[extropy-chat] Lottery tickets as personal savings plan

[Hal Finney]

I mentioned the Marginal Revolution (marginalrevolution.com) blog the
other day, on immigration; they also had a pointer to a pay article
in Forbes with a great idea.  Recall that I had also discussed human
irrationality and the paradox of how people can remain irrational in a
world which will take advantage of them financially (in connection with
human over-confidence).  These two threads come together in this entry
from the blog:

http://www.marginalrevolution.com/marginalrevolution/2006/05/get_lucky_or_ge.html

> A lottery savings ticket would look just like a lotto ticket, scratch
> like a lotto ticket, cost a buck and pay out the same prizes. The
> only difference would be that half the revenue would be earmarked for a
> personal retirement savings account rather than for education. There would
> still be about a third for prizes and the remainder for administering
> the game.
>
> Setting up a personal retirement account would be no more difficult
> than setting up a mutual fund. Players would receive a swipeable card
> that would automatically credit a portion of each losing ticket to the
> player's retirement account...
>
> Some 20 million Americans spend at least $1,000 a year on lottery
> tickets. For these heavy purchasers the new tickets would increase their
> personal savings by $500 a year. Invested over 40 years, these savings
> tickets would generate an expected retirement nest egg of $200,000. This
> is a lot of money for the mostly not very prosperous crowd who buy
> lottery tickets every week.

They are actually quoting the Forbes article, which is by Ian Ayres and
Barry Nalebuff.  I was intrigued enough by this idea to order their book
"Why Not?" from Amazon.  I'll write about some of the amazing ideas in
this book soon.

The problem this proposal aims to fix is two-fold: poor people tend not
to save enough of their income, which both keeps them poor and makes
them especially vulnerable in old age; and poor people waste money on
the lottery.  By turning lottery income into personal savings plans we
exploit people's human weakness for gambling and turn it into a long-term
benefit in the form of forced savings.

Politically this would be difficult because of the charade that lottery
money is being used for schools.  In fact, all government income is
essentially put into a big barrel and used as the government likes.
The whole school thing was just a scam to sell the lottery to voters.

The bigger issue is that diverting lottery profits to be income for
poor people would reduce government revenues.  In the long run it should
be OK because government liabilities would be much lower in the future
as poor people are able to fund their own retirements, but governments
tend not to think in the long term.  Taking a hit today in return for
long-run benefits is the opposite of how governments usually work.

Hal