Lottery
A lottery is a scheme for raising money by selling chances to share in a distribution of prizes. The prize pool is often a sum of money, but it may also be made up of smaller amounts. In many large-scale lotteries, there is a jackpot that attracts the most attention and is the largest prize offered.
The word lottery is derived from the Dutch noun lot, meaning “fate”. In the 17th century, state-sponsored lottery were quite usual in Europe; they proved popular and helped raise funds for a variety of public usages.
Several governments outlaw lotteries; some endorse them to the extent of organizing national or state lottery. Governments regulate the sale of lottery tickets, and vendors must be licensed to sell them.
In the United States, winnings from a lottery are usually paid in cash or in the form of an annuity. In the case of an annuity, the winner receives a one-time payment and then an increasing annual payment over time. This is a good deal for the lottery winner, as it preserves the value of the prize pool.
Decision Models
A decision model based on expected utility maximization can explain the purchase of lottery tickets. In this type of model, the curvature of the utility function can be adjusted to capture risk-seeking behavior.
While a monetary gain is an important factor in making a lottery purchase, the ticket’s non-monetary value is also a factor. For example, a lottery purchase can be a rational decision if the entertainment value obtained by playing is high enough to outweigh the disutility of the monetary gain.
