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The Mathematical Case For Buying a Powerball Ticket
HughPickens.com writes Neil Irwin writes at the NYT that financially literate people like to complain that buying lottery tickets is among the silliest decisions a person could make but there are a couple of dimensions that these tut-tutted warnings miss, perhaps fueled by a class divide between those who commonly buy lottery tickets and those who choose to throw away money on other things like expensive wine or mansions. According to Irwin, as long as you think about the purchase of lottery tickets the right way — purely a consumption good, not an investment — it can be a completely rational decision. "Fantasizing about what you would do if you suddenly encountered great wealth is fun, and it is more fun if there some chance, however minuscule, that it could happen," says Irwin. "The $2 price for a ticket is a relatively small one to pay for the enjoyment of thinking through how you might organize your life differently if you had all those millions."
Right now the Multi-State Lottery Association estimates the chances of winning the grand prize at about 1 in 175 million, and the cash value of the prize at $337.8 million. The simplest math points to that $2 ticket having an expected value of about $1.93 so while you are still throwing away money when buying a lottery ticket, you are throwing away less in strictly economic terms when you buy into an unusually large Powerball jackpot. "I am the type of financial decision-maker who tracks bond and currency markets and builds elaborate spreadsheets to simulate outcomes of various retirement savings strategies," says Irwin. "I can easily afford to spend a few dollars on a Powerball ticket. Time to head to the convenience store and do just that."
Right now the Multi-State Lottery Association estimates the chances of winning the grand prize at about 1 in 175 million, and the cash value of the prize at $337.8 million. The simplest math points to that $2 ticket having an expected value of about $1.93 so while you are still throwing away money when buying a lottery ticket, you are throwing away less in strictly economic terms when you buy into an unusually large Powerball jackpot. "I am the type of financial decision-maker who tracks bond and currency markets and builds elaborate spreadsheets to simulate outcomes of various retirement savings strategies," says Irwin. "I can easily afford to spend a few dollars on a Powerball ticket. Time to head to the convenience store and do just that."
buying a home. Hasn't made sense since the 1970s. The social contract is broken, you no longer can rely on job security or a decent pension. Yet the banks still expect you to pay them on time. A home is a *liability*, not an investment.
The math falls apart most the time if two people could win
I can have all the fun of imagining swimming through my vault of cash without wasting the money it takes to purchase the ticket.
My odds of winning may be 1 in 175 million, but my odds of getting $337 million dollars any other way are 0 so it's not that bad.
Sure if I work hard and invest right I can earn a few million, but 175 million is just not going to happen any other way. I'm willing to spend a couple of dollars for that slim chance.
I still maintain that by not buying a ticket my odds of winning are not significantly reduced.
you have to live somewhere though.
I figure the lottery is a tax on stupidity. And if it goes to $500 million I'm easily ten bucks' worth of stupid.
...in seeing stupid people part with their money for a worthless piece of paper.
If your chances are 1 in 175 million. 1 in 175 million minus one are chumps. Buy more tickets if you're a bigger chump. They'd have been better off wiping their butt with the cash.
Not such a great proposition when you consider that your chance of being killed in a car accident on the way to the store exceeds your chance of winning the big one.
I doubt they discount the expected value based on the possibility of a split pot.
Without knowing how many people are playing this round, you don't have totally accurate estimates.
You probably have a better chance being eaten by a polar bear and a regular bear in the same day than winning the big prize on the lotto.
Happiness in intelligent people is the rarest thing I know.
Ernest Hemingway
An unchecked lottery ticket in my wallet. That way i am both potentially broke and wealthy at the same time.
Any insufficiently advanced magic is indistinguishable from technology.
.. At tax on people that are bad at math.
You could call it a tax, considering it's run by your state government. And considering the demographic of those who buy the most lottery tickets, it's a horribly regressive tax.
Those same demographics are also those that are most likely to poorly manage a sudden multi-million dollar windfall, and end up broke in a relatively short time.
I don't even like the "2 bucks to imagine what if" angle. If there's any serious problem humanity has, it's our really really really awful ability to assess risk. Do we really need to be encouraging that?
A certain Neil Irwin has stakes in a lottery company?
So fucking what?
What's that get you? 1/3 of a small coffee at Starbucks?
I buy tickets for the state lotteries each week. Relatively low payouts compared to Powerball, with a greater (but still infinitesimal, 1:6,000,000 or 1:2,000,000) chance of winning.
It is entertaining, for an OCD-ish planner like me, to jigger with figures (inflation, taxes) and imagine what kind of lifestyle and payouts to relatives the week's jackpot would support.
FWIW I'm an extremely aggressive saver, have a rigorous household budget, and live a modest lifestyle; there's a good chance I'll be able to retire by 60. My lottery ticket money comes out of my "movies, toys, and other fun stuff" budget.
The odds aren't appreciably closer to zero, the enjoyment is the same or greater, there is no chance of disappointment, and the cost is zero.
If you invest the $104 a year you'd otherwise spend on lottery tickets then with interest at the end of 40 years (from age 20 to age 60) you will have accumulated about $9K, assuming 3.5% interest.
Blasphemy is a human right. Blasphemophobia kills.
And if the pot breaks $350 million, seemingly making the ticket a worthwhile investment, so many people will start buying tons of tickets that the winner (every one of them) gets even less than usual.
Oh come on, everyone who buys a ticket makes that exact same excuse. "It's a small price to pay for a dream."
Conveniently neglecting to mention that you can still do that without wasting money on lotto tickets.
If you play once a week, then just skip the morning coffee on that one day. It's that simple. If I spend the money on the coffee and consume same, what have I gained? Sure that coffee probably gets you that little push in the morning for some, but I'm sure you could do without coffee for just that one morning (or afternoon, if you drink multiple coffees in a day).
In either case, the money is gone and you ain't getting it back. I'll take the miniscule chance at a dream :)
Disclaimer : I don't buy lottery tickets regularly, but the expenditure can be rationalized if you were going to spend (throw away) the money anyway.
Where does one get those magical 3.5% interest? I wouldn't be surprised if government bonds pay less than that by now.
We used to have a Bill of Rights. Now, with the rights gone, all we have left is the bill.
$9k in 40 years will be worth what, $500 bucks in today's money before taxes?
"Transparent" is a shit show that trades on every stereotype going. A man in drag is NOT a transsexual.
As many have already pointed out, $2 won't even buy a decent cup of coffee, so most people (or, most people who post here anyway) wouldn't miss it. Regardless of how one might feel about the value received, the investment is pretty much down in the noise.
But where this can do damage (to anyone, not only the minimum-waged) is the mistaken belief that one can acquire the prize by buying a *whole lot* of tickets. Every once in awhile you hear of people who have hocked their possessions and put every dime they had into lottery tickets. It doesn't end well.
Oliver's law of assumed responsibility: If you're seen fixing it, you will be blamed for breaking it.
..floats your boat, go for it. people spend stupider money on "fun".
absent that type of reason, don't bother rationalizing, there's no rational point in buying lottery what-so-ever.
I'm one whose behavoir aligns pretty well with the article. I start playing the lotto when the jackpot gets north of $150 million. Statistically and historically it's wasted money, but I can blow $10 here or there without much consequence. If I saved and invested all the money I wasted on powerball, I'd have maybe $1,000-2,000- not a life changing amount of money for me.
As I type this, a thought occurs to me- maybe I should double my lotto expenditures- every time I buy lotto tickets I deposit the same amount of money into a mutual fund of some sort- see where I'm at in another 10 years.
Anyway, the interesting thing about lotto economics is not middle class and higher people who use modest discretionary funds for a shot at the big jackpot. It's that lotto sales are highest in the lowest income communities- people with less money to waste, for whom $10 is a more significant part of their paycheck. The lotteries are funded largely by people with the least money to spare.
Now it's likely that in the absence of state driven gambling, illegal gambling would arise (or grow bigger), possibly with even worse consequences for the least well off among us. That's a significant factor in the moral case for or against state-sanctioned lotteries. There are some states without lottos- Hawaii, Alaska, Utah, Mississippi and Alabama- so there ought to be some information about this factor. A quick google search yields some leads, which I do not currently have the time to digest.
Alcohol, Tobacco and Firearms should be the name of a store, not a government agency.
When it gets over $350 million I spend $20 on 10 tries.
I read the article, and it is interesting considering what one's initial expenditures would be.
Of course I don't expect to win, I will check my numbers in the morning.
I have, luckily, had much better performance with roulette, where I stand at about 300% above where I started all told (under $2000 in earnings total). Good times, I like Vegas every few years...
BlameBillCosby.com
I can't back it up (I've never done that before on /., really) but I read somewhere that your odds of getting killed at the convenience store or on the trip to the convenience store to buy the lottery ticket are greater than your chance of winning the lottery jackpot.
The expected value of a lottery ticket could be 10x the cost, but no rational person who isn't already very wealthy should buy one. The utility of the 100 millionth dollar is far less than the dollar you're spending on the ticket.
Like you, I too enjoy thinking through how I would spend millions of dollars of windfall should I ever receive it. In the end, can you guess what will make us different on this issue?
Although I only actually seek the cheap lottery ticket at the end of a year for the shake of a tradition, I can imagine that playing more often could be a rational act.
Under the premise of risk diversification [1] there should be a buying incentive, however low, for a high-risk act of huge potential pay-off. A lottery ticket stands normally little chance to make you rich, yet the rewards are potentially higher than most other every day rational acts (studying, working, saving money etc). A single win can reward more than a lifetime's earnings, or at least it happens so in quite a few well publicised cases. That's why the "first ticket" may just make sense.
Judicium: the rationalised *frequency* of buying lottery tickets is a low number, however it is NOT zero, for any rational player; Math included !
If somebody has been enough of a geek to calculate rationalised lottery playing (on GDP per capita per country basis?), kindly follow this up!
And for the record: "Death is a tax on people who do not play life"
[1] http://en.wikipedia.org/wiki/D...
Idea stolen from here
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
who win these jackpots. Illegal aliens and UFO frequented trailer park residents.
Schrodinger's Ticket?
Mutant Freaks of Nature: "Frighteningly Addictive"
...Some BS that everyone has read 18 times before.
Yes, the Powerball is 175 million to 1 against winning, being $15 million or $450 million. The odds don't change. There are only so many numbers.
But so what? The cost of 'a' Powerball ticket, $2, is trivial. If $2 really makes that much difference in your budget....even $2 a week, every week....then you do not need to do it, whatever the percentages say.
I almost never buy lottery tickets but every once in a while when the pot gets big I'll spring for some quick picks on the off chance I'll win. It's money I can easily afford so why not take the chance. Now if I was spending every week on the lottery that would be stupid but every once in a while isn't that big a deal. It's kind of like when I go to Las Vegas and play blackjack. I'll take maybe $250 in to play with and I quit if I loose it all.
If by some strange chance I do win I'll reserve enough to live the rest of my life on, maybe $20 million and probably distribute the rest to charity (and no charity is not my needy relatives who'll be asking me for money).
Sigh.
Look, if you do win, you'll burn through it very fast and end up no better, and with fewer friends and upset relatives than if you didn't bother at all.
That's what happens.
Raffles on the other hand, since they return 100-400 percent of the expected value, tend to do a lot better.
(caveat - I have won raffles, lotteries, and many forms of gambling myself, but that has nothing to do with your odds)
-- Tigger warning: This post may contain tiggers! --
Optomist...
$9,000 US dollars in 40 years will be about $5.00 US value. In fact a large Coffee at starbucks will cost $10,000
Do not look at laser with remaining good eye.
The expected value of a gamble being positive does not necessarily mean it is a good idea for a limited human.
Consider, for example, a lottery which cost $50K to enter, and returned 10e80 dollars with probability 1 in 10 billion.
Expected value dictates that it's an absolute home run, but 99% of individuals would not take that bet, because with near-certainty it will bankrupt them.
Similarly, for most, a $1 bet for a $1M jackpot with 1 in 1.1 million odds (e.g. negative EV) is better than a $1 bet for a $10M jackpot with 1 in 9.9 million odds (e.g. positive EV).
Why? Because of the nonlinear value money has to an individual.
using Searchlotto, a reseller of the Yahoo search engine. Syndicate with 20 people per ticket, paid for by sponsor ads (which I never click on, but evidently some people do). Cost to me: 0.
So my return on investment was 0 until I won a few pennies once, and now it's infinite.
Any any fool will tell you, gambling is best done with other people's money.
Jesus Christ. They're turning geekdom into the new stupidity. We've all lived long enough to see science and even math perverted and turned against us.
We have to stop it, before it's too late. We must stop TBBT.
If spending $2 on a lottery ticket is so good, why not use every dollar you've got to buy lottery tickets. That will give you a much bigger chance of winning.
The last time I bought a powerball ticket I not only lost the $2, I lost 2 hours of productivity stressing out over which yacht I should buy if I won. It's just not worth the stress.
Mathematical case implies a relation to the probability of winning which is definitely not the case here. What's really meant is that there's a utilitarian case that, w/the usual hand waving, you can apply some dollar value to.
Indexed corporate bond fund.
The original post to /. was from hughpickens.com at 02:21 PM - this one was posted almost 5 hours later and thus is a duplicate
Great job /. moderators....
Yes, the odds of winning are 1/175M. But the odds of winning without a ticket are exactly zero, which is inifnitely smaller than 1/175M. Also, they run these lotteries until someone wins, which means SOMEONE has to win. That someone could be you if you buy a ticket. It CAN'T be you if you don't.
Me? I never buy lottery tickets. My life is pretty good. Not wealthy, but rich.
RS
Shoes for Industry. Shoes for the Dead.
I could gain the same pleasure by fantasizing that instead of being my father's son, I am in fact the bastard son of a billionaire and his sole heir, and he's about to come to the end of his days. He didn't tell me because he wanted to see what I could make of myself. There, saved $2.
because it gives the working class a false sense of hope. It's a buffer. A fake safety net that keeps the poor from asking too many questions about things like wealth inequality and declining wages. We do similar things with racism and classes/casts. And before anyone asks, yes, I am comparing racism and the lottery. From the ruling classes standpoint they serve the same purpose. Distractions to keep plebs us from asking for things like stable incomes and health care. Maybe it's not like this in the rest of the world but here in the States luck is considered a skill. Something you worked at and honed. And if you didn't get lucky and win the lottery it means you did something wrong. You're a bad person. That's what the lottery does here. Sure, it's not the only thing. But it's another tool in the 1%'s belt to keep the other 99 in check.
Hi! I make Firefox Plug-ins. Check 'em out @ https://addons.mozilla.org/en-US/firefox/addon/youtube-mp3-podcaster/
people bet on poker games and super bowls, too. do they fantasize when playing poker or while watching seattle lose?
I buy co-operative bank share for my low risk, inflation protection investment. I buy www.desjardins.com/ca/rates-returns/savings-investment/federation-capital-shares/index.php as the rates is min(Canada central bank, rates voted by the executive assembly). They are somewhat hard to buy but have better rates than govt bond and are as safe but for some reason, probably related to his commission, the investment clerk at Desjardins do not want you to buy those, you have to insist
I would do 2 girls at the same time....
I realize these comments are intended to be slightly humorous, but consider the annual inflation rate needed for that prediction to come true:
Optomist...
$9k in 40 years will be worth what, $500 bucks in today's money before taxes?
This would require an annual inflation rate of 7.5%! In the US, we haven't had monthly inflation that high since 1982!
Optomist...
$9,000 US dollars in 40 years will be about $5.00 US value. In fact a large Coffee at starbucks will cost $10,000
This would require an annual inflation rate of 20.6%! In the last 100 years in the US, the monthly inflation rate has only been in the 20% range for a few months and only after the immediate end of the two world wars.
I used to work at a small grocery store in the poor part of town. We had one woman who came in multiple times per day at bought 7 lottery tickets each time (lucky 7), sometimes she would buy 3 sets of 7. I estimate that she wasted at least $50 day on lottery tickets and obviously never won more than $500 pot when I was there.
She was the worst case, but I wish I could say she was alone. We had many, many patrons that burned so much money on lottery tickets and cigarettes. Since that experience I have never had the urge to buy a lottery ticket or smoke a cigarette.
increases the odds infinite times (from 0 to 1 in 175mil). After one, it's wasteful. And dreaming about it wastes my time, so I subscribe. If I win, great! When I don't, I don't even notice.
>small one to pay for the enjoyment of thinking through how you might organize your life differently if you had all those millions
see, this is what poor, uneducated proles do, they fantasize about money instead of doing something with their lives
Who logs in to gdm? Not I, said the duck.
Years ago, my wife and I went to Vegas. We're not big gamblers, but did a little gambling. The cost we sunk in was rationalized as entertainment - not an attempt to make money. We were able to be entertained for a couple of hours on not much cash.
With the lottery, we do play every so often, but it's the exception rather than the rule. I'm perfectly capable of fantasizing about what I'd do if I won $40 million without buying the ticket. (After giving money to family, paying off bills, putting money away for the kids' college funds, and taking a celebratory vacation, I'd probably just deposit the remainder and live off the interest.)
My sci-fi novel, Ghost Thief, is now available from Amazon.com.
TIPS bonds are indexed on inflation. I do believe that the current inflation rate is under 3.5% these days, though. You can in theory get higher interest rates out of other investment types (real estate, stocks etc) but can also lose money on those.
I'm trying to teach myself to set people on fire with my mind... Is it hot in here?
The big difference between renting and buying is that instead of throwing away money to pay someone else's mortgage, you are building equity in your own property.
This was common sense in the 1960s and 1970s. Now with debt consolidation, second/third mortgages and other similar schemes, home equity is frequently tiny or illusory.
there's an excellent report on this matter that was published more than 10 years ago.
A Home Without Equity is Just a Rental with Debt:
http://papers.ssrn.com/sol3/pa...
lucm, indeed.
When one is reduced to praying that they will get something for nothing, they have made an error that will lead them to ruin.
Americans have always taken pride in their ability to forge their way to success. Regardless of their initial status, they always feel that they can move up, improve, make a better life than their parents. This and only this is what made America great.
When Americans sit back on their easy chair and hope for a miracle to bring them a fortune, they have reduced themselves to being no better than the Asians who worship 'luck' in the casinos across the country. It is unAmerican and I, for one, would be ashamed of participating or winning such a gambling enterprise.
...omphaloskepsis often...
According to Numbeo, the buy/rent ratio in Seattle is 10. That'sobscenely expensive (Boston is 3), but that's still pocket change compared to Geneva, Switzerland, where it's 35!!! Look at the numbers, the price *per square meter* in Geneva is 2x the average monthly disposable income.
lucm, indeed.
Go outside, look towards the sky, open your arms and wait for a few minutes for the money to fall.
You have about the same odds to gain big money as paying for one of these lottery tickets (and it costs you nothing and takes less time)
So this woman goes in to church and prays to God.
"God, you know our situation. My husband is in the hospital. I can't find a job. Our kids are hungry. Our house is in foreclosure. We have no money to pay the bills. Please, God, if you would let me win the lottery, all of our problems would be solved."
Lottery comes and goes and the woman doesn't win. So she goes back to church and prays again.
"God, our situation has gotten worse. My husband is home from the hospital but is sick. All of the kids are now sick as well as hungry. The bank says they're going to kick us out of the house. The power and gas have been shut off. Please, God, let me win the lottery so that we can be happy and we will only take what we need to get back on our feet and then donate the rest to the church!"
Lottery comes and goes and the woman doesn't win. So she goes back to church and prays some more.
"God, we're in desperate straits. The police have kicked us out of our home. They bank has taken all of our posessions to pay off the debt. My husband and children are living in the park, but the police have threatened to kick us out of there. Please, God, don't forsake us! Help us by letting me win the lottery!"
Suddenly, she hears a booming voice say:
"Meet me halfway! Buy a ticket!"
Thanks. I'll be here all week.
...are also probably two car payments, a mortgage, and a credit card payment per month in debt. Half the people I know throw away many magnitudes more money in interest on their debt each month than I could hope to spend on lottery tickets.
The odds could be favorable if the jackpot got high enough, but they are still far from that. You need to consider more than just the odds of winning and the potential payout. Of course the increase in the ticket price from $1 to $2 effectively halved your per dollar payout. But three other important factors need to be considered, and only one in three favor the player. The one that favors the player is the chance of winning the smaller prizes. Overall, it is a drop in the bucket, but it does add to the player's odds. On the negative side is that if there are multiple winners, and there often are when the jackpot gets large, you split the winnings. This very significantly reduces the potential winner payout, but is usually not mentioned when factoring the odds. The other big loss is that if you win the government (federal and most states) take back huge part of what you supposedly won (as much as 50% or more total). So you really need to factor that in and compute the odds after taxes, not on the supposedly won amount. And, of course, start rmath with the small one-time cash payout amount, not the inflated thirty to fifty year payout. If you want a long payout you can take the smaller sum and buy an annuity and get a better return that the hype the lottery is offering.
I'm an American. I love this country and the freedoms that we used to have.
The real time to buy a lottery ticket is when the expected payout - the payout times the odds that at least one person will draw the winning number - is more than the expected gross revenue since the last drawing.
Here's a simple example:
pick 4 numbers from 1 to 100. The odds of winning are 1 in 100,000,000.
If 100,000,000,000 million people play every week, then in the first week the odds that SOMEONE will win are close to but not quite 100%, so the expected pay-out is a bit less than $100,000,000. Smart money says don't play.
To keep things simple let's assume that the next week only 100,000,000 new people play. The odds that SOMEONE will win are close to but not quite 100%. They are certainly over 50%. The expected payout will be a bit less than $200,000,000 and certainly more than the $100,000,000 that bettors put on the table this time around. The smart money says play.
If you don't see how this works, assume YOU are the only bettor in week two and you buy all 100,000,000 tickets using a random-number-generator. There will be duplicate bets (if you weren't the only ticket-buyer, these numbers would result in you having to share the prize), but you will cover well over 50,000,000 of the possible combinations. If you win, you more than double your investment, and the odds of you winning are more than 50/50.
Of course in the real world it's almost never going to become a good investment to buy a lottery ticket if all you care about is financial return. Why? Because as the jackpot goes up, people who normally don't buy tickets do so. Why? Some do it for emotional/fantasizing reasons. Some do it so they can tell their grandchildren how they "almost won the big one." Some may do it because they think the number of new tickets sold will be low enough to make it a "smart decision" to buy a ticket.
Bottom line: There may be good reasons to buy a lottery ticket, but "because it's a good investment/because it's a smart gamble" is almost never one of them.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
Did you read the report before talking about short-sighted comments?
lucm, indeed.
Playing a high-stakes lottery makes sense as long as you're buying the tickets with money that you can afford to lose. The odds of winning may be very, very small, but the key thing is that you only have to do it once to change your whole life.
In contrast, playing scratch tickets is completely stupid unless the crack-like thrill of an occasional win makes it worthwhile. Basic probability theory tells you you're going to lose, how much you're going to lose, and how fast you're going to lose.
My odds of becoming a millionaire teaching you lot maths are exactly zero, and in that sense the lottery is better.
buying a home. Hasn't made sense since the 1970s
Just looking at dollars and cents, there's no way you can make a blanket statement like that. Every city's housing and rental market is unique and the market today isn't the same as it will be a year from now. The same city that is "better to rent in" today could easily become "better to buy in next year" or vice-versa, while the city a few states over could easily be the other way around both now and a year from now.
There's also the issue of how much house you need. I know of one city that in the mid-2000s at least was better for buyers if you wanted a 3-bedroom suburban home but better for renters if you needed a 1-bedroom accommodation. At least it was after you added in the "volatility-risk cost" of buying a condo (the condo market was much more volatile than the single-family-home market in that city, meaning you could easily either take a bath or walk away with an unexpected bonus if you were forced to sell, say, due to a job transfer).
And this is not even considering the intangibles like "how much do I value not having to go through the hassle of selling when I want to move" and "how much value to I have in not being at the mercy of a landlord who can jack up rents with each lease renewal and/or sell the property to someone who wants to not renew my lease and move in himself."
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
You're leaving out meteor strikes with a solid gold core. No need to calculate exact odds. This is a found-money thought experiment. They're just as much fun to think through as a lottery ticket, without involving the kinds of ark-B people who enrich themselves selling losing propositions to poor people.
Or, if you don't have your own back yard, you can always use a cheap Chinese wok to pan for gold in the bath tub, on the principle of transfluoridation. The real reason people buy lottery tickets is to avoid the domestic strife of everyone trying to monopole-ize the bathtub at the same time. Plus the fact that hot water costs real money.
Or, if you don't even have your own bath tub, you can believe that you're a trillionaire on planet Tresfunadore and you're taken there every night on the ethersubwarp, only for some very good reason that's presently slipped your mind, you can't remember all the joys and wonders while you're awake in your earthling body in your mysterious but very important mission here on planet earth.
I'm not sure that would be a reason *not* to pick #'s from the cookie.
I'd be happy to have $5m (1/100th of a $500m jackpot)
After a certain point, it becomes less about how I could affect/change my life, and more about how I could affect others'
I'm guessing the chances of getting hit by a bus on the way to get that ticket are greater than the chances of winning. Did he factor that in?
Did you see the blank checks our idiots in congress wrote first to the defense contractors and then to the insurance companies? Go to the grocery store, and tell me inflation iis 1%. The price of gas has completely hidden the cost of groceries doubling in the last 7 years.
True. However, it can be an investment that rides with inflation (like a tide lifting all boats). Though besides that, it's really good if you have children and need the extra room and a friendly community with good public schools.
OTOH, if you're single and young (in this economy for sure), renting is the way to go. You're not tied down both physically and emotionally. You're also nimble in both energy and extended employment opportunities. Once you buy a house, you're stuck unless you can find a buyer; then comes the time frame and move. Selling a house is a much bigger PITA then buying one.
Shorter version: Single, rent. Have a family, start looking at home ownership.
Life is not for the lazy.
In Germany there is another angle to lotteries.
We have an assortment of lotteries here but they are all state run (state monopoly on lotteries here).
Now the profit of the lotteries doesn't just go to the states coffers, but are meant to go towards worthy causes. The most commonly known lottery here (6 out of 49) I believe goes towards sports funding. Lots and lots of money goes to various football associations (some might argue too much, esp. probably too much to the big boys), I believe towards building and maintaining football fields and stadiums, but also towards others sports and some cultural stuff.
Some other lotteries go towards some charities I believe.
I haven't really looked into the whole thing fully, but if you agree that this sort of assorted hopefully somewhat useful funding is fine with you, then you can see your ticket as a donation to those causes that also provides you with a chance of winning a lottery.
he doesn't have lucky numbers he always plays. Otherwise, there is a miniscule, but non-zero chance of having a very awkward conversation with him when he wants his winnings.
They will lower that EV signifiantly in the US. And of course multiple winners.
My credit union has been paying over 3% in dividends for the past few decades. Several years the shares paid 5%. Definitely averages over 3.5%.
It's not hard to find 3.5% interest. Heck, you can get that guaranteed if you look around. Can't imagine where you're not coming close to it.
This isn't quite right... Though I guess it depends on the lottery system.
In Australia, when a really big (enough to advertise it) powerball/lotto/etc prize pools come along, you'll often find more than one division 1 winner - in fact, there's usually half a dozen.
The smart players don't buy a single lotto ticket, they typically buy a few games of a large system entry once every few years - the odds of winning when you can choose 9-10 numbers when most people choose 7 are exponentially higher than average, at great cost.
At my last office there was a group of 15 or so people who'd often get system entries for anything more than 20mil or so - in the 2 years I was there, they won division 1 once (and division 2 half a dozen times). They were ahead greatly (half a million or so each), but they certainly weren't millionaires - just debt-free and having fun.
People usually point to the "expected value" as an argument that it's a bad bargain.
But it seems to me that the expected value is meaningless unless the experiment is performed often enough for the Law of Large Numbers to even out the results.
So, if a person plans to buy daily a ticket at 1/100 odds, you can make an expected-value argument. But if they plan to buy daily a ticket at 1/175000000 odds ... well, yes it's inadvisable, but it's hard to make an expected-value argument.
Bogus title. There's nothing "mathematical" about this case for buying the ticket. It's just a circular argument that says it's worth the $2 because you get $2 worth or pleasure out of it. It's a stupid article and an even more stupid submission for a site like this.
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Nice timing -- posted 15 minutes before the drawing?
I thought of that decades ago. In fact I even thought one step further. I figure I could also fantasize about finding a bag full of money on the street. Or finding a lottery ticket that would win the lottery. That's about as unlikely as buying a ticket and winning the lottery and it's free!
Gladstone Gander does it all the time.
It's happened before too.
Actual winnings were 1/3 of what was predicted by his calculations since there were multiple winners.
I agree lottery tickets can be cheap entertainment (an argument for letting people buy them longer in advance before the draw). I used to give them out as party favors.
She was like chocolate when she drank... semi-sweet at first and then increasingly bitter.
I have a budget for "fun" activities though, and I consider powerball to be one (i.e. money I throw away for my own amusement). So why would drink a 2$ glass of wine be less "money thrown away" than buying a 2$ powerball ticket ? They are in the same class, and at 2$ your wine won't be that good that you have much more excitement than at the ball drawing.
C. Sagan : A demon haunted world:
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I asses the risk of losing that 2 bucks as a huge propability but not very harmfull outcome. So the total risk evaluation for that would be very, very low. On the other hand, we have a super low chance of getting millions of dollars, but the outcome would be life changing. So the comparison is even. And outcome shows it doesn't matter financially if I play or not. So, if I feel like playing I can, without it being a stupid financial decision. Just giving that 2 dollars to charity would be equally stupid financially.
Great point. $2 spent to spark the conversation about what you would do with all the money is definitely worth it.
3, 33 or 333 millions. Would that make any difference? I don't think so.
It you want to calculate the expected gain then you should only consider the useful gain.
For me, 1 or 2 millions would be enough for the rest of my life so if I had to choose a lottery, I would pick one that maximize the probability to gain that amount. Any lottery with a smaller maximal gain (e.g. a few millions) but a higher probability is a better choice.
The math is off quite a bit by the fact that whenever the jackpot becomes really huge, the number of people playing goes up by a lot, which typically translates into the jackpot going to more than one person. In other words, the math is only right under the assumption that you will win the jackpot yourself with no one else to share it with.
Justify your purchase however you like but ultimately state lotteries are a highly hypocritical tax on the poor & middle class who don't do math well.
I know people making minimum wage who purchase a ticket or two every single day of their lives. It's kind of sad. The only thing sadder is that my kid's school now depends on these people for funding.
If we are ok with allowing the state to promote vice, I'd rather my government just sold me recreational drugs.
He is arguing about the return of investment from buying a non-winning ticket. That's not really the actual math.
The actual math involved here is in the winning ticket. For the lottery company, expected value is pretty much all they are interested in. But expected value is not everything. If it were, nobody would need any insurance since an insurance, again, relies on getting more expected value from their customer than the customer gets in return.
The point of an insurance, however, is that it will keep a largely unlikely event from hitting your life in a way it will not recover from. A lottery is sort of the opposite in that it may provide a largely unlikely event that will boost your life in a way that you could not hope to do yourself. An insurance is about closing an unlikely bad doorway downwards, a lottery about opening an unlikely good one upwards.
For a billionaire, neither insurance nor lottery make much sense since they don't open or close such singular doorways. If there is no conceivable shortage of money, lotteries and insurances do not provide either chance or security above your means.
If you count up minimum balance fees, check fees, ATM fees, fees for touching the door handle, fees for talking to a teller, etc. It is ridiculous, you are better off stuffing your money under the mattress than giving it to a bank.
putting the 'B' in LGBTQ+
We'll need engineers in 20 years, that would be a fairly safe bet... Probably lawyers too... And doctors...
I'm not sure we need lawyers now, let alone in 20 years
Getting a good education, getting a job, having a middle-class life, finding a good partner, not getting sick, being athletically gifted, being intelligent, winning the lottery.. wait..
The argument that lottery tickets are bad value is based on the expected (mean) return.
For example, for every $2 ticket, you might get $1 in prizes on average.
On average, you're losing on every ticket.
However - this completely fails to value the fact that you have massively increased the standard deviation of your return, so although your expected return is $1, there is some chance that you'll get $1million.
We recognise that reducing standard deviation on negative events has value.
For example, your expected return on your insurance payments of $1000 is less than $1000. However, you have reduced the standard deviation of the expected return and (hopefully) negated the possibility of losing $1million.
On average however - you lose money whenever you buy insurance.
If we are willing to pay (on average) to avoid losing $1million, then it is is equally logical to pay (on average) for the opportunity of gaining $1million.
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Note true. Home equity has rebounded tremendously over the last 2-3 years and is back above 60% of GDP just like it was in the 50's and 60's.
"Similarly, for most, a $1 bet for a $1M jackpot with 1 in 1.1 million odds (e.g. negative EV) is better than a $1 bet for a $10M jackpot with 1 in 9.9 million odds (e.g. positive EV)."
That's a good observation. When I play the lottery, I specifically choose to play the game that has the highest probability of winning 1 to 2 million dollars. Since that's game changing for me, I don't see the need to shoot for $40M with a much lower probability of winning.
Did you read the report before talking about short-sighted comments?
For those who don't want to read a 30-page report just to decide if you have a valid point (or if the report you linked is even relevant), I'll provide the summary that you should have provided, and try to guess at the argument you were trying to make (but didn't):
The report argued (in 2001, before the bubble and collapse) that much of the growth in housing was driven by relaxed lending which allowed more segments of the market to buy homes, and that this growth was driving an increase in prices. It further argued that if we saw a significant economic collapse, particularly a large rise in unemployment, that this effect could collapse.
Your argument, I presume, is that buying a house is risky because the price could collapse, leaving the borrower "upside down", holding a large debt they can't pay.
(Now we'll see if my AC stalker crapfloods responses to this post.)
Note to ACs: I usually delete AC replies without reading them. If you want to talk to me, log in.
If the odds are 1 in 175 million, then a $2 breaks even when the after tax, instant profit exceeds $350 million. In this particular jackpot was $564 million. Instant payment of $381 million. Now, taxes (and the chance of splitting it with others) makes this not a real investment, but it got pretty darn close.
But if the jackpot got to say $800 million, buying a ticket becomes a mathematically good bet.
But there are other things going on. Honestly, if you hit the jackpot for anything over 20 million, it won't make that much of a difference. It will radically change your life in pretty much the same way. Most likely you will gain somewhere between six months to one year of happiness, a year or so of realizing that things are going poorly and then the rest of you life with a CRAPLOAD of depression and anger about how everything went to hell.
Why? Because if you gain something too quickly and easily, you neither value it nor do you know how to maintain and keep it.
Chances are very high you will want to help out a few people you know that really need it, which will cause a bunch of people that don't really need it to come begging for help. If you turn them down, suddenly your friends turn on you. If you don't turn them down, suddenly you are broke.
Your leisure activities will dramatically change and your friends won't be able to afford to go with you unless you pay for them. Which turns the relationship from friends to hanger-ons. It's hard enough to keep family from disintegrating, let alone your friendships.
Honestly, my advice to anyone that wins is to REFUSE TO TELL ANYONE YOU WON. At most, tell them you won a smaller amount. Don't sign anything giving up your privacy, instead keep it a secret from EVERYONE you are not married to. Set up a Trust that will anonymously help people you think truly need it, and do NOT take credit for it.
You can't 'bring your friends' along for the lifestyle, but you can occasionally show them a fantastic time.
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from Starbucks no i do not do neither
Insurance is a losing bet. It's a $1 ticket with an 80-90% payback. The funniest part is that it's a bet you *do* hope to lose. Rather it's a business decision, a hedge, which does not always need to show a positive ROI.
In the case of a lottery ticket, it's not a business decision. It's a lark, an entertainment. It's also one of the only ways to become independently wealthy with almost zero work (12 minutes at minimum wage, less than 5 minutes of labor at average wage). For 99% of the people out there, it's the *only* chance they will have of becoming independently wealthy. And someone *will* win eventually.
While I can't argue that people are, as a whole, bad at math. In fact, they're even worse at probability than general math. But it's not necessarily a tax on people who are bad at math, it's a peek at a life they would never, ever encounter for themselves in the normal course of their lives.
Is it just my observation, or are there way too many stupid people in the world?
It's silly to say that it made more sense in the 60's and 70's than today, because nothing about the economics have changed, only the behavior of mortgage holders.
Even so, whether one is a better decision depends on the interest rates, the length of the mortgage, realtor fees, and what the market is doing. This calculator lets you figure it all out, and is actually a pretty impressive applet in terms of presenting information and allowing you to quickly get a grasp of all the variables in the problem: http://www.nytimes.com/interac...
The big thing that changes the equation the most IMO is going with a 15-year mortgage. Especially considering that rates are generally 1% lower on the shorter mortgage, it makes a dramatic difference in how your equity builds. For instance, on my home I could've taken a 30-year at 4.75% and paid $1100 a month, with maybe $100 of that going to principal. Instead, I'm paying $1400 a month on a 15-year @ 3.75% interest rate, with $700 going to principal every month. Think of it this way: would you pay $300 a month to get $600 more in equity every month?
Of course, the scenario changes as you get farther along in the mortgage, but conventional wisdom I've seen says that short mortgages are only for people who are intending to pay off a house and retire in it. Seems to me that short mortgages are best for anybody who doesn't like being a slave to the bank.
Do I make the payments on my pickup and trailer home, or do I play the lottery? I play the lottery of course. If I win, I can pay off the truck and the trailer.
"I'm so moist I'm sticking to the leather." -Kermit the Frog on The Late Late Show
The main way the math falls apart is that the value of money isn't linear.
The difference between nothing vs winning (or losing) $1 doesn't change most people's lives at all.
The difference between nothing vs winning $10,000,000 changes most people's lives a lot.
The difference between winning $10,000,000 and winning $100,000,000 doesn't change most people's very much. (In either of those cases, they can do whatever they want, and the rest of the money is just some number in some online video game called Schwab or Fidelity).
With a non-linear value curve like this -- lotteries actually make sense -- they're win/win for both sides.
if possible, gamble with other people's money. It's been "lucky" for me, anyway.
Mortgage bankers and Wall Street have perfected this to a fine art...
I don't usually play the Lottery unless the Jackpot is over 10 Million. Winning 1 Million isn't worth it, by the time you buy a House and Car it's gone. Then the House and the Car become a liability with taxes and repairs. In any case, I played this one even though I knew I was more likely to be crushed by an Asteroid.
Red, hope is a good thing, maybe the best of things, and no good thing ever dies.
Considering the bankruptcy rate and suicide rate among lottery winners, considering the strained friendships and relationships of lottery winners, and considering the failure of lottery money to actually make lottery winners happier, I think I'm lucky that I haven't won the powerball.
Good thing I only have to spend $0 to be this lucky!
There is ZERO risk for corporate banks to loan money. They either get the house AND keep whatever has been paid towards it up until that point or are fully reimbursed in the long run.
Expected value is only a good metric for evaluating lottery tickets if you expect to win often enough that it'll average out over time. For this particular lottery where $2 buys you a 1/175m chance of winning $337.8m, it doesn't make sense to reason that you're paying an average of $0.07 cents to play unless you're planning to buy several billion tickets over the time period you care about. For this lottery, the entire point is the variance. If you buy a ticket you are paying a trivial amount of money for a small possibility of a life-changing event.
There are occasionally lotteries and people for which expected value does make sense:
http://newsfeed.time.com/2012/08/07/how-mit-students-scammed-the-massachusetts-lottery-for-8-million/
http://www.nytimes.com/1992/02/25/us/group-invests-5-million-to-hedge-bets-in-lottery.html
I haven't read the linked article, but from my own experience, having purchased my first townhouse in '85, then another in '96, and finally a single family in '00, I've pulled gained value over renting in each case. And that's even in a down housing market (late 80s), I got a traditional 30yr fixed mortgage each time, no debt consolidation, or second mortgages. The single exception is the HELOC I have on our current home, which I've used to help pay my daughter's college, and a new vehicle...that' is debt is nearly zero now. The point being with the mortgage interest tax write off, you're not only building equity, you're paying less in income tax.
Just another day in Paradise
You need to consider opportunity cost. Personally I chose to take the largest and longest term mortgage, because that frees up cash to invest. If I'm paying 3% to the bank (post mortgage deduction) but earning 8% in the market, I'm not really "losing" anything.
The risk-free (i.e. government-guaranteed) inflation-adjusted 30-year interest rate in the U.S. is about 1% at the moment. On the one hand, that a seems depressingly low, and compared to historical rates it is. On the other hand, periods of low long-term real interest rates tend to be highly correlated with periods social and political stability, so perhaps today's low interest rates are a price worth paying.
If you are willing to accept a reasonable, but non-trivial, amount of risk, you could invest the stock market. A 3.5% inflation-adjusted rate of return is actually a very solid guess about future long-term stock market returns. Of course, there is definitely a risk that your returns will end up lower - that's why the stock market is a higher-risk, higher reward investment.
Here's a useful rule of thumb for estimating inflation-adjusted stock market returns in developed nations over long periods time (at least 20 years): Rate of return = Real economic growth rate + Divided rate - Expense ratio - Dilution rate. The "dilution rate" is the rate at which your shares of stock are diluted by companies issuing new shares of stock, and the the "expense ratio" is the proportion of your assets that are consumed by investment costs, usually in the form of transaction and recordkeeping costs incurred by your mutual fund.
The dividend rate of the domestic stock market is currently about 2% per year, and the market's dilution rate seems to be around .5% per year. Assuming that you invest via a low-cost indexed mutual fund from a company like Vanguard or Fidelity, your expense ratio should be a rounding error - less than .2% per year. The real economic growth rate is the only unknown, but for the past two centuries has remained surprisingly close to 2% per year in industrialized nations. Again, keep in mind that we're talking long term trends; obviously growth rates were much lower during the recent recession and much higher during the .com boom.
Putting that all together: 2%+2%-.5%-.2% = 3.3% estimated rate of return, which is almost exactly the rate cited by the grandparent. Keep in mind though, that this is a very long term estimate; the stock market might go up or down 50% in a single year. Also keep in mind that there's a good chance that this estimate will be wrong - after all, the reason that the expected return is relatively high is that there's a reasonable but non-trivial risk that your rate of return will be much lower than expected, even in the long run.
Anyone who wants to become a finance nerd would do well to read William Bernstein's book The Intelligent Asset Allocator. The book explains the rationale behind this rule of thumb, and everything else you might ever want to know about estimating financial returns.
If lottery tickets were sold as entertainment, we could agree to disagree about whether spending money on nothing is fun. They aren't sold as entertainment. They are sold as a means to exploit the false hopes of people in desperate need of real opportunity and guidance. It's not fun. It's wrong.
I don't know about your PowerBall setup - but the payout is when you do the power-play because that engages the multiplier - without it you cannot win the "monster payout" that is advertised. Those are $3 each. When I do play the lotto, I don't even waste my time with PowerBall @ $3 per ticket unless the jackpot is over $250m, and then I know I'm tossing my money away anyway.
Debt consolidation and second/third mortgages are cases where people are putting additional expenses on their mortgage. Essentially, they're using their houses as collateral on additional loans. The ability to do this is a good thing, if used properly, a good thing. Has buying a house and paying for it with a mortgage become worse since the 60s and 70s?
"When you have eliminated the unacceptable, whatever is left, however improbable, must be the truthiness" - Holmes
Insurance is the opposite of a bet. If you bet money, you're assuming more risk. If you buy insurance, you're assuming less risk. If you don't have insurance, you're betting that nothing all that bad will happen to whatever you aren't insuring. If you can pay off the possible costs without hurting yourself much, you probably don't need the insurance and will be better off without it. Large enterprises often can absorb the risk and self-insure, meaning they don't buy insurance but prepare to pay out for problems as they come.
If your car was totaled in an accident, could you replace it without messing your life or plans up? In that case, you may want to not have collision insurance. If it would, you may want to have collision insurance, since that limits your loss.
With insurance, you're normally never hoping to have to collect. Even if it won't cost me significant money to replace my car if totaled, because of insurance, it would still be a hassle, and insurance companies normally don't like to cover all of a loss (they really don't want people hoping to collect on their insurance, and perhaps helping it along).
"When you have eliminated the unacceptable, whatever is left, however improbable, must be the truthiness" - Holmes
The point is that insurance is only in principle a bad deal if you yourself can cover the costs of whatever may happen. If you can't, it's an investment, and in some cases an essential one.
First and foremost, the main point of the original post notes that playing the lottery (like many other frivolous actions) has entertainment value that has to be factored in. Unless you never, ever, spend money on frivolities - a movie night simply because, "Why not?"; a "better" bottle of wine; a new handbag to go with the 50 you already have; that scroll-saw with all the features you'll never actually use - you frankly have no right to ignore that side of things. And on the weeks where the jackpot is huge, that entertainment value is high; well worth the meagre cost.
Secondly, though. Straight financial analyses of ROI assume that all money is equal. It isn't. If you're penniless and starving, £10 could save your life. Whereas, if the courts have given you until tomorrow to find another £20,000 or go to jail, £10,000 isn't going to be much use.
Similarly. If your finances are such that you can expect to earn lottery-win figures across your life, or to at least consistently have enough finance (whatever "enough means") to go do the things you want to, then, sure, playing the lottery for financial reasons alone is stupid (playing it for others, which is what the OP is about, is another matter entirely). Or at the other end, if you have so little money that the cost of a ticket will make a noticeable dent in your finances, then, again, it's something you should clearly think twice about.
If you are in the middle ground between those two extremes, though - and a LOT of people are - then simple maths isn't what it's about. Ticket costs are negligible - to the extent that buying or not will affect your life, they might as well be zero. Whereas a big win is extremely unlikely but potentially life-changing - out of all proportion to the straight numbers. Sure, the overwhelming probability is that most every tickets bought will be money you'll never see again. So what? You can afford it, and nothing less risky that you can do with that ticket money is going to give you any chance at all of such a life-changing win (as so many lotteries like to point out, "you have to be in it to win it"). Why on earth wouldn't you play?
I can take that $2 and get a satisfying PBR at a local pub.
You need to consider behavior (I'm more diligent about paying my mortgage than saving money, as I expect most people are).
Also, in the early years of that 15-year mortgage, where you are spending $300 more to build $600 more in equity, the ROI is incomparable. Yes, it works out approximately similar over 30 years, assuming perfect savings, low mortgage interest, and consistent market return, but over 5-10 years (the average time of owning a home) I would bet that the 15-year is optimal nearly every time.
That's fine, IF it's entertainment.
The problem is that poor people buy the things out of desperation, not for entertainment.
People are spending food money on the things and that's simply wrong on so many levels.
I have a different take on the nonlinearity of the utility in this case. A lottery takes a small monetary price from many and gives a huge monetary return to a few. But I generally assume that each additional increment of monetary return has utility that scales like 1/N. More important, a lottery winner will have their life changed, mostly complicated. Winning a large pool of wealth makes new actions possible, which lottery organizations use to sell the joy of imagining your favorite newly enabled actions to us non-winners. But having created a visible pool of wealth will attract attention from potential beggars and potential thieves. To the extent this wealth pool is useful, it needs to be managed and protected. This is a problem for lottery winners. So are the newly available options for a winner to make bad choices that can make a life worth, such as addictions and risky recreational activities.
Wednesday, while at a convenience store, I spent $2 on a ticket and dreamed a little, But I was aware that the winners, possibly including me, would have their lives changed, more complicating them then perfecting them. It would be a challenge to use such a pool of wealth in ways that make myself more satisfied and not less, but a challenge I mostly feel willing to accept.
A irrational brain puts more weight on small loss then a chance for a huge reward. It's not just lottery tickets. We make bad choices like this all the time. Playing way too safe because we can only see the certain small loss instead of the uncertain much bigger reward.