America just provided 190 million examples of how economics is about more than money

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It doesn’t take a genius to understand that the odds of winning the lottery are astronomically unfavorable.

Even if you had carefully considered the quantifiable risks and returns of $US2 lottery ticket, then you would have concluded that Wednesday’s $US564 million Powerball jackpot was not a gamble worth pursuing.

Despite this, nearly 190 million tickets were sold before the drawing, according to

Are all those millions of people who bought those tickets just totally nuts?

It’s about more than money

People are incentivized by more than money.

Having said that, the behaviour of Wednesday’s lottery players can perhaps be better explained by a fundamental concept in economics: utility.

Utility is an abstract measure of how much satisfaction different goods and services bring consumers. It provides a framework for analysing the behaviour of economic agents: ideally, people who are choosing between different things to buy will wind up choosing those things that provide them the most utility.

Utility theory then gives one possible explanation for why so many people play the lottery when jackpots get huge, even though the maths on the expected dollar return doesn’t work out: There could be something intrinsic to buying a lottery ticket for some people that brings them at least $US2 worth of utility.

My boss and I argued about the lottery recently, and he pointed out that, for him, buying a ticket worked as a “psychological insurance policy”. Had he not bought a ticket, he would have been disappointed after the drawing, wondering “What if I’d played?” For him, avoiding that fear of missing out was well worth $US2.

Something along these lines could be true for many of the people who bought tickets. Even if somewhere deep down inside they rationally knew that winning the jackpot was insanely unlikely, some other factor, like avoiding the regret of not buying a ticket, or taking thirty seconds to daydream about quitting their job and buying a yacht, brought enough utility to justify the $US2 cost.

This is why sentiment surveys matter

This kind of analysis of consumer psychology and desires is part of why measures like consumer confidence are so important to understanding the economy. If consumers are feeling good about their situations and the future, their utility preferences may shift over to spending more on goods and services, further boosting the economy. If they’re worried about losing their jobs, preferences may move in the other direction, with consumers forgoing spending to instead prepare for a rainy day.

Even though from a purely fiscal perspective, playing the lottery is a bad idea, many people can still go out and rationally buy the occasional ticket before a monster jackpot drawing. The act of buying the ticket itself can bring enough satisfaction for one reason or another to outweigh the probable monetary loss.

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