If you’ve ever purchased a lottery ticket, you’ve participated in one of the world’s biggest business models. State and national lotteries generate an average of $100 billion a year. But where does all that money come from? The answer to this question is not as simple as it might seem. But it’s worth remembering that, according to Occam’s razor—a rule of logic from a 14th-century philosopher that states that the simplest solution is often the correct one—the vast majority of lottery revenue comes from a very small percentage of ticket sales.
The word “lottery” derives from the Dutch noun lutjen, meaning “fate.” The practice of drawing lots to determine property distribution can be traced back centuries. For example, the Old Testament instructs Moses to take a census of Israel and divide land among its inhabitants by lot. And the Roman emperors used to distribute properties and slaves through this method.
Modern lotteries are generally classified as gambling because, unlike most games of chance, participants must pay a consideration—money or other value—in order to have the opportunity to win a prize. However, some lottery-like promotions—such as military conscription and commercial promotion in which prizes are awarded by random selection procedures—do not meet this strict definition because they require payment of a consideration but do not involve the possibility that the player will lose.
While some people consider the purchase of a lottery ticket to be irrational, others find it a worthwhile pastime. This is primarily because of the entertainment value—or other non-monetary benefits—that may be obtained through playing the game. In addition, the purchase of a ticket can be considered an investment in the future. Thus, it is possible to calculate the expected utility of winning the lottery, and if the expected monetary prize exceeds the cost of buying a ticket, then it may be a rational choice for that individual.
The first European public lotteries to award money prizes were held in the 15th century in Burgundy and Flanders. In these early lotteries, towns sought to raise funds for town fortifications or to help the poor. Francis I of France established similar lotteries for private and public profit in several cities between 1520 and 1539.
Today, state governments have a different attitude toward lotteries. The overwhelming majority of them levy a tax on winnings, and these taxes can be quite significant—especially in states with high population density. The money collected from these taxes is then redirected to state programs, such as education and public works. The only exceptions are Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, and Washington, which do not impose a state income tax on winnings. The rest of the states use these revenues to fund their general budgets and other programs.
