Don't be the Unlikely Ninth.
So, as you’ve probably heard, tonight’s $1.5 billion Powerball couldn’t actually make each and every one of us red-blooded Americans a millionaire, because of one of every red-blooded American’s worst enemies: math.
Pity. And all the economics say, “buying a lottery ticket is only slightly more rational than lighting your cigarette with two rolled-up dollar bills. Oh yeah, and you don’t smoke anymore because you are a perfectly rational financial robot and lung cancer is expensive.”
And yet, according to The Wall Street Journal’s Chief ECONOMIC Commentator, you might want to think about throwing those two dollars into the office pool.
Now Greg Ip is not one of those fuzzy-headed “daydreaming about being a billionaire is worth the money kind of people,” like old friend Matt Levine. And he definitely doesn’t buy Neil Irwin’s argument last year that, while it makes no sense to buy a Powerball ticket tomorrow for a 0% chance (rounding!) at $40 million, a 0% chance of winning $1.5 billion is a good bet, because Greg Ip is no more impressed a $1.5 billion imaginary windfall than with one of $40 million.
So there’s no joy in a Powerball ticket, at least for joyless people like Greg Ip. So why is he the proud owner of a one-ticket’s stake in the Journal’s pool? Because, dear reader, there are more powerful emotions. Like fear: of one’s wife, of being the only guy left at the office on Friday because everyone else moved to St. Barth, of the perverse certainty that a pool you don’t join is guaranteed to win, of being that guy.
“Loss aversion” refers to the fact that people feel pain more acutely than pleasure. The disutility from a dollar lost exceeds the utility of a dollar gained.
Just before I bought that lottery ticket, I wasn’t imagining all the wonderful things I would do with my share of $1.5 billion. Rather, I was imagining everyone in my office sharing in the $1.5 billion—except me, because like a stubborn econ I had refused to buy a ticket. My bureau chief Jerry Seib bought a ticket because, he admitted, he couldn’t bear explaining to his spouse why he wasn’t sharing in the winnings.
Being able to visualize the agony of not winning, but not the joy of winning, must be a form of loss aversion. Peer effects are clearly at work. If the choice were whether to buy a ticket by myself, I would have said no. If someone I knew won, I’d endure my penury in blissful anonymity. But to do so with the full knowledge of all my colleagues?
To avoid that shame, $2 sounds like a bargain.
Why an Economist Plays Powerball [WSJ Real Time Economics blog]