This NY Times article about prize-linked savings accounts got me thinking about the popularity of lotteries:

“While building up savings offers the best route out of poverty, the glamourless grind of socking away a dollar here and there has a tough time competing with the heady fantasy of a Mega Millions jackpot. But instead of attacking lotteries, a growing number of credit unions and nonprofit groups are using them to encourage low-income families to save.

They offer what are known as prize-linked savings accounts, which essentially treat every deposit as a ticket in a prizewinning raffle. The idea is to offer the thrill of gambling without the risk. Even perennial losers keep their savings.”

So, what if lottery players instead invested in a simple S&P500 Index Fund?  Of course, those who were the largest lottery winners would be worse off, but given payout rates of just under 60%, the group of lottery players as a whole would be much better off.

Here’s what the Freakonomics folks wrote in 2010:

The facts are simple. Americans have a low savings rate; and Americans love to play the lottery. Last year, we spent more than $58 billion on lottery tickets, or roughly $200 per person. As entertainment goes, the lottery is pretty cheap – a dollar and a dream and all that. But as an investment, it offers a dreadful return. States typically withhold about 40 percent of the ticket money from the prize pool for overhead costs and, often, education funds. That’s a far worse return than casino gambling or horse race betting. Which is why the lottery is sometimes called “a tax on stupid people.”

One lesson idea would be to have students create a one minute Public Service Announcement (see this lesson on How to Create a PSA from Next Gen Personal Finance) to encourage lottery players to invest/save rather than play the lottery. Here are some websites that could be helpful as they build their arguments:

• Size of the market is enormous:  According to NASPL, $68.8 billion was spent on state lotteries in 2012 or about $230/per person in the United States.
• What are the odds of winning the lottery?  A simulation here.
• What are better uses of the money spent on lotteries (Kiplinger)?
• Psychology of why we play the lottery (CNN)
• Is the lottery ever worth playing (Investopedia)

Good luck!

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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