgets of said States (was that another shoe to drop?).

Rebecca Wilder


  1. @ Kirk,

    I don’t think playing the lottery has to be stupid. This view leaves out the value we get from the benefit of anticipation, which can be real pleasure as well. The question is: is the value of anticipation greater than the "cost of disappointment” (from not winning) and the “value of money to play in lottery” combined?

    I recently had a more detailed look at it:“are-lottery-players-stupid”/