I. A Brief History
Buying a lottery ticket is the most common method of gambling in the world. Some countries offer a national lottery, while others give more leeway to privateers or ban them entirely. Critics of the lottery and lifetime abstainers alike sometimes share a belief that the system exists to prey on lower-class folks. It’s often referred to as a “tax on stupid people” as millions play every drawing with daydreamy thoughts of finally hitting it big.
Looking at the odds for Powerball and Mega Millions in particular, it’s easy to come to the conclusion that buying a ticket is equivalent to throwing $2 in a furnace. Your odds of a jackpot win for either of these lotteries, which are essentially nationalized despite being owned privately, hover around 1 in 300 million. Sure, you can get paid by matching some white balls or the special Powerball/Mega Ball, but your odds of winning anything are around 1 in 24 for both. That’s a measly 4 percent, so matter how you chalk up the numbers, these games are an absolute money farm for those running them.
However, most people are unaware of the rich history of lottery games as well as their importance in funding colonial America and the initial expeditions to actually get there. The British held lotteries as early as the late 1500’s, and they quickly became widespread as the government realized their potential to fund wars and colonial ambitions (1).
Like many facets of British culture, lotteries made their way across the Atlantic and were vital to the survival of colonial towns by providing a method of voluntary taxation, in the words of author Neal Millikian (2). They’d remain commonplace until the late 18th century, when a moral panic and crooked games led nearly all fifty states to ban the practice. After a long time underground, New Hampshire was the first state to establish an official lottery in 1964.
II. What can the Lottery Fund?
The Powerball website provides estimates for how ticket revenue is broken down on a state-by-state level. By throwing these numbers in a spreadsheet, we can have a good vantage point for seeing where this money goes around the country. The data shows that on average, 59% goes to prizes, 6% keeps the game running, another 6% for the retailer, and 27% to public services.
By cross-referencing with sales data, I’ll be able to know exactly how much money from the Powerball was allotted for public goods in a given year. This data is found publicly on lottoreport.com, a privately run website that provides no guarantees on accuracy. Despite this, the numbers are updated daily and have been for years, which gives off the impression that the site is well-maintained and that any inaccuracies are probably insignificant. I don’t think it’d be a good use of time to find individual figures for every lottery state, and while I did find per-state revenue for 2020, that year was very abnormal thus skewing the data.
In 2019, ticket sales generated about $3.7 billion, and a very rough estimate of $1 billion went to social services. By looking at data from the Congressional Budget Office, we also know that of the $4.4 trillion the government spent that year, a little less than half went to social services. That is obviously more money than could ever be made running a lottery, even if Powerball and Mega Millions were truly nationalized.
Americans will never voluntarily pay their taxes, but the idea I am exploring is how a lottery game could account for at least 50% of a state’s welfare and social services budget. For starters, it would take much more than the 27% of Powerball ticket revenue that currently goes to those areas. Every lottery game would have to sell many times more tickets for this to work just on paper.
In some states, specifically those high in population, this is just simply impossible. California spent about $100 billion on public welfare a few years ago, and the state lottery came out recently saying they’ve made about $112 billion from sales in the 36 years since its inception. On the opposite end of the spectrum, Wyoming is the only state to spend under a billion on welfare. If half of their budget was paid for by the lottery, each Wyomingite would need to spend $702 on lottery tickets in a year (Half of Budget / Population).
The state we’ll try to make work for this experiment is going to be Rhode Island. I lived there for a short while during childhood and my parents actually met each other working in the lottery printing industry up there. It has a robust social welfare system, and its population is rather small making it more ideal for this experiment than Wyoming or North Dakota per say, who don’t spend very much on social welfare.
Rhode Island spent about $5.1 billion on social services in 2015. This includes education, medicaid, and transportation, about 57% of the total income the state government brought in. Given our idea to meet half of that at $2.5 billion, we know from a 2019 RI Lottery report that they bring in about $1 billion in gross revenue from all games, with $263 million coming from traditional ticketed games. About $400 million of this went to the state’s general fund.
Looking at these reports, it appears clear that there’s only a few scenarios where my idea could be hypothetically accomplished. Much more tickets would have to be sold, or the lottery would have to merge into a single game that would beat any existing ones in popularity. Another option is to better allocate the money from sportsbooks, which were recently legalized in the state.
61% of traditional lottery revenue is paid in prizes, while the same is true for 95% of sportsbook revenue. It’s likely that soon sportsbooks will make more money than the lottery everywhere, but they’re still banned in most states and don’t share the same near-universal appeal as a massive Powerball jackpot does. Unfortunately for our experiment, the jackpots will absolutely have to be reduced for any chance of meeting the funding goal.
The research (3) available on the psychology of lottery players suggests that dropping jackpots to give more money back to the government would never work. Even if a player is aware of where his $2-$3 is going, it’s simply not the point. You’re playing in the first place to win the big jackpot that gets posted on advertisements, and the less that number is, the less likely you are to play.
III. Building an Ideal Game
A game that is capable of generating 5x the revenue would have to be simply ingenious. Slots and table games may make billions for casinos, and are simple games of chance, but we are focusing here on a specific type of gambling and how it could go from a facet of common life to a true disruption of the system. The lottery ticket as a gas station counter item will slowly become a thing of the past. Video lottery, which isn’t to be confused with online tickets, nets about double the amount of income as physical and online tickets in Rhode Island.
If a lottery game is ever going to make close to half of a state’s social services budget, it will surely have to be online to eliminate underlying costs. A few mobile games come to mind, such as Candy Crush Saga or the very short-lived Flappy Bird, which have a reputation for being extremely addicting, and could be a model for meshing gambling with casual games. There are legal and moral obstacles to this idea in that only verified adults can play the lottery, but I see it as a potential future for the industry and the only way my idea could ever work.
I can’t stress enough how important it is for these games to have huge jackpots. I’ve provided academic evidence for this fact, but keep in mind that when the Powerball jackpot reached over a billion in early 2016, $1.2 billion was made in ticket sales nationally just the week of the big drawing. I think the ideal lottery game for generating profit is something digital with a huge, growing jackpot, but also casual enough that it feels more than entertainment and less like gambling.
Aside from voluntary taxation being a pipe dream, I think it’s also not worth it to imagine gamblers planning their bets based on where their losses end up. Trying to figure out how the lottery could make this much money is a challenge, but a bigger one is creating something that convinces the public that playing is a societal obligation, as it happened in the old days. People obviously play the lottery to make money, but there’s a certain fear of missing out that spreads more as jackpot prizes rise.
There doesn’t need to be any brand new futuristic ideas if the games are made compulsory as a substitute for taxation. Among many, there’s a glaring fault here that those who have more income would have more tickets and thus better odds, but it’s interesting to imagine nonetheless. Tax returns would come in the form of lucky wins. Doing things that in the real world give you a tax write-off would instead raise your odds.
Is this crazy idea dystopian and unfair? Absolutely it is, but it’s far less complicated than the tax code we live under in the US. If a game can be so enthralling that it makes you forget you’re gambling, surely it can be such that it makes you forget you’re paying taxes. There can’t be many ways to change our emotions towards paying the IRS, but with how much of a pain it is currently to file taxes, lottery mobile games could provide the same rose-tinted glasses as a well-designed slot machine or skilled blackjack dealer.
IV. Qualifying as a Disruption
There’s little chance we’ll see a lottery game anytime soon that qualifies as a disruption by the criteria Clayton Christensen provides. I don’t see how the Powerball or Mega Millions, despite their popularity, would fall at the high-end of the market. It’s very cheap to play, and is a much easier habit to control than virtually every other form of gambling. A few lottery plays a year will always cost less than one visit to the casino a year.
I think the high-end market of the lottery would be $10 scratch off tickets, but the $3 price to buy a Powerball ticket with Powerplay is a lot for your chances of getting any return, so we’ll say that’s the high-end. Our mobile game idea could sell tickets at a quarter a pop, like a slot machine does, and have better odds but slightly smaller prizes. Done the right way, I think it really could work and disrupt the incumbent organizations of Powerball, Mega Millions, and individual state lotteries.
Disruptions do take a while to manifest, and this one would have to grow small until it makes enough money to offer the level of jackpots that are high enough to attract the public. The idea of a lottery is very old, so this wouldn’t be forming a new market, rather shaking up the business model and possibly re-defining what a lottery and gambling means in the public conscience. The New Yorker article from Jill Lepore leads me to believe that if the lottery were still unregulated, the games would've fully gone digital by now and would be making more money. However, I think I speak for everyone that regulation is a vital necessity for facilitating a lottery, given the fact that fraud does indeed still happen.
If it’s not obvious already, there is almost no incentive whatsoever for an entrepreneur to pursue the low-end of any gambling market, even the lottery. The Powerball jackpot almost always pays for itself with how many tickets generally need to be printed before a winning one is cashed. The rapid growth and legalization of sports betting makes it the ideal field for those looking to disrupt and make money.
That doesn't mean that using the lottery as the main driver for public funding is impossible, though. It would just require a complete change in how people view the lottery. With enough smart design and innovation, users can be led to dumping lots of money into something that might not be worth it, which is what mobile game developers aim for.
(1) Millikan, Neal Elizabeth. Lotteries in Colonial America. Routledge, 2011.
(2) Millikan, Neal Elizabeth. Lotteries in Colonial America. Routledge, 2011.
(3) Griffiths, Mark, and Richard Wood. “The Psychology of Lottery Gambling.” International Gambling Studies, vol. 1, no. 1, 2001, pp. 27–45., https://doi.org/10.1080/14459800108732286.