In the fourteen-hundreds, towns across the Low Countries started holding lotteries, offering tickets for a chance to win cash prizes. The prize money helped to build town fortifications and support the poor. Lottery proceeds also served as a kind of get-out-of-jail card, granting immunity from arrest except for crimes such as piracy or murder.
In modern times, states are less able to count on revenue from taxes and have instead turned to the lottery as a way to boost their coffers. During the nineteen-sixties, as the population boomed and inflation accelerated, state budgets began to strain, and it became difficult for legislators to keep services up without raising taxes or cutting them—both options deeply unpopular with voters. The lottery was hailed as a “budgetary miracle, allowing states to make hundreds of millions of dollars seem to appear out of thin air,” Cohen writes.
A fifth requirement is that the lottery pool should be large enough to attract a sufficient number of potential players. A certain percentage of the pool must go toward administrative expenses and profit to organizers and sponsors, leaving the rest for prizes. The choice of whether to offer few very large prizes or many smaller ones depends on cultural values and a host of other factors, but one thing is clear: Potential bettors demand larger prizes. Ticket sales increase dramatically for jackpots that approach ten figures, and people who would not normally gamble spend far more than their incomes on tickets.
The last requirement is that the winnings be paid out in a timely manner. Winnings are typically paid out either as a lump sum or in an annuity. A lump sum provides immediate cash, while an annuity gives the winner a steady stream of payments over time. Choosing the right option depends on the financial goals of the winner, the rules of the specific lottery, and the tax laws in the jurisdiction where the prize is won.
Lottery players are a diverse group, with different levels of wealth and different attitudes toward gambling. The wealthy tend to buy fewer tickets than the middle class and working class, but they do play; one study found that Americans earning over fifty thousand dollars per year spend about one percent of their income on lottery tickets. In contrast, those earning less than thirty thousand dollars per year spend thirteen percent of their income on tickets. In addition, the wealthy tend to buy fewer tickets than the average player, so they are less likely to be affected by changes in odds. This explains why, for example, one of the biggest Powerball jackpots was won by three asset managers from Greenwich, Connecticut, even though those same assets managers spent only one percent of their annual income on lottery tickets.