Have You Been Framed?

USA Today reports that lottery ticket sales have surged across the country recently.  You might think that the tough economy would actually dampen sales with falling disposable incomes.  However, neuroeconomic research suggests that this is exactly what you would expect.  Neuroeconomics is a new scientific field that combines neuroscience, economics and psychology in the study of how the human brain evaluates risks, rewards and probabilities in making decisions.

Financial records for 41 state lotteries that end their fiscal year in June show 28 had higher sales than the year before. Seventeen of those states set all-time sales records.

California had the highest percentage gain over 2010 — 13.2% — to $3.44 billion, just shy of a record $3.6 billion set in 2006, spokesman Alex Traverso said.

Arkansas's growth was higher at 21%, but its lottery didn't start until September 2009, so the comparison with fiscal year 2010 was not over a full previous year.

Arizona posted a record $583.5 million in ticket sales and Missouri, topped $1 billion for the first time.

Jason Zweig in the book, Your Money and Your Brain, writes about how animals that are running low on food, water or warmth have what ecologists call a "negative energy budget". Simply stated, when these creatures are hungry, thirsty or cold they rarely will waste their energy on small but steady gains. They simply cannot take the chance that slow and steady will keep them alive.  When they are in a state of deprivation they are more willing to risk getting nothing if it also means they have a feasible way to get a big boost to restore their depleted energy.

Humans seem to operate the same way according to Zweig. 

The less money people have, the more willing they often become to take on extra risk, just as a quarterback will throw a "Hail Mary" pass last in the fourth quarter or a basketball player will launch a deperate shot from half-court just before the final buzzer sounds.

This often leads to the result that those who can least afford to lose what little they have are the most prone to put it at high risk by taking a flyer with long odds.  I have done it myself in the casino.  It seems that the lower I go with my pile of chips the more willing I am to place a bigger bet. 

Consider these examples from Your Money and Your Brain that illustrate the point.

• When more than 1,000 Americans were asked to pick the most practical way to become wealthy, 21% said "win the lottery".  Among those with incomes of $25,000 or less, nearly twice as many felt their best chance at getting rich was a lottery ticket.
• In the second half of the year, mutual funds with below-average returns become up to 11% more volatile than those that had above-average returns in the first-half.  Consciously or not, the managers of funds that lagged in the first six months buy riskier stocks in an attempt to salvage their returns by year-end.
• Blacks and Hispanics are more reluctant than whites to take moderate financial risks-yet nonwhites are between 20% and 50% more willing to take substantial financial risks.  Black and Hispanic households, on average, have roughly one-fourth the total new worth of the typcial white household.

Another neuroeconomic principle that drives lottery sales is the surprisingly big difference in the way we react to odds expressed as percentages (such as 10%) compared to how we respond to odds expressed as frequencies (such as one out of every ten).  The brain does not process percentages very well.  They are abstract and hard for most people to comprehend easily.  Numbers are easier to understand and to relate to.

Consider if a surgeon tells you that your surgery has a 95% success rate.  How soon can you do it, Doc?  On the other hand, what if the surgeon tells you that you have a 5 out of 100 chance that you will die?  Can I think about this, Doc? 

Zweig quotes psychologist Paul Slovic to explain the difference in how your brain processes the information.

If you tell people there's a 1 in 10 chance of winning or losing, they think,"Well, who's the one?  They'll actually visualize a person."  More often than not , the one person you will visualize winning or losing is you.

That is another reason why lotteries do well.  Perhaps the odds of winning that $300 million Powerball drawing were 1 in 50 million but you actually saw the winner on tv picking up the check. That could be you the next time.  At the same time, if you are asked to choose between a $100 deductible health care plan and a $5,000 deductible plan and are told that only 5 out of 100 will benefit from the lower deductible after taking account of the premium costs, you will still most likely avoid the higher deductible plan.  After all, this could be the year that you get hit by that bus and you will be one of the five. Why take that risk?

People's judgments about risk are very flexible and subjective.  A minor change in context or description can make a big difference in how risk is perceived. This is called "framing" by psychologists.  It is all about context.  Almost every decision is made in reference to something else whether we are consciously aware of it or not.

You see the same effect in the current budget deficit debate.  We keep hearing about trillions of dollars in cuts.  We keep hearing about the effects this will have on children, seniors, the needy and disabled.  Trillions of dollars is a lot of money.  Who would want to hurt these people who need that money to live on? 

You never hear it framed this way...

"The federal government is projected to spend almost $50 trillion over the next 10 years.  Our goal is to save just 3% of this amount."

This is actually what the Super Committee  on the Budget Deficit is charged with doing. It's hard to argue with this modest goal when it is framed this way, isn't it?  The Republicans need framing lessons if they are to be successful in getting our budget under control.  Of course, if it gets much worse the federal government can just start buying lottery tickets. We are getting close to "Hail Mary" time.