This series is adapted, with permission, from a Chinese-language series by our friend Marcus Ji, who looks at historical events through an economic lens. We have condensed and adapted the original for an international audience.
Most discussions of the lottery start with the odds of winning. That is the wrong place to begin. A lottery was never designed to produce rich people. It was designed to raise money for the state without raising taxes. The winner is just a cost in the system.
A tax nobody is forced to pay
In 1567, Elizabeth I ran the first English state lottery. The purpose was written out plainly: repair the harbours, strengthen the kingdom’s defences, fund other public works. Three details of the design show how hard a sell it was:
- 400,000 tickets at 10 shillings each – more than an ordinary person could afford, so the intended buyer was the propertied class, not the common people.
- A top prize of £5,000, but much of it paid in silver plate, tapestries and linen rather than cash.
- Strangest of all, every buyer received one week of immunity from arrest – for any offence short of murder, serious felony, piracy and treason.
Offering a week’s freedom from arrest as a sales sweetener tells you where the seller stood. This was not a popular product being sold; it was something that needed a bribe attached before anyone would take it. Sales were poor. People called it “taxation by the back door,” and they were right. The draw was delayed until 1569, and Elizabeth never repeated the experiment.Â
The same pattern turned up with better results in other places:
- Between 1790 and the American Civil War, lottery revenue in the United States built roughly 50 colleges, 300 schools and 200 churches. Harvard, Yale, Princeton and Columbia all took lottery money in their early years. Benjamin Franklin ran a lottery to buy cannon for Philadelphia; George Washington ran one to build a road west.
- Japan’s takarakuji, its national lottery, launched in 1945 to fund the war effort and to soak up spare cash that would otherwise have pushed prices up. After the war, it was turned to financing reconstruction.
All these lotteries show a common pattern. When governments are unable to tax their peoples directly (lack of power, or political cost too high), governments turn to lotteries. Its place in public finance is roughly that of a municipal bond today – money now, raised with the least possible resistance.
The only number that matters
The economics of a lottery come down to a single figure: the return to player, or RTP – the share of ticket sales that comes back to buyers as prizes. Mainstream lotteries cluster between 45% and 55%: the US Powerball around 50%, the UK National Lottery about 53%, Japan’s takarakuji 46.5%, Canada’s Lotto 6/49 around 45%.
To see what that figure means, let’s compare it with a casino game. The simplest game on a casino floor is sic bo, a bet on whether a roll of three dice comes up “big” or “small.” Under standard payouts, the house keeps an edge of 2.78%, which is an RTP of 97.22%. Put $100 through it, and over time you lose $2.78. Put $100 dollars into lottery tickets, and over time you lose $45 to $55. Measured by expected value, a lottery ticket is 16 to 20 times worse than the worst simple bet in a casino. That is not a matter of opinion; it is one RTP divided by the other.
One thing the comparison hides is where the money goes. The casino keeps its 2.78% as private profit. Of the 45% to 55% a lottery player loses, only 20% to 36% actually reaches the public purse – the difference is operating cost, sales commission and tax.
What the buyer is really paying for
If a lottery ticket returns minus-45 to minus-55%, why do hundreds of millions of people buy one anyway? Most people think that the reason is because players are buying hope. That answer is circular: it explains the buying of hope with the wanting of hope, and adds nothing. There is a more specific one.
Researchers Haisley, Mostafa and Loewenstein ran a neat experiment. They recruited people at a Greyhound bus station in Pittsburgh and paid each 5 dollars to fill in a survey that included a question about income. The trick was in how the income brackets were written:
- For one group, the brackets started at “under $100,000,” so almost everyone ticked the lowest box.
- For the other, they started at “under $10,000,” so the same kind of person landed in the middle of the range.
Everyone was then given the chance to spend the 5 dollars on scratch cards. The group that had been nudged into feeling relatively poor bought nearly twice as many – 1.27 cards on average, against 0.67 of the mid-range group. Their real incomes were no different. The only thing that changed was how poor each person felt at the moment of buying.
So the thing that drives lottery-buying is not how poor you are but how poor you feel – the sense of being behind – and that feeling can be produced cheaply from outside. The broad data agrees:
- Each one-point rise in a US state’s poverty rate is matched by about $230 more in lottery sales per head.
- Households earning under $25,000 a year spend around $600 on tickets; households earning over $100,000 spend $289. Lower in dollars, an order of magnitude higher as a share of income.
That is what economists mean by a regressive charge: the burden falls hardest, in proportion, on those with the least.
Now put this next to Elizabeth. Her lottery was resented because the 10-shilling price placed the burden on the propertied – and the propertied had a voice. Drop the price to two dollars a ticket and aim it at low-income buyers, and the complaint goes quiet. The system did not become fairer. The people paying for it changed. That is why an instrument invented in 1567 has run for four and a half centuries with almost no political resistance: its cost falls on the group with the weakest political voice.
When the tool captures its master
A fiscal instrument that raises this much money can also slip its leash. In 1868, Louisiana’s treasury was empty after the Civil War. A former lottery agent, Charles Howard, offered the legislature a deal: his company would give $40,000 a year to the state charity hospital in return for 25 years of exclusive, tax-free lottery rights. The state, desperate for funds, agreed.
For the next quarter-century the Louisiana Lottery Company was among the most profitable firms in America, nicknamed the “Golden Octopus” because it reached through the US postal system into homes across the country. Ninety per cent of its revenue came from outside Louisiana. It bribed courts, the legislature and banks as ordinary practice; the governor admitted he could not fight it. It even dropped its unsold tickets into the draw, so a share of the prizes fell back to the company and the real payout ran below the published rate.
What ended it was not moral protest but jurisdiction: other states could do nothing, because they had no authority over Louisiana’s legislature. So in 1890, Congress banned lottery tickets and advertisements from the US mail, and in 1892, the Supreme Court upheld the ban. Cut off from 90% of its income, the company moved to Honduras and folded by 1907. The lesson is direct: once a fiscal tool earns enough, it turns around and captures the government that licensed it. American states banned lotteries almost completely afterwards, and none ran a modern one again until New Hampshire in 1964 – a gap of nearly seventy years.
The people who beat it, and why they are not the exception they seem
If a lottery is a mathematically losing game, then winning at it over the long run should be impossible. A few people managed it anyway, entirely within the law, and their cases mark exactly where the line between possible and impossible sits.
- A retired Michigan couple, Jerry and Marge Selbee, read the rules of a game called Winfall in under three minutes. It had a “roll-down” rule: when the jackpot reached $5m with no winner, the money did not keep building but rolled down to the smaller prize tiers. Selbee worked out that in a roll-down week, every $1,100 staked returned about $1,900. Over nine years, buying in bulk on those weeks with a group of family and friends, they won more than $27m, for a pre-tax profit near $7.75m.
- MIT students found the same flaw in a near-identical Massachusetts game and set up a company to work it, clearing at least $3.5m over seven years. On one occasion they bought 700,000 tickets in four days – enough to push the jackpot past the roll-down line themselves, rather than wait for it to arrive.
- The state of Massachusetts, meanwhile, made $120m from the very same game. When investigators looked into the large bettors, expecting organised crime or corruption, they found neither – only people who had done the arithmetic correctly.
None of these winners succeeded through discipline or patience. They succeeded because a flaw in the rules made the game, for a short window, a winning one. That distinction is the whole point. The gambler’s ruin theorem shows that in a repeated losing game played with a limited bankroll, the chance of ending at zero climbs towards certainty – and, less obviously, that being far ahead does not save you: keep betting the same way and ruin is still the destination. In a genuinely losing game, no amount of self-control changes the direction of the outcome. The direction changes only when the underlying maths changes – and the one party for whom a lottery’s maths is reliably positive is the house that runs it.
The business logic, in short
Read together, the pieces settle into a plain account of what a lottery is for. Its first function is fiscal, not recreational: from Elizabeth I in 1567 to Japan in 1945, it exists to raise state revenue when direct taxation is not an option. That is why the return to player (RTP) has sat at 45 to 55% for centuries – the figure is not set by competition but by the balance between what the state needs and what buyers will tolerate. And the reason the arrangement provokes so little objection is that its cost rests on the people least equipped to object. The lottery is the state raising money by selling a bet that pays back about half of what goes in, to the buyers who can least afford it, with the shortfall described as a public good.
Previously in this series: Governments will never take away welfare, they will just shrink the value of it
