How Lucky Do You Feel?
A Motley Fool Special Report

by Jim Surowiecki
May 21, 1998

Let's state the obvious: $195 million is an awful lot of money. Let's also state what may not be so obvious: The risk-to-reward ratio for anyone participating in last night's Powerball drawing was, even with the massive potential payoff, so rotten that it was the very definition of a sucker's bet. As a result, the frenzy that seemed to seize the country once the size of the Powerball pool became apparent was emblematic of two things: First, most people still don't have any real conception of how to manage their money; and second, the U.S. has done far too good a job selling its citizens on the idea that "all you need is a dollar and a dream."

The spectacle of that frenzy was pretty remarkable, even though we should be all thoroughly jaded by decades of lottery mania. The jackpot was on the front page of New York's Daily News two days in a row, while Interstate 95 was jammed with cars trying to get from New York -- where you couldn't buy Powerball tickets -- to Connecticut, where you could. One man walked into a Greenwich store and purchased 4,000 tickets, and some law-enforcement officials suggested that it was possible that people would be scalping Powerball tickets in the hours before the drawing. When President Clinton's press secretary, Mike McCurry, showed up 25 minutes late to his daily press briefing he offered the excuse that he had been standing in line at a crowded 7-Eleven in order to buy lottery tickets. By Wednesday evening, 80% of all possible Powerball combinations had been sold and the jackpot soared to $195 million, where previous projections had estimated that it would be closer to $150 million.

It's difficult to imagine, in other words, a less productive use of American resources and American time than we've seen over the past few days. People standing in line to buy lottery tickets aren't creating value of any kind for society, and neither are the people selling the tickets. All a lottery is, in essence, is a giant regressive tax scheme, in which a huge chunk of money is taken from one group of people -- the ticket buyers -- and distributed among the winners, the lottery operators, and the state governments. And this most recent Powerball extravaganza was the most egregious such scheme ever implemented.

Attacking the lottery is a difficult thing to do, because essentially you're attacking the way people freely decide to spend their money. Just as any rational person should feel uncomfortable telling other adults that they shouldn't eat potato chips or go see Godzilla, so that same person should feel uncomfortable telling other adults that they shouldn't play the lottery. While one can argue that lottery advertising unduly influences people's attitude toward the game, one could very well say the same about people's attitudes toward alcohol, tobacco, automobiles, or whatever. Unless you want to ban advertising of all kinds, it's hard to see what makes lottery advertising special. And, in any case, lotteries were popular long before there was mass-media advertising. As lottery supporters are fond of pointing out, one was used to help set up Harvard University in the 17th century.

What's wrong with Powerball, then, is not that the people caught in lottery traffic jams -- probably the first such traffic jams in history -- are somehow mindless zombies, duped by those clever ad slogans. It's rather that the case against lotteries, and in favor of investments, has still -- even in the midst of a bull market -- not been sufficiently made. In one sense, the Powerball frenzy is just the most extreme example of a general American bias against savings. In another sense, it's an excellent expression of the increasingly dramatic divide between rich and poor in the country, a divide that manifests itself most strikingly not in terms of income but in terms of wealth.

Wealth, after all, is something that is generally the product of accumulation over time, which means that it is generally the product of successful savings and investment. The richest Americans tend not to be those who make the most money on an annual basis, but rather those who have invested the most wisely (in Bill Gates' case, by founding Microsoft) and saved the most rigorously. But one of the basic truths of the U.S. economy is that the more you make, the more you tend to save, not merely in absolute terms, but in relative terms as well.

Now, in one sense, this is completely obvious. If you're making $15,000 a year, you're not going to have much left over to save, while if you're making $150,000 a year, you can save 10-15% of your income and still live very well. But, in another sense, the fact that the rich save relatively more is not obvious at all. And the lottery is an excellent expression of just how curious, and frustrating, this phenomenon is.

Consider these numbers, which are taken from a scathing piece by Kim Phillips called "Lotteryville, U.S.A.": In one Chicago suburb where the average income is $117,000 a year, the average household spends $4.48 a month on the lottery, while in another Chicago suburb where the average income is $33,000, the monthly average is $91.82. That is a stunning discrepancy, and that goes a little way toward explaining why wealth in this country has been concentrated in fewer and fewer hands over the past two decades. Ninety dollars a month is not a huge sum, but over the span of a year it's the beginning of a fairly meaningful investment fund and, when the miracle of compounding is taken into account, it's the potential roots of a tolerable retirement. But the people in the lower-middle-class suburb toss that money away every month. Why?

Phillips suggests that it's because lotteries are actually a rational investment for poor or working-class people. "Poor people's money doesn't work right," she writes. "It doesn't save, doesn't accumulate, it doesn't invest.... It gets traded in, given away, stolen, lost." Phillips believes she's describing something that's always true about the difference between poor people and rich people. But what she's actually describing is what will be true as long as people who don't have much money believe that saving is a hopeless endeavor. In other words, as long as you think that you can't invest, you won't.

Money, after all, really is just money. It doesn't care about its origins or about its eventual destination. A dollar put into an index fund will grow at the same rate regardless of whether it's one of forty-nine other dollars or whether it's one of forty-nine thousand other dollars. In that very basic sense, a working-class person's dollar is worth just as much as a rich person's dollar, and it has the same investment potential.

The problem is that this potential will be difficult to realize until making an investment -- whether it be in stocks or in bonds or in other securities -- is as easy as buying a lottery ticket. It's not hard to understand, after all, why people play the lottery. If I have $10 in my pocket, I can't go down to the corner store and buy an eighth of a share of Microsoft or even add that $10 to my mutual fund. But I can go down to my corner store, buy 10 Powerball tickets, and for a little while dream of a life without work. Making the process of investing much easier than it is even today is, therefore, a crucial part of steering people away from the lottery.

Just as important will be driving home the fact that small amounts of money piled up over a period of time eventually can become a large amount of money, and that no matter how small the sum, you should think about how valuable the money you spend today would be twenty years from now if it were invested. That is especially true with the lottery, because unlike buying a car or a nice suit, where the value you derive from the product may outweigh even the long-term value of the money, a lottery ticket has practically no value at all outside of its potential payoff. Unlike gambling, for instance, a lottery is not enjoyable in any real sense. What's strange about lotteries, in fact, is that they're not so much examples of Americans' tendency to overspend as they are examples of Americans' tendency to discount the importance of patience.

Statistically speaking, of course, no one ever wins a lottery. The odds against winning the Powerball drawing, for instance, were 80 million to 1, which means that it's impossible to justify buying a lottery ticket in any rational terms. (The continued popularity of lotteries, in fact, is a refutation of the idea that humans are always rational economic beings.) The only way to justify it is to assume that you have no other options. Here I'm referring not so much to the person who buys one Powerball ticket on a lark as I am to those people who play the lottery every week and shell out hundreds of dollars a year in pursuit of a chimera. If these people believed that their money could "save, accumulate, invest," then the lottery would become less attractive. Stopping the state sponsorship of Powerball, then, is less important than changing the popular attitudes toward investing that make something like Powerball a roaring success.

In his biography of Warren Buffett, Roger Lowenstein tells a story of Buffett on a golf trip with three other buddies, all of them preposterously rich. One of the four said that if the other three invested $10 apiece, he would pay $10,000 to anyone who got in a hole-in-one that weekend. Buffett, predictably enough, refused to invest the $10, even though he got a lot of ribbing for his stinginess. The point is that he believed the odds were seriously against him, and he preferred to keep the $10 rather than simply toss it away. The odds for the Powerball players were even worse, yet 195 million times someone decided that it was worth investing a dollar even if the chances of winning were non-existent. When it comes to the lottery, then, what America really needs is nothing more complicated than a simple dose of Buffett-ism. As the saying goes, somebody has to win. But as the saying also goes, somebody has to win, and it won't be you.