How the House Edge Works in the Lottery

Three Lottery Ticket Games, House Icon, Arrow Going Up, Arrow Doing Down
Gambling experts love to tell everyone about the house edge. Some gambling tip articles sound like Cliff Clavin on the TV show Cheers: always explaining things no one cares about.

Most of a casino’s customers love to play slots. All the expert advice in the world won’t persuade them to switch to blackjack or poker. Slot games demand little thought, so one can chat away with their neighbors or ignore the rest of the world completely.

Some people enjoy calculating the casino’s statistical advantage in its game. I know poker players who rarely play other games because the house’s income is limited to rakes or table fees.

A 10% rake could be more profitable on a per-player basis than a slot game with a 96% theoretical RTP. But the house makes most of its money on the slots.

In games where player choices matter, the house’s theoretical edge may differ from its actual edge. The theoretical edge is the difference between what the house expects to retain from wagers and what players win back. A player making poor choices intangibly improves the house’s advantage.

Do Lottery Games Work the Same Way?

Yes and no.

All legal lottery games are designed to generate revenue for the people running the games. That means some percentage of the players’ wagers are not paid back.

Hand Holding Scratch Off Lottery Game, Money Bills Flying

To that extent, there is a house edge on lottery games, but it’s not computed the same way as for table and slot games.

Craps and roulette are similar to lottery games in some ways, but the actual house edge tends to vary in those games.

Lottery games are based on different principles.

There are three main types of lottery games:

  1. Pick and draw games, where players choose numbers
  2. Scratch games
  3. Sweepstakes and second-chance drawings, where players don’t pay to play

I recall someone once asked if bingo is more like a lottery game or a game of skill. It’s a little bit of both.

  • The players pay a flat fee per game (like a lottery)
  • The numbers are pulled randomly (like a lottery)
  • Players can use the same card or change cards (like a table game strategy)
  • Good players are skilled at scanning their cards for called numbers
There is a poker-like house edge in bingo. But it’s a more random-seeming edge than poker rakes.

The house edge in lottery games is not random at all. The house is always guaranteed a minimum percentage of wagers in lottery games.

A lottery’s profits depend more on how many people play the game than on the percent of wagers retained. That’s because lottery games have much higher fixed costs than casino games.

Who Gets the Money in a Government-Run Lottery?

Lottery Numbers Background, Government Building, American Flag, Money Bills
When the government runs the game, everyone expects clear and transparent accounting. And yet anyone who has dealt with government bureaucracy knows it’s never that clear-cut. It can take weeks or months for the accountants to tally everything up.

Still, the costs of running lottery games run at millions of dollars per game.

Professional journalists paid to explain the lottery games should be able to agree on how they work. That’s not the case.

According to an article from Fortune posted in 2016, a pie chart showed that 50% of lottery revenue is paid to “jackpot winners.”

The Fortune article breaks out the other 50% according to a formula used by the Powerball system.

But then in 2017, a CNN article claimed that about 63% of lottery revenues are paid back to players.

Are both articles correct? Quite likely.

The CNN article provides less detail about game finances, but it talks about all lottery games combined, not just the Powerball drawing.

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The important thing to know is that players can expect about one half to two-thirds of their money to be paid back to other players.

The remaining 33% to 50% is the lottery house edge. Although the percentage varies by game design, in practice, only unclaimed prizes change the house edge.

Lottery Jackpots Are Progressive, but Other Progressive Games Are Not Lotteries

Anyone who plays a progressive slot machine game knows the bonus prize, or the progressive jackpot, keeps growing with every play until someone wins it.

A progressive prize is only awarded based on random chance.

Lottery drawings are all about random chance. But unlike slots and card games, the lottery players don’t do anything other than making a wager. They can pick their own numbers, but they don’t have to.

In a lottery drawing the game is all about the jackpot. In a casino game, the progressive jackpot merely sweetens the deal if the player wins in a certain way.

Does the Lottery House Edge Affect Prize Awards?

Lottery Winner Walking, People Celebrating, Confetti, Lottery Numbers
The rules in a game of standard blackjack are clear. If a player draws an ace and face card and the dealer doesn’t, the player is paid 3:2 odds. For every $10 the player bet, the house pays $15.

That’s not bad, but who expects to get rich playing blackjack?

Very few people are that good.

It’s a small bettor’s game.

It doesn’t matter how many players sit at the same table. If everyone draws an ace and 10 and the dealer doesn’t, everyone is paid 3:2 odds.

Things work differently in lottery games. Each game has a prize budget.

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The budget is determined either by how many people buy tickets for a drawing or how many scratch tickets are printed for the game.

All prizes come from the game budget. Players who win scratch ticket prizes don’t share their winnings with anyone. In a drawing, more than one player may pick the same numbers and so they have to share the prize.

A Notable Exception: Keno

Keno Number Balls
Keno is often compared to state-run lottery games, but keno has one difference. The house sets a maximum payout in keno. It doesn’t matter how many people play or how many numbers a player matches: the maximum payout keeps the house in business.

In a state-run lottery, there is no maximum payout.

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Unwon prizes from each drawing roll over into the next game, increasing the pool of payouts for that game.

Unclaimed prizes sweeten the deal for the state but are not predictable.

The probabilities of winning don’t change in a true lottery drawing. Players have the same options every week.

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But the jackpot keeps growing until at least one person claims it.

Meanwhile, the lottery system takes its cut as a fixed percentage of the ticket sales. It doesn’t matter how many tickets are sold. The percentage stays the same.

There is no direct correlation between the lottery house edge and the size of the jackpot.

The House Edge in the Lottery Is Inflexible

Savvy scratch game players check official game websites to see how many unclaimed prizes remain in a game. They favor the games with the most unclaimed prizes. But some percentage of unclaimed prizes could already have been purchased.

Back of Lottery Card Displaying Odds of WinningLottery games group all chances of winning together. Look at the back of the next scratch card you buy, and you’ll see something like “chances of winning are 1 in 4.” Casinos may attach stickers to their slot games with similar projections.

These aggregate estimates are marginally helpful to players.

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People are more likely to lose 10 games in a row in a 1-in-6 win ratio than in a 1-in-4 ratio.

But what really matters is how many prizes are left to be won.

Scratch game players may choose to buy more tickets even after the top prize is claimed. They know they won’t win the big money, but they still hope to win something. In slot games, every player has the same chance of winning a maximum prize every time they play.

Conclusion

The more people who buy lottery tickets, the more profitable each drawing or scratch game becomes.

In a casino game, the house edge needs far fewer players to make a big profit. Many casinos rely on losses from high rollers – the whales – to cover their losses in the small games.

Lottery games are cheap and easy to play. They’re also available in far more communities than legal casino games. The appeal of the big lottery win makes it a highly profitable game for the house.

The lottery house edge is more predictable and steady than a casino game’s house edge. You may not be able to leverage that into a profit, but now you have another reason to prefer cards and roulette to lottery games.