The Problem of Over-Optimism

A competition in which participants buy tickets and names are drawn at random to determine the winners, or a system for allocating prizes based on this competition. Often used as a synonym for keno or video poker, but also for any type of gaming scheme in which participants pay to play. Usually, but not always, the first stage of such a competition relies on chance, although there are lottery arrangements in which skill plays a part in later stages. Lotteries generally enjoy broad public approval and support as a source of painless revenue. They are particularly popular in times of economic stress, when they can be portrayed as a substitute for taxes or cuts in government spending.

But the popularity of lottery games can obscure their costs. The most obvious cost is the opportunity cost of the time that people spend on playing them, which could be better spent on other activities. Another cost is the social disutility of a monetary loss, which can outweigh the entertainment or other non-monetary value that the game provides. Yet, a tiny sliver of hope that a ticket might be a winner can outweigh these negatives for some individuals. Thus, the popularity of lottery games can be viewed as an example of the problem of over-optimism.