Will sales of lottery tickets fall during the recession?

A loyal blog reader asked me an innocuous question the other day - will sales of National Lottery tickets fall during the recession?

The reader herself has not bought a ticket for at least three years and I cannot even remember the last time I entered the main draw, it was probably at least a decade ago.

Indeed the whole issue of why people continue to fork out large sums on lottery tickets when the odds of winning are so low will always be of interest to behavioural economists keen to understand more of the weaknesses that people have when assessing probability and risk.

The odds on winning the Lotto jackpot are 13,983,815 to one; there is a 51 to one chance of winning any of the prizes.

As Henry Fielding said in 1792 ““A lottery is a Taxation Upon all the Fools in creation”

Soft-core gambling

A former student of mine, Louis Barclay wrote in an essay last year that

“The lottery is classified as soft-core gambling, in contrast to most casino games, which are termed hard-core. The distinction is based on the relative sums of money spent on both forms, and their power to turn into an addiction (compulsivity). The lottery is also distinguished by the relatively infrequent opportunities to play, and the relatively long delay between bet and outcome.”

Behavioural economists like to study lotteries because they provide a wonderful platform for observing the revealed preferences of people on a regular basis and they can highlight the heuristics and biases in behaviour that lead people to depart from a rational approach to playing the various lottery games.

Louis wrote a superb essay on the economics of the national lottery which can be downloaded here: Louis_Barclay_Lottery.pdf

For the moment lottery ticket sales are doing rather well. Camelot released a new set of figures this week which trumpeted an increase in ticket revenue of more than £180 million in the six months to the end of September.

Demand seems to have been sustained by the launch of new games linked to the Olympics and a cluster of EuroMillions jackpots. Sky Active and the Play by Text mobile phone service have also provided new platforms for people who want to gamble.

This is a business where new games have a limited product life cycle and in which organic growth of the business can only be sustained by innovation in its diverse portfolio of games including joint ventures with other lottery service providers.

Camelot - which I have usually assumed is a business with a licence to print money - says that over two thirds of the UK About 70% of the UK adult population now played the National Lottery regularly, with players spending on average about £3 a week.

Leaving aside the impact of new games - including a subscription system for regular players - how can it be that people are spending more on the lottery amid all of the economic and financial turmoil?

Some gambling counsellors fear that thousands of lottery players are ignoring the odds stacked against them and regarding a weekly punt on the lottery as a way of overcoming rising debts. Here is a classic case of information failure with adverse social consequences.

For others, the weekly punt might be regarded more as a temporary relief to the doom and gloom. Indeed the £1 or £2 spent on tickets could be among the last items of spending that is reined in as the recession deepens.

If sales of lottery tickets rise as real incomes fall (and remember we are talking in the aggregate here, everyone has a different story to tell) - then we might classify lottery tickets as an inferior good, with a negative income elasticity of demand.

But it may be too early to come to a view on this. Sales of lottery tickets might prove to be a lagging indicator of the economic cycle, an item of discretionary spending that does eventually decline when macro-economic conditions worse, for example when it becomes clear that unemployment is on a firmly rising path.