Testing for Efficiency in Lotto Markets

Frank Scott and O Gulley

Economic Inquiry, 1995, vol. 33, issue 2, 175-88

Abstract: State-sponsored lotto games, because they are pari-mutuel and because jackpots with no winners are rolled over into the next drawing, present an excellent opportunity to test for market efficiency. Using data from Massachusetts, Kentucky, and Ohio, the authors investigate bettors' responses and test for weak-form efficiency. Lotto bets do not have positive net expected returns, thus weak-form efficiency exists. To evaluate strong-form efficiency, the authors utilize the concept of a rational expectations equilibrium. They find that, in general, lotto bettors' decisions to play generate a level of sales that conform to their original forecasts of expected value. Copyright 1995 by Oxford University Press.

Date: 1995
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