SEA at ASUStudent Economics AssociationStudent Economics Association

Powerball EconomicsStudent Economics Association

The Role of Government Economics and the Environment

ACTIVE ECONOMICSOutsourcing

What is Economics?

Economics is a social science concerned with the logic of scarcity, cost, value, and choice

Economics:Money, Numbers, Choices, and Consequences Money LOTS of it

Numbers not the powerballs themselves, but the mathematical odds behind the numbers

Choices Are lottery tickets good investments?

Logic Who is going to play this game ? Who is going to win (long run) ?

Consequences personal and societal

Youve been gambling again !Lets Play our Lotto Game

Powerball EconomicsStudent Economics Association Pick three numbers:& choose heads or tails: (Kennedy is heads)+

Payoffs

1. To win anything, you call the coin flip correctly.

2. Then: 0 correct numbers -- 0 1 correct number --$1 (1 candy bar)2 correct numbers --$2 (2 candy bars) 3 correct numbers --$5 (5 candy bars)

Think about it: How much would you pay to play (a) once, (b) every week (c) many times every week ?

Relative Frequencies 0 1 2 3 Correct NumbersFrequency (20 possibilities)11 9 9Three Red: 1/20Three White: 1/20

Expected Value: xi pi Add up payoffs (x) weighted by probabilities (p) 0 1 2 3 Correct NumbersFrequency (20 possibilities)11 9 9EV = (0 + 9 + 18 + 5)/20 = .80 = (0) (1) (2) (5)

0 1 2 3 4 5 PB x 1/42 White Balls (1 55) Power Ball (1 - 42) Probabilities x = 5 4 3 2 1 1 55 54 53 52 51 1/3.5 million !If you bought 12 powerball tickets every week, you would have a 50% chance of winning a jackpot once in 134,000 years

Expected Valueof a Lottery Ticket The expected value of a Powerball ticket is in the neighborhood of 22 before taxes!

Remember each ticket costs you one dollar

Economic Questions and Issues

1. Is Powerball a bad investment?

2. Is it irrational to play powerball?

3. Who plays powerball?

4. What is the states objective?

5. As a matter of policy, is it a good idea to use lottery gambling as a major revenue source?

6. Are there hidden costs?

Lets think about thisGovernment sells Powerball tickets ($1 each)Ordinary citizens buy ticketsMost Citizens receive nothing from govt. directly in terms of monetary gainMoney used in government programs (state parks, schools, etc.)This sounds like it could be a

a TAX!!!

Regressive tax: tax rate (%) gets higher as income gets lower the poor pay relatively moreSo what kind of tax could be? Progressive tax: tax rate (%) gets higher as income gets higher (e.g., US personal income tax) the rich pay relatively more

Some Hidden Costs Over Ten Million Problem Gamblers in US Arizona prints Play Responsibly on its tickets; Colorado contributed 300K to Gambling addiction studies

The National Council On Problem Gambling has hotlines to help those who become addicted.

Researched by Prof. Earl L. Grinols, Baylor University, Nov 2004http://www.texaspolicy.com/pdf/2005-03-vlt-grinols-summary-11-04.pdf Cost Per Pathological Per Adult Gambler Capita

Crime 359175 Lost Productivity 235858 Bankruptcy 251 6 Suicide Illness 773 20 Social Services 425 16 Regulatory Agencies 62 1 Family Disruption 2880 60

TOTALS $10,330 $219 Some Specific Gambling Costs

WE cant win if YOU dont play !!!

Introduce ourselves and tell about SEA

So how many people think that the questions I just asked you have nothing to do with economics?Well maybe we need to ask What exactly is Economics?Any ideas?I would like to dispel any myths about what economics is it is not all about money, math or numbers

Social Science: economics studies choices, often without judging the choices as good, bad, correct or incorrect

Logic: start from a presumption that individuals are rational that they have good reasons for their choices, even though we might not make the some decisions

Collectively, individual decisions have social consequences.

All of these facets of economics math, numbers, money, choice, social consequences are found in the simple economics of the powerball game. In studying powerball, we see economics in actionSo, if there are 25 of you, we estimate that we need 20 candy bars per game to pay you off. There will be some variance in each game, mainly depending on whether there is a jackpot or not. But over time, this is a very dependable estimate.

So, if you bet a candy bar, we take a few bites and give it backGetting this number right is a very complex exercise. I frankly dont know where this number comes from, but it is similar to the one in http://books.google.com/books?id=Ua-_5Ga4QF8C&pg=RA2-PA131&lpg=RA2-PA131&dq=expected+value+of+a+powerball+ticket&source=web&ots=jJj5XXz9MO&sig=kJpEEUZo6WGmJjJ7dcb2V3uPXLU

The simplest way would be to look at a simple ratio between total payoff and total amount bet. But the correct number will variable with the actual size of the powerball jackpot.Negative expected return, huge variance (risk)

2a. Some people play it for entertainment. Fine but the more important reason (which explains who plays) is2b. For some, it is their best investment opportunity because they have good reason to prefer huge variance (who?)

Lower income groups. And they play not for enjoyment, but for a small chance of becoming rich. That huge variance is, in their estimation, the only way they can achieve wealth.

The state is the broker (bookie). For the state, risk is negligible. Returns are high and certain because the law of large numbers is in its favor.

Lottery gambling is a voluntary (so most people are ok with it), but highly regressive tax. As a regressive tax, it is contrary to widely accepted social policy of lower tax rates for lower income groups.

The government is sending out the message that gambling is good and is facilitating gambling as a common, everyday practice. It is hard to say that state lotteries cause gambling addictions, but the do contribute to the problem.