Economist Explains Why Lotteries Increase Perceived Value

Economist Judd Kessler, a professor at the University of Pennsylvania's Wharton School, has explained how lotteries and similar "hidden markets" function not to create excitement, but to reveal and capitalize on pre-existing demand for scarce goods. Kessler, author of "Lucky by Design," stated in an interview with Fortune that the presence of a lottery for a product or experience indicates "excess demand" – meaning more people desire the item at its current price than can be satisfied. These "hidden markets," which also include restaurant waiting lines, queues, and Ticketmaster-style waiting lists, serve as mechanisms for allocating limited resources without resorting to simple price increases that would naturally reduce demand. Kessler elaborated that a visible line outside a restaurant, for instance, acts as a strong signal to potential customers, suggesting that the item being offered is highly desirable at its current price point. Businesses facing such excess demand have several strategic options: they can increase prices to match the demand, implement a first-come, first-served system, or intentionally maintain these "hidden markets." The latter strategy, Kessler noted, can be deliberately employed by sellers. By perpetuating scarcity, businesses can generate significant excitement and foster stronger future demand. The psychological appeal of winning a lottery or securing a coveted item through a waiting list extends beyond mere financial savings. Kessler highlighted that the feeling of obtaining something that others desired but could not acquire contributes significantly to the perceived value. This sentiment is a direct outcome of how these "hidden markets" operate. Ella Hozhei, a lottery entrant for Broadway shows in New York, shared her experience, noting that she regularly participates in drawings as a cost-effective method to see productions she is interested in. By avoiding the full ticket price, the lottery allows her to take calculated risks on shows she might otherwise be hesitant to purchase due to uncertainty about her enjoyment. This approach underscores how lotteries can democratize access to desirable experiences, making them attainable for a broader audience by managing scarcity and perceived value. The core economic principle at play is that the demand for the item is already high enough to warrant a lottery system, which then amplifies the desirability of the prize through the mechanism of winning against competition.