The casting of lots for decisions and determining fates by chance has a long record in human history, although the use of lotteries for material gain is of more recent origin. It is the latter development that has brought lotteries into conflict with other governmental functions, particularly public policy on gambling. The process of lottery establishment is one in which policy decisions are made piecemeal and incrementally, and the result is that the industry evolves with little or no centralized oversight. The results of the evolution of lotteries are, in fact, at odds with the overall public welfare, with problems such as compulsive gambling and regressive impacts on lower income groups being symptomatic of the problem.

In the case of a state lottery, the basic structure is simple: a pool of funds is established, costs of organizing and promoting the lotteries are deducted from that amount, and the remainder is available for prize winnings. This pool of funds must be balanced between few large prizes and many smaller ones. It is generally believed that a larger pool of prizes leads to higher participation by potential bettors and therefore higher revenues, but this is not necessarily true.

The purchase of a lottery ticket can be accounted for by decision models based on expected utility maximization if the entertainment value or other non-monetary benefits obtained from the tickets are high enough to outweigh the disutility of the monetary loss caused by the purchase. Other models based on utilities defined on things other than the outcomes of the lottery can also account for lottery purchases, such as those characterized by risk-seeking behavior.