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."

Comments

A Home Without Equity is Just a Rental with Debt

[lucm]

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...

Re:I'll take the wine instead

[j-beda]

I think the lottery is a win in general. Yes, you have people who become addicted or can't afford to spend the money, but that's life. On the plus side a lot of people sincerely enjoy playing and much of the cash goes to public works and schools and such. It's practically an optional tax, and the idea of taxes being optional I find fantastic.

Except for the fact that the lion's share of money raised by the lottery is from people purchasing multiple tickets. And for the fact that money raised by lotteries does not typically add to the tax base, it just allows governments to decrease the amount of money they send to the schools from out of general revenue.

http://stoppredatorygambling.o...
"80% of Lottery Profits Come From 10% of the Players"

http://www.cpjustice.org/stori...

"...What we found, however, was that lotteries did not enhance the funding of public education. Lottery states actually used a smaller percentage of their wealth for education than did non-lottery states...."

You don't decide, the market does

[lucm]

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.

Re:Another silly decision

[afidel]

The CRA did NOT cause the financial crisis! This has been debunked many times. In fact in ~75% of communities CRA loans had lower default rates through late 2009 than traditional conforming loans (let alone crap like interest only, sub-prime, and liar loans) due to more stringent underwriting criteria. No, the cause was improperly rated securities comprised of crap that was sold in bundles to the big banks and through the back door to Fannie and Freddie.

Re:A Home Without Equity is Just a Rental with Deb

[swillden]

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.)