A lottery is a game of chance in which people pay for the opportunity to win prizes. Part of the money taken in by a lottery is used to award the winners and to pay the costs of administering the lottery. The money left over is profit. Lotteries are extremely popular and legal in more than a hundred countries.
In the United States all lotteries are operated by state governments, which have granted themselves the sole right to do so. In other words, they are monopolies that do not allow any commercial lotteries to compete against them. The profits from U.S. lotteries are used solely to fund government programs. As of August 2008, lotteries operated in forty-two states and the District of Columbia. In addition, lottery tickets could be legally purchased by any adult physically present in a lottery state, even if that adult did not reside in the state.
According to the North American Association of State and Provincial Lotteries (NASPL), Americans wagered $57.4 billion in lotteries in fiscal year (FY) 2006. U.S. lottery sales were up from $52.6 billion in FY 2005, an increase of 9%.
The drawing of lots to determine ownership or other rights is recorded in many ancient documents. The practice became common in Europe in the late fifteenth and early sixteenth centuries. Lotteries were first tied directly to the United States in 1612, when King James I (1566 – 1625) of England created a lottery to provide funds to Jamestown, Virginia, the first permanent British settlement in North America. Lotteries were used by public and private organizations after that time to raise money for towns, wars, colleges, and public works projects.
An early American lottery, conducted by George Washington (1732 – 1799) in the 1760s, was designed to finance construction of the Mountain Road in Virginia. Benjamin Franklin (1706 – 1790) supported lotteries to pay for cannons during the American Revolution (1775 – 1783). John Hancock (1737 – 1793) ran a lottery to finance the rebuilding of Faneuil Hall in Boston. Lotteries fell into disfavor in the 1820s because of concerns that they were harmful to the public. New York was the first state to pass a constitutional prohibition against them.
The Rise and Fall of Lotteries
The southern states relied on lotteries after the Civil War (1861-1865) to finance Reconstruction (1865-1877). The Louisiana lottery, in particular, became widely popular. According to the Louisiana Lottery Corporation, in “ History of Lottery ” (September 2008, http://www.louisianalottery.com/assets/docs/fact%20sheets/HistoryofLotteries.pdf), in 1868 the Louisiana Lottery Company was granted permission by the state legislature to operate as the state's only lottery provider. In exchange, the company agreed to pay $40,000 per year for twenty-five years to the Charity Hospital of New Orleans. The company was allowed to keep all other lottery revenues and to pay no taxes on those revenues. The Louisiana lottery was popular nationwide — 93% of its revenue came from out of state. It was also extremely profitable, returning a 48% profit to its operators.
In 1890 Congress banned the mailing of lottery materials. The Louisiana lottery was abolished in 1894 after Congress passed a law against the transport of lottery tickets across state lines. Following its closure, the public learned that the lottery had been operated by a northern crime syndicate that regularly bribed legislators and committed widespread deception and fraud. The resulting scandal was huge and widely publicized. Public opinion turned against lotteries, and by the end of the nineteenth century they were outlawed across the country.
Negative attitudes about gambling began to soften during the early twentieth century, particularly after the failure of Prohibition (1920 – 1933). The state of Nevada legalized casino gambling in the 1930s, and gambling for charitable purposes became more commonplace across the country. Still, lingering fears about fraud kept public sentiment against lotteries for two more decades.
Rebirth in the 1960s
In “ History of the New Hampshire Lottery ” (2008,http://www.nhlottery.org/AboutUs/History.aspx ), the New Hampshire Lottery Commission notes that in 1963 the New Hampshire legislature authorized a sweepstakes to raise revenue. The state had no sales or state income tax at that time, and it desperately needed money for education programs. Patterned after the popular Irish Sweepstakes, the game was much different from the lotteries of the twenty-first century. Tickets were sold for $3, and drawings were held infrequently. The biggest prizes were tied to the outcomes of particular horse races at the Rocking-ham Park racetrack in Salem, New Hampshire. Nearly $5.7 million was wagered during the lottery's first year.
The New York Lottery states in “ New York Lottery'Mission ” (October 2, 2008, http://www.nylottery.org/ny/nyStore/cgi-bin/ProdSubEV_Cat_333652_NavRoot_305.htm) that New York introduced a lottery in 1967. It was particularly successful, grossing $53.6 million during its first year. It also enticed residents from neighboring states to cross state lines and buy tickets. Twelve other states established lotteries during the 1970s (Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan, New Jersey, Ohio, Pennsylvania, Rhode Island, and Vermont). Analysts suggest that lotteries became so firmly entrenched throughout the Northeast for three reasons: each state needed to raise money for public projects without increasing taxes, each state had a large Catholic population that was generally tolerant of gambling, and history shows that states are most likely to start a lottery if one is already offered in a nearby state. For example, Ron Stodghill and Ron Nixon report in “ For Schools, Lottery Payoffs Fall Short of Promises ” (New York Times. October 7, 2007) that Michael F. Easley (1950 – ), the governor of North Carolina, said before his state established a lottery, “ Our people are playing the lottery. We just need to decide which schools we should fund, other states' or ours. ”
During the 1980s lottery fever spread south and west. Seventeen states (Arizona, California, Colorado, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Missouri, Montana, Oregon, South Dakota, Virginia, Washington, West Virginia, and Wisconsin) plus the District of Columbia started lotteries. Six more states (Georgia, Louisiana, Minnesota, Nebraska, New Mexico, and Texas) started lotteries during the 1990s. They were joined after 2000 by North Carolina, North Dakota, Oklahoma, South Carolina, and Tennessee. Most people approve of lotteries. More people approve of lotteries than actually buy tickets and participate, although the gap between approval and participation rates seems to be narrowing.
Early lottery games were simple raffles in which a person purchased a ticket preprinted with a number. The player might have had to wait for weeks for a drawing to determine if the ticket was a winner. These types of games, called passive drawing games, were the dominant lottery games in 1973. By 1997 they had ceased to exist, as consumers demanded more exciting games that provided quicker payoffs and more betting options.
Nearly all states that operate lotteries offer cash lotto and instant games. Players of lotto games select a group of numbers from a large set and are then awarded prizes based on how many picked numbers offer a second set of numbers chosen in a random drawing. Most lotto tickets sell for $1, and drawings are held once or twice per week to determine the winning numbers. Scratch-off instant games are paper tickets on which certain spaces have been coated with a scratch-off substance that when removed reveals numbers or text underneath that must match posted sequences to win.
Most states offer other numbers games, such as three-and four-digit games. Pull tabs, spiel, keno, and video lottery games are much less common. Pull tabs are twoply paper tickets that must be separated to reveal symbols or numbers underneath that must match posted sequences to win. Spiel is an add-on feature to a lotto game that provides an extra set of numbers for a fee that must be matched to numbers selected in the random drawing to win. Keno is a lotto game in which a set of numbers is selected from a large field of numbers; players select a smaller set of numbers and are awarded prizes based on how many of their numbers match those in the drawn set. Video lottery terminals are electronic games of chance played on video screens that simulate popular casino games such as poker and blackjack. Keno and video lottery games are considered by many to be casino-type games, especially because they can be played every few minutes (in the case of fast keno) or at will (in the case of video lottery terminals), which makes them more controversial and generally less acceptable than more traditional lottery games.
As of 2008, many lottery games were conducted using computer networks. Retail outlets have computer terminals that are linked by phone lines to a central computer at the lottery commission, which records wagers as they are made. The computer network is a private, dedicated network that can be accessed only by lottery officials and retailers. Players can either choose their numbers themselves or allow the computer to select
numbers randomly, an option known as Quick Pick. The computer link allows retailers to validate winning tickets.
Most lotto drawings are televised live. Some states also air lottery game shows in which contestants compete for money and prizes. For instance, The Big Spin. the California State Lottery's thirty-minute game show, has been broadcast since 1985. Contestants, who are chosen through lottery drawings or special promotions, spin a big wheel to win cash prizes in front of a cheering audience.
Lottery winners generally have six months to one year to collect their prizes, depending on state rules. If the top prize, usually called the jackpot, is not won, the amount of the jackpot usually rolls over to the next drawing, increasing the jackpot. Lotteries are often most popular when the jackpot has rolled over several times and grown to an unusually large amount.
Most states allow players to choose in advance how a jackpot will be paid to them — either all at once (the cash lump-sum prize) or in installments (an annuity, usually paid out over twenty or twenty-five years). Either way, in most states taxes are subtracted from the prize.
In 1974 Massachusetts became the first state to offer an instant lottery game using scratch-off tickets. By 2008 games involving scratch tickets (or “ scratchers, ” as they are called in some states) were extremely popular. Lottery organizations offer many different scratch games with various themes.
Scratch games run for a specified period, usually for several months to a year. Many scratch tickets allow a player to win multiple times on each ticket. The top prize amounts are often hundreds of thousands of dollars. However, some of the games offer prizes besides money, including merchandise, trips, vehicles, and tickets to sporting events and concerts. For example, in 2006 a Missouri scratch game gave away a seat at a table at the World Poker Tour tournament. The total winnings for such prizes often include payment by the lottery commission of federal and state income taxes on the value of the prizes.
Many lotteries have teamed with sports franchises and other companies to provide popular products as prizes. For example, in June 2008 the New Jersey Lottery Commission announced a scratch game in which a Harley-Davidson motorcycle was the top prize. Many brand-name promotions feature famous celebrities, sports figures and teams, or cartoon characters. These merchandising deals benefit the companies through product exposure and advertising; the lotteries benefit because the companies share advertising costs.
In 2008 most states offered “ high-profit point tickets ” — scratch tickets priced as high as $30, which are often part of a holiday or themed promotion. (Traditional scratch tickets sell for $1 to $5.) The higher-priced tickets appeal to many scratch players because they offer more valuable prizes and payouts than regular-priced tickets. However, in “ ‘ Zero ’ Chance Lottery Tickets Stun Some Players ” (CNN.com, July 7, 2008), Jason Carroll and Susan Chun report that in 2008 state lotteries came under fire for continuing to sell the high-priced scratch-off tickets even after the top prize had been won. In fact, Scott Hoover of Washington and Lee University sued the state of Virginia for a breach of contract after he bought a scratch-off ticket called “ Beginner's Luck ” and later learned the top prizes had already been won.
Most lotteries operate toll-free numbers or Web sites that provide information on scratch-game prizes. Patrons can find out which prizes have been awarded and which remain to be claimed.
Sometimes even nonwinning lottery tickets have value. Most state lotteries run occasional second-chance drawings — and even third-chance drawings — in which holders of nonwinning tickets for particular games can still win cash or prizes. For example, the New York Lottery held a second-chance drawing during the summer of 2006 in which holders of nonwinning Subway Series scratch tickets could win Mets and New York Yankees tickets and merchandise. The grand prize winner in Florida's $100,000 Hold 'Em Poker second-chance drawing in December 2007 won a seat at a World Poker Tour tournament with a buy-in of $10,000, a week's accommodation at the tournament site, additional spending money, and tickets to the tournament finals. Winners of quarterly second-chance drawings in Nevada may be awarded either $2,500 in cash or thirty $10 scratch-off tickets.
Video Lottery Games
Video lottery games are highly profitable computer games that are played on video lottery terminals (VLTs). They are monitored and controlled by a central computer system overseen by a state's lottery agency. VLTs were operated in nine states in 2008: Delaware, Louisiana, Montana, New Mexico, New York, Oregon, Rhode Island, South Dakota, and West Virginia. Three of these states, Rhode Island, Delaware, and West Virginia, launched the first multistate, progressive video lottery game in 2006 (a progressive jackpot is one that increases with each game played). Known as Ca$hola, the game begins with a $250,000 jackpot.
VLTs in Louisiana, Montana, and South Dakota are owned by private entities. Those in Rhode Island are leased by the state to private operators. VLTs in the other states are owned by state lottery commissions. In Delaware, New York, and Rhode Island, VLTs are only allowed at racetracks. Except in New York, profits from
the VLTs are split between the racetracks and the state lotteries. The VLTs in New York were challenged in court because the state's constitution requires that lottery proceeds benefit education programs. Some VLT revenue was going to racetracks, so the courts declared the diversion of lottery revenue unconstitutional. In 2005 the state legislature amended the law. Under the new legislation the money for the racetrack owners comes out of the state's general fund and all the money gathered from the VLTs goes to education.
In Iowa, VLTs were introduced in 2003, and eventually nearly six thousand VLTs were bringing in over $1.1 billion in revenue. However, according to the Cedar Rapids Gazette Online (July 15, 2006), calls to the state's hotline for gambling problems rose 17% in 2005, largely because of VLTs, and the state legislature shut down the VLT program in May 2006.
Video lottery games have become controversial because many people consider them hard-core gambling. They allow continuous gambling for large sums of money, as opposed to lotto play, which features drawings only once or twice a week. Opponents of video lottery games contend that they are much more addictive than traditional lottery games because of their availability and instant payoffs. They also contend that the games have a special appeal to young people, who are accustomed to playing video games.
POWERBALL. During the 1980s lottery officials realized that multistate lotteries could offer higher payoffs than single-state lotteries because the costs of running one game could be shared. The Multi-State Lottery Association (MUSL) was formed in 1987 as a nonprofit association of states offering lotteries. It administers a variety of games, the best known of which is Powerball. In this lotto game each ticket has six numbers: five numbers are selected out of fifty-five numbers, and then a separate number, the Powerball, is selected out of forty-two numbers. The odds of winning the jackpot are about 146 million to 1. Drawings have been held twice weekly since the first drawing on April 22, 1992. The largest jackpot ever paid out, in February 2006, was $365 million. It was split evenly among eight coworkers in Lincoln, Nebraska.
As of August 2008, MUSL(http://www.musl.com/musl_members.html ) had thirty-one members. Each member state offered at least one MUSL game, and twenty-nine member states, the District of Columbia, and the U.S. Virgin Islands offered the Powerball. Each member keeps 50% of its own Powerball ticket sales; the rest is paid out in prizes.
MEGA MILLIONS. Mega Millions is a popular multi-state game that is offered in twelve states. Players choose six numbers from two separate number pools: five numbers from 1 to 56, and one number from 1 to 46. All six numbers must be chosen in the drawing to win the jackpot. The odds of winning the jackpot are about 175 million to 1. Drawings are held twice weekly.
Mega Millions was originally known as the Big Game. The first Big Game drawing took place on September 6, 1996. It became popular and soon offered jackpots of more than $50 million. Its largest jackpot was won in May 2000 — two winners, one in Michigan and one in Illinois, split $363 million.
However, Big Game sales lagged during FY 2001, so game operators renamed it Mega Millions and increased the initial jackpot to $10 million, twice what it had been for the Big Game. Ticket sales increased dramatically. In 2005 the minimum jackpot was raised to $12 million when California joined the lottery. The biggest Mega Millions jackpot was in March 2007 — $390 million was split between a couple in Woodbine, New Jersey, and another person in Dalton, Georgia.
HOW LOTTERIES OPERATE
In 2008 most lotteries were administered directly by state lottery boards or commissions. The lotteries in Connecticut, Georgia, Kentucky, Louisiana, and Tennessee were operated by quasi-governmental or privatized lottery corporations. In most states enforcement authority regarding fraud and abuse rested with the attorney general's office, state police, or the lottery commission. The amount of oversight and control that each legislature has over its lottery agency differs from state to state.
Even though lotteries are a multimillion-dollar business, lottery commissions employ only a few thousand people nationwide. Lottery commissions set up, monitor, and run the games offered in their states, but the vast majority of lottery sales are by retail outlets that contract to sell the games.
According to the NASPL (2008, http://www.naspl.org/index.cfm?fuseaction=content&PageID=9&Page Category=31), over 191,000 retailers sold lottery tickets in the country in 2008. California had the most retailers (19,000), followed by Texas (16,281) and New York (15,900). Half of all lottery retailers were convenience stores. Other outlets included various kinds of stores, nonprofit organizations (churches and fraternal organizations), service stations, restaurants and bars, bowling alleys, and newsstands.
Retailers get commissions on lottery sales and bonuses when they sell winning tickets. They also get increased store traffic and media attention, especially if they become known as “ lucky ” places to purchase lottery
tery tickets. Some state lottery Web sites list the stores where winners purchased their tickets. For example, in “ Lucky Retailers ” (April 6, 2006,http://www.calottery.com/SecondaryNav/RetailLocations/LuckyRetailers/ ), the California State Lottery notes that one retailer in Port Hueneme, California, sold six winning million-dollar-plus tickets between 1987 and 1994.
Lottery tickets are often impulse purchases, so retailers sell them near the checkout. This also allows store operators to keep an eye on ticket vending machines to prevent play by underage customers. Because convenience stores increasingly offer pay-at-the-pump gasoline sales — transactions that are likely to decrease in-store traffic — lottery officials in Minnesota and several other states are contemplating ways to sell and print tickets at the gas pumps. In fact, a patent (U.S. Patent 6364206,http://www.patentstorm.us/patents/6364206.html ) was issued in 2002 that would enable lottery ticket transactions at gas pumps. In 2008 the New Jersey Lottery Commission was considering selling lottery tickets in mass-merchandise stores, such as Target and Home Depot.
LOTTERY PLAYER DEMOGRAPHICS
Jeffrey M. Jones of the Gallup Organization states in One in Six Americans Gamble on Sports (February 1, 2008,http://www.gallup.com/poll/104086/One-Six-Americans-Gamble-Sports.aspx ) that in 2008, 46% of adults had purchased a lottery ticket within the previous year. Many state lottery commissions conduct demographic studies to get a better picture of lottery players, largely because they want to better target them in marketing campaigns. The findings in two states provide some insight into lottery players.
In Demographic Survey of Texas Lottery Players 2007 (December 5, 2007,http://www.uh.edu/cpp/txlottery.pdf ), the University of Houston's Center for Public Policy states that only 38% of Texans played the lottery in 2007, which was the lowest level since the lottery began in 1992. (See Figure 7.1.) People with an income of $75,000 to $100,000 were the most likely to play (50%), whereas people with an income of less than $12,000 were the least likely to play(28.6%). (See Table 7.1.) Men were more likely than women to play the lottery (41.5% and 36.1%, respectively). Older people were more likely than younger people to play the lottery, and people who were employed at least part time (45.2%) were more likely than retired people (33.2%) or unemployed people (17.1%) to play the lottery. These figures suggest that a worsening economy may be partially responsible for the drop in lottery players in 2007.
The amount of money various demographic groups spent on the lottery differed greatly, however. Young people, Native Americans, males, and individuals with
less education were likely to spend the most on the lottery. (See Table 7.1.) The most popular game was Lotto Texas; about 85% of people who played lottery games played Lotto Texas, and over one-third (34.6%) of those purchased tickets at least once a week. Individuals spent the most money on scratch games, with the average player spending $33.27 per month on such games.
According to the South Carolina Education Lottery, in Player Profile Study 2006 (September 2006,http://www.statelibrary.sc.gov/scedocs/L917/000391.ppt ), 54% of those polled had played the South Carolina lottery in 2006. About 51% of females surveyed had played the lottery, as opposed to 49% of males. A higher percentage of African-Americans (62%) had played the lottery than whites (50%). Of all age groups, a higher percentage of people between thirty-five and fifty-four had played the lottery (58%) than any other age group.
Seventeen percent of players said they played the lottery more than once a week ( “ frequent players ” ), 13% said they played about once a week ( “ regular players ” ), and the rest said they played one to three times a month ( “ occasional players ” ) or less ( “ infrequent players ” ).