You are more likely to be killed by a shark than you are to win the lottery in your lifetime. Though your odds of being attacked by a shark are almost four thousand times higher than your chances of winning the lottery, you don’t need to steer clear of the ocean yet.
Instead, it’s the lottery you may want to avoid, with odds of winning this January’s record-breaking Powerball were as low as 1 in 292 million. Despite the tremendously low odds, both federal and state governments endorse the running of lotteries, with almost zero regulation. Meanwhile, stringent regulations at both the state and federal levels have been put in place to prevent individuals from diversifying their portfolios and accessing investments outside of the public markets, with the justification of protecting less sophisticated investors.
How did this ironic paradigm take hold? And how did we come to a place where government-backed lotteries are being heavily marketed, despite being the worst possible investment an individual could make?
History of the Lottery
Despite the alarmingly low odds of winning, the lottery has become an institution in the United States. In fact, Americans spent almost $78 billion on lottery tickets in 2012 because of the extremely high stakes. The same year, Mega Millions made history with the largest jackpot ever at the time: $656 million.The prize was split three ways by winners in Kansas, Illinois, and Maryland.
Though lotteries were common in the United States during the 19th century, by the beginning of the 1900s most forms of gambling, including lotteries and sweepstakes, were illegal in the US and most of Europe. This remained the case until well after World War II.
However, in the 1960s casinos and lotteries began to reappear as a strategy for governments to raise revenue without raising taxes. Proceeds from the sale of lottery tickets help governments close budget gaps and boost educational funding.
Today, only seven US states (Alabama, Alaska, Hawaii, Mississippi, Nevada, Utah, and Wyoming) do not participate in the national Powerball or run their own intrastate lottery.
Advertising & Access
Lotteries spend millions of dollars on marketing—and are beginning to get more creative (and deceptive) about the manner in which they advertise. Washington’s “Department Of Imagination” and New Jersey’s “Give Your Dream A Chance” campaigns misrepresent the likelihood of winning and instead imply that it would almost be irresponsible not to play.
The Illinois State Lottery famously placed billboards reading “This Could Be Your Ticket Out” in one of Chicago’s poorest neighborhoods.
There is little doubt that if what was being sold in any of the above were considered “securities”, both the state and federal regulators would waste little time in bringing forth enforcement proceedings for intentionally misleading sales materials, if not outright fraud. However, despite the fact that federal law mandates that advertising “must be truthful, not misleading, and, when appropriate, backed by scientific evidence,” based on the advertisements employed by state lotteries, it appears that state lotteries act as if they are exempt from truth-in-advertising laws. The protection of unsophisticated investors/gamblers/citizens doesn’t seem to mean much if it is the revenue of the state that is in play.
And, as advertising budgets grow, the accessibility of the lottery is expanding, as well. In 2012, Illinois was the first state to begin to sell lottery tickets online. Since then, 12 other states have approved proposals to expand sales online. From apps, to automated machines in casinos, to online platforms, purchasing a lottery ticket has never been easier.
Approximately half of all Americans have purchased at least one lottery ticket.
Besides being over 18 years of age, there are no limits on who can play or how many tickets you can purchase, despite the statistic that more than 99% of participants will lose substantially all of their money. In fact, roughly 20% of the population buys the vast majority of tickets. Even worse, households earning less than $12,400 a year spend an average of 5% of their income on lottery tickets.
The Great Irony: Regulation of Private Syndication
Whether intentional or not, the regulation of securities is designed to exclude the vast majority of people from many of the most attractive investments, quite the opposite of the lottery system.
Traditionally, investments in real estate and small businesses have been the sole purview of wealthy individuals and investment funds (whose own investors are wealthy individuals). This is primarily due to one reason—the regulatory costs associated with raising capital from the masses makes it uneconomical compared to other forms of capital raising.
The sale of securities is highly regulated and restricted. For a company to even think about raising capital from the masses, they must navigate a complex labyrinth of regulation, which is onerous and back-breaking for smaller companies. Rational, smaller companies will almost always avoid opening their business up to investment by the masses, and instead continue to rely almost exclusively on capital sources from wealthy individuals and banks.
By placing all of the responsibility of investor protection onto the company, regulators effectively cut off the possibility that smaller investors will have the opportunity to invest in 99% of investment opportunities. From the perspective of a business, it makes little sense to incur the arduous and backbreaking costs associated with reaching the masses, especially when abundant sources of capital are already available.
In recent years, many have trumpeted “crowdfunding” as a way to let average investors participate in startup investing. But, as of August 2015, approximately 30 states had some form of a law legalizing investment crowdfunding, while 44 states had lotteries. The federal crowdfunding regulations are not scheduled to become effective until May 16, 2016.
Conclusion: Don’t Strangle An Industry
Undoubtedly, most, if not all, financial advisors would advise their clients to invest their money rather than purchase lottery tickets.
However, outside of wealthy individuals, the availability of attractive investments is extremely limited, often solely to securities listed on a national securities exchange, and even that may be beyond the reach of many investors with the brokerage fees and other costs associated with building a balanced stock portfolio.
Though it makes little sense to purchase a single $50 share of Microsoft when the brokerage fee could easily amount to $10 or more, it makes even less sense to play the lottery where you know with 99% certainty that you will lose your entire “investment”.
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