Lottery

A lottery is a popular form of gambling which involves the drawing of lots for a prize. Some governments forbid it, while others endorse it to the extent of organizing a national lottery. It is common to find some degree of regulation of lottery by governments.

The first signs of a lottery trace back the Han Dynasty between 205 and 187 B.C., where ancient Keno slips were discovered. The lottery has helped finance major governmental projects like the Great Wall of China.

The first known European lottery occurred during the Roman Empire, and was mainly done as a form of amusement at dinner parties. Each guest would receive a ticket, and prizes would often consist of fancy items such as dinnerware. Every ticket holder would be assured of winning something. The first European lottery to award money was held in Florence, Italy in 1530. As with the earlier Roman style lottery, all ticket holders would be eligible for a small prize, such as a trinket, for playing.

The Dutch were the first to shift the lottery to solely money prizes and base prizes on odds (roughly about 1 in 4 tickets winning a prize). The lottery proved to be very popular, and was hailed as a painless form of taxation. In the Netherlands the lottery was used to raise money for e.g. supporting poor people, building dikes, construction of defense works for towns and to buy free sailors from slavery in the Arab countries. The English word lottery stems from the Dutch word loterij, which is derived from the Dutch noun lot meaning fate. The Dutch state owned staatsloterij is the oldest still existing lottery.

Lotteries come in many formats. The prize can be fixed cash or goods. In this format there is risk to the organizer if insufficient tickets are sold. The prize can be a fixed percentage of the receipts. A popular form of this is the "50-50" draw where the organizers promise that the prize will be 50% of the revenue. The prize may be guaranteed to be unique where each ticket sold has a unique number. Many recent lotteries allow purchasers to select the numbers on the lottery ticket resulting in the possibility of multiple winners.

Lotteries are most often run by governments or local states and are sometimes described as a regressive tax, since those most likely to buy tickets will typically be the less affluent members of a society. The astronomically high odds against winning have also led to the epithets of a "tax on stupidity", "math tax" or the oxymoron "voluntary tax" (playing the lottery is voluntary; taxes are not). They are intended to suggest that lotteries are governmental revenue-raising mechanisms that will attract only those consumers who fail to see that the game is a very bad deal. Indeed, the desire of lottery operators to guarantee themselves a profit requires that an average lottery ticket be worth substantially less than what it costs to buy. After taking into account the present value of the lottery prize as a single lump sum cash payment, the impact of any taxes that might apply, and the likelihood of having to share the prize with other winners, it is not uncommon to find that a ticket for a typical major lottery is worth less than one third of its purchase price.

The fact that lotteries are commonly played leads to some contradictions against standard models of economic rationality. However, the expectations of some players may not be to win the game, but to experience the thrill and indulge in a fantasy of possibly becoming wealthy. Even ignoring the thrill factor, there is the theoretical possibility that the purchase of a lottery ticket could represent a gain in expected utility, even though it represents a loss in expected monetary value, thus making the purchase a rational decision. Insurance, for instance, represents negative expected monetary value but is not considered to be a tax on stupidity because it is generally believed to deliver positive expected utility to the individual.