Sandra Maximiano: Games of chance and a lot of bad luck
Last year, the Portuguese spent 6 billion euros on games of chance. Of this, 3,097 billion euros were spent on social games, with more than half going to scratch cards; 2,431,8 billion euros on online betting; 322,4 million euros were spent in casinos and slot machines; and 54,35 million euros were spent on bingo cards. On average, 16.4 million euros were spent per day on games of chance.
When it comes to gambling, the Portuguese have no problem opening their wallets. The reasoning is always the same: "what's a euro or two when we can win thousands or even millions?" The distance between living a modest life, counting pennies, and becoming a millionaire is, for many, the distance of a scratch card or a Euromillions ticket. Dreaming doesn't cost anything, but it has cost the Portuguese a lot of money.
Why do we buy so many scratch-off tickets? Why is Euromillions so attractive if only 1 in 140 million wins the jackpot? Why do we think that playing more frequently increases our chances of winning? Why are we so averse to investing in the financial market, but so prone to participating in games where the return is on average negative?
When we buy a scratch card, a lottery ticket, or play the lottery or Euromillions, we generally aren't aware that we're making an investment. Basically, we're buying, for a few minutes or days, the dream of changing our lives. Sometimes, during times of economic crisis, playing lotteries is a way to alleviate financial anxiety and uncertainty. It's like taking a magic pill that makes us dream and feel better. If this feeling of well-being isn't accompanied by a sense of disappointment in case of loss, then perhaps there's some sense, or rationality, in the decision to gamble. But, in reality, however much we want to rationalize the decision to participate in games of chance, this decision is shrouded in cognitive and behavioral biases.
First, I want to highlight the gambler's fallacy. Imagine flipping a coin four times and getting heads on all four of those flips. The temptation is to think it's almost impossible to get heads again, forgetting that each flip is an independent event and that the result of one doesn't influence the next. In other words, the saying "third time's the charm" doesn't apply to games of chance. For example, having nine scratch-off tickets without a winning ticket doesn't make buying a tenth a "safe investment."
Secondly, the desire to gamble is greater the higher the perception that it is possible to win, and this perception is influenced by the information available. For example, the perception that it is possible to win the lottery seems more likely if we know of recent winners. In other words, we suffer from availability bias, which manifests itself when we attribute greater relative importance to information that is more cognitively accessible because it is easier to remember. Casinos are well aware of this bias and take advantage of it by sometimes displaying information about jackpot winners at the entrance.
Third, there is the illusion of control and the belief that "next time is the day" when, for example, we are just one symbol away from the winning combination on a scratch card, or when the stars in the Euromillions lottery are the numbers next to the ones we chose. The feeling that we were so close to winning also increases our perception of the possibility of winning.
Fourth, there is excessive optimism regarding the probability of winning, especially when the prize is very large. It doesn't matter if the odds of winning are one in 10.000 or one in a million; if the prize value is very high, our attention is focused solely on that value. In other words, we overestimate the true probability.
Finally, the decision to gamble is often justified by the fact that it only costs a few euros. If we had to open an account with several hundred euros to be used for games of chance, we would be more aware of the money that is lost and would be less willing to make such a risky investment. Moreover, many of those who gamble with a few euros a week would not have the financial capacity to open such an account.
Beyond the cognitive and behavioral biases that should be considered in the regulation of games of chance, there are important aspects related to income distribution. On the one hand, many gamblers have low annual incomes and poor financial literacy, which prevents them from investing in higher-yield financial products. On the other hand, individuals with lower incomes are those who are most likely to gamble, especially if they feel they are at a financial disadvantage. A laboratory experiment, conducted a few years ago by a team of behavioral economists at Carnegie Mellon University, showed that participants with lower incomes (where monetary endowment was randomly distributed) were more likely to play the lottery when they felt poor, that is, when they had information about the income of other participants.
Gambling expenses are generally a regressive tax. For example, consider two families with net annual incomes of €16.000 and €50.000 respectively. Consider also that both families spend approximately €3.50 per week on gambling, equivalent to a single EuroMillions bet and the purchase of a €1 scratch card. In total, they spend about €168 per year on these games. For the lower-income family, this expense represents 1,05% of their annual income, while for the higher-income family it represents only 0,336% of their income.
What can be done to minimize the inequality promoted by games of chance? For example, games that are more appealing to wealthier classes and less focused on scratch cards could be promoted; the number of intermediate prizes could be increased and the astronomical amounts of the top prizes, which bias the decision, could be reduced; financial literacy could be increased through education, teaching more about risk and probabilities. Finally, financial institutions could offer financial products that allow for small investments, without significant contractual bureaucracy, which could have a gaming component. For example, in Ireland, "prize bonds," which are a savings instrument, draw €1 million per year and €50.000 weekly. The investment is safe and requires a minimum of €25.
The allure of gambling is ancient, and paying to dream is just as valid as paying for any other service, but we must not forget that games of chance and gambling exacerbate inequalities, if only because dreaming is more expensive for those who already have little.
(*) Sandra Maximiano is an economist, holds a Master's degree in Economics from ISEG and a PhD in Economics from the University of Amsterdam. She is an Assistant Professor at Purdue University. She published the above article in Expresso.
(Haisley, E., Mostafa, R., Loewenstein, G. (2008). Myopic risk-seeking: The impact of narrow decision bracketing on lottery play, Journal of Risk and Uncertainty, Volume 37 (1), pp 57–75)
