Thursday, September 9, 2010

Post-code lotteries: should you play?

Tim Harford writes two great columns and I can't recommend them enough. I also recommend his book, The Undercover Economist, because (I think) it's one of the best introductions to be big ideas in neoclassical economics.

But in this advice column I think he skips over an important point. Normal lottery tickets are a waste of money because (1) they tend not to make winners happy and (2) you expect to lose money on them. Post-code lotteries are different, though. They work by giving everyone in a given ZIP code a prize (tens of thousands of dollars). This point is important because research suggests not buying a lottery ticket could make you sad becuase you'll feel poor compared to your neighbors if you don't win. Ben Bernanke summarized the research:
If I live in a country in which most people have only one cow, and I have three cows, then I will have lots of social status and self-esteem and will thus feel happy. But if everyone around me has a luxury car, and I am hung up on status, I won't feel very special unless I have both a luxury car and an SUV. This relative-wealth hypothesis can explain why rich people are happier than poor people in the same country, but also why people in richer countries are not on average much happier than people in poorer countries. It's the big fish in a little pond phenomenon.
So you can think of the ticket as insurance again feeling worse if your ZIP code wins. I still don't know if it's worth it, but postal-code lotteries might be a worthwhile form of insurance.

No comments:

Post a Comment