Why People Play Lotteries and Why It Matters

This Article is motivated by a puzzle. Lottery play is extremely common. Yet such play is inconsistent with standard economic theories of the consumer, which feature rationality and risk aversion. Faced with the puzzle, theorists have generally tried to save risk aversion at the expense of rationality. Three common explanations for the prevalence of lottery play emerge: that people are ignorant; that they are irrational; and that they find a consumption value in playing the lottery. But on deeper investigation none of these theories is ultimately satisfying.A more promising explanation upholds the rationality of consumers at the expense of risk aversion. This explanation turns on the idea of indivisibilities in consumption expenditures, and looks more closely at individual preference structures and the possibility that consumers operate under multiple utility functions. This emergent, rationally-based theory holds out more promise for lottery reform than do the more traditional explanations. Further, the new theory gives insights into certain important institutional features of society. Most important, the new theory involves a movement toward a better, more respectful theory of the consumer, one that can inform a wide range of policy analysis