Fellow economist Susan Woodward sent me this anecdote about Ronald Coase and gambling that I thought worth sharing. It led me to remember my own interesting story about gambling and one famous economist.
Bob Hall [her husband] and I were talking about the 1987 Coase conference at Yale, which I attended but Bob did not.
I was a major buddy of John Peterman (then the director of the Federal Trade Commission’s Bureau of Economics) who was a favorite student of Coase, and so I was seated by Coase at the dinner. We talked about what I was working on (at the Council of Economic Advisers) and I answered, “National lotteries.” I opposed them because I thought the government should lean against all gambling. (I was raised Protestant.)
“No, no,” said Coase. His mother had had a very hard life, but she had bought a state lottery ticket every week, and spent the weekend fantasizing about what she would do if she won. It made her life much better! The utility gain, he stated, is highest from a low probability but high payoff lottery. Even if the odds are poor, state lotteries are good because they are honest. That changed my view.
Susan’s story reminded me of my own story. My mentor at Fortune magazine when I started writing frequently for Fortune in 1984 was Dan Seligman, the book review editor. [I’ve written about Dan’s mentoring here and here.] He also had a regular column called “Keeping Up.” Besides being a great writer, Dan had a great sense of humor and a solid understanding of economics.
One more thing about Dan is that he loved gambling. So when people criticized gambling and, even worse, pushed to ban it, Dan didn’t like that.
MIT Nobel Prize winner Paul Samuelson had written a negative statement about gambling. Samuelson stated, just as many economists and others maintain, that gambling is zero sum; what one side gains is exactly what the other side loses. But, as I said, Dan understood economics. He understood that if you observe people doing anything, they must like it. If they keep doing it, that’s further evidence that they like it. The fancy term economists use is “revealed preference.” Their actions reveal their preferences.
In essence, what people leave out when they say that gambling is zero-sum is the pleasure people get from gambling. Not everyone gets that pleasure and those who don’t tend not to gamble.
In his column, Seligman could have used the argument I just made. But he found a cleverer way of responding to Paul Samuelson. People who knew much about Samuelson knew that he loved playing tennis. Dan was one of those people. So he turned Samuelson’s anti-gambling argument against him. In tennis, argued Dan, when one side wins, the other side loses. So tennis is zero-sum. Should we then be critical of tennis and maybe even ban it?
You might respond that people enjoy tennis. Exactly.
