How Much is a Lottery Ticket Really Worth? (It’s Less than You Think)

By: Zack Halberstam

Government-run lotteries are pervasive in the United States, with almost every state administering lotteries. In 2019, U.S. lottery revenues exceeded 80 billion dollars. In Massachusetts alone, the lottery generated 1.1 billion dollars for local expenditures. Many Americans participate in lotteries, especially less well-off Americans, who spend perhaps 13 percent of their income on lottery tickets. Because lotteries are such popular games, it is worth analyzing the lottery from a game-theoretic perspective. Is playing the lottery worth it?

We begin the analysis by discussing the expected value (average return) of a typical lottery ticket. Lotteries are fundraising measures for the states administering them, so they must give out much less in prizes than their revenue. On average, only 60 percent of state lottery revenue is distributed in prizes. This means that, in most cases, the expected return of a ticket must be significantly less than its price, since states run the lottery with a sizable profit margin. To be more specific, we consider one of the most played lotteries in the United States: Powerball.

Powerball and Expected Value

To play Powerball, players pay 2 dollars and select five numbers from 1 to 69 and the titular Powerball, which varies from 1 to 26. Players win prizes based on the numbers they successfully predict. Predicting all 6 numbers results in a jackpot, shared if multiple players predict them correctly.

Possibilities from playing Powerball

Sources: Prizes, Odds

For the July 15th Powerball drawing, with a roughly typical jackpot of 137 million dollars, the expected value of a 2 dollar ticket is 79.8 cents, assuming the jackpot would not be shared and ignoring taxes. Jackpot sharing and taxation render the expected value even less, making typical Powerball drawings quite unfair, in terms of expected value.

However, for unusually large jackpots, the expected values of Powerball tickets may exceed their cost. For the drawing with the largest jackpot ever, in any U.S. lottery, 1.586 billion dollars, the expected value of a 2 dollar ticket would be a quite favorable $5.75, if the jackpot were not shared. While the increased likelihood of jackpot sharing with large jackpots and tax considerations generally keep the expected value of a ticket under 2 dollars, it is not inconceivable that Powerball would provide favorable expected values. The expected value of a Powerball ticket was occasionally more than its price before a series of rule changes beginning in 2009. So, would it be a good idea to play Powerball, if the expected value were favorable? The answer is still a resounding no.

Utility to income

To understand why even lotteries with high expected values of tickets are usually bad deals for players, we take a more nuanced view of the value of large prizes. The happiness of an individual with 10 million dollars is not 1 million times the happiness of one with 10 dollars, and thus it is crucial to understand how satisfaction changes with income to determine whether playing the lottery is a good idea.

Economists use the term “utility to income” to describe the satisfaction people derive when earning various amounts of income. The rate that utility to income changes as income increases is called “marginal utility to income,” and it is usually understood to decrease as income level increases. Consider an intuitive example: if you lost 1,000 dollars, you would be less upset if you were earning 1 million dollars per year than if you were making 10,000 dollars. The amount you value 1,000 dollars is less when you have more income, as is the amount you value each additional dollar.

This phenomenon, “diminishing marginal utility to income,” is extraordinarily relevant to lotteries, where players may win enormous sums of money. The difference in utility between winning 50 million dollars and 51 million dollars is negligible, though the difference between winning nothing and winning 1 million dollars is massive. Because expected value does not take this into account, explicitly considering utility to income is crucial in understanding the lottery. To quantify how much diminishing marginal utility to income affects the lottery, we use a model of utility to income proposed by Layard, Mayraz, and Nickell.

Layard, Mayraz, and Nickell suggest a model where utility to income is measured by a function of the form

Using results from surveys that show the variation in reported happiness over different income levels, they estimate the parameter .Taking their best estimate, =1.26, we can calculate the expected utility that individuals with various income levels have when playing Powerball (ignoring taxation and assuming no jackpot sharing, for simplicity) and the utility they have when not playing Powerball. Unsurprisingly, the expected utility for individuals at every income level is less when they play Powerball than when they do not.

To quantify the extent to which playing Powerball is a bad deal, we determine what a “fair ticket price” for the game would be. That is, we determine the ticket price at which the expected utility of playing Powerball is the same as the utility of not playing. We provide fair ticket prices for various income levels, at three different jackpot levels: the typical July 15, 2021 jackpot, the largest jackpot of all time, and an impossibly large jackpot of 1 quadrillion dollars (to demonstrate Powerball’s unfairness is not rectifiable by increasing the jackpot).

Interestingly, jackpot size barely affects fair ticket price. This is because, in the model, utility to income does not vary over many orders of magnitude, and thus the tiny chance of a jackpot barely impacts expected utility. The fair ticket prices are all between 19 and 27 cents, miniscule compared to the price of a ticket, as well as the expected value of the tickets (79 cents, $5.75, and over 3 million dollars, for the three considered jackpot sizes).

Fair ticket prices for Powerball with various household income levels and jackpots

Source: Income percentiles

The expected utility calculation shows that Powerball tickets are priced at roughly 8 to 10 times their value, and no jackpot can ever make them worth close to their price. So, Powerball tickets (and, in all likelihood, most other lottery tickets with large jackpots), are extraordinarily poor purchases. Considering expected value alone (as most articles about the lottery do) grossly understates the extent to which Powerball tickets are a terrible deal.


If lotteries are such unfavorable games, why do people play them?

The most compelling explanation is that many lottery players are irrational. Several psychological factors make it difficult for people to make sound decisions about risk. We struggle to comprehend remote nonzero probabilities, often vastly overestimating them (likely one reason many people cite exceedingly rare side effects as a deterrent to getting vaccinated). We estimate chance by weighing how easy it is to think about the possible outcomes (sometimes known as the “availability heuristic”). Lottery players can very easily picture striking it rich, helped along by the many news articles profiling big winners.

Lottery operators take advantage of these irrationalities in game design and advertising. An ad series for the New York Lottery, for example, invited players to think about the life they would have “when [they] don’t have to think about money.” This appeals directly to the availability heuristic, making consumers feel a big lottery win is more likely by making them think about that possibility. Relatedly, Powerball’s “Power Play” option, allowing players to spend an extra dollar for a chance at larger non-jackpot prizes, is a bad deal. Nevertheless, many players choose it, in part because humans have a strong tendency to avoid regret: if the player wins big without Power Play, they will regret not having spent one more dollar to win even more money.

Could rational people play the lottery? Some speculate that lottery players know the lottery is a bad deal, but play it because they enjoy the game. This may describe some lottery players, but it certainly does not explain all lottery activity. Roughly half of all lottery players say they play for money, rather than fun, and this figure is higher among those with lower incomes. Clearly, many people play the lottery hoping to win.

Friedman and Savage offer another explanation for how rational people could play the lottery. In a 1948 paper, they reject the notion that marginal utility to income must always increase, using many people’s willingness to play games of chance and purchase insurance as evidence for a strangely-shaped utility curve. While intriguing, Friedman and Savage’s paper has been vigorously challenged, and even the authors would likely agree that marginal utility decreases on average over huge ranges of income, making their explanation less likely to cover willingness to play games with tiny chances of enormous prizes.

Ultimately, the best explanation seems to be that most lottery players are, in fact, not playing the lottery in their best interests. Lotteries appeal to many human fallacies surrounding risk, persuading many vulnerable citizens to part with their money in the futile hope of winning a better life. Perhaps the government should reconsider this method of fundraising!