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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."
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.
Indeed. And our apartment was raising the rent by $150. So we found a house, and are now paying $100 less (after mortgage and escrow) each month, plus the enjoyment of simple things like being able to paint or remodel, and plant a garden or have a bonfire in the back yard. Seems like a solid choice despite the social contract.
Definitely a good option in your case. In ours, we found a townhome that allows us to paint and do limited remodeling, and plant a garden. And if anything major goes wrong, we don't have to foot the bill. Oh, and there's rent control on the entire complex, so raising the rent is indexed against property taxes (meaning property tax would also be going up like this).
Other than as a financial investment, I really can't see the reason for buying a condominium though -- you pay just as much, and own no land (but still have conditions you must agree to about property use).
I'd buy land in a rural area if I could afford to live there -- but that's what retiring people tend to do, and it's bumping up the land value pretty much everywhere as the boomers retire.
Definitely a good option in your case. In ours, we found a townhome that allows us to paint and do limited remodeling, and plant a garden. And if anything major goes wrong, we don't have to foot the bill. Oh, and there's rent control on the entire complex, so raising the rent is indexed against property taxes (meaning property tax would also be going up like this).
Other than as a financial investment, I really can't see the reason for buying a condominium though -- you pay just as much, and own no land (but still have conditions you must agree to about property use).
I'd buy land in a rural area if I could afford to live there -- but that's what retiring people tend to do, and it's bumping up the land value pretty much everywhere as the boomers retire.
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. You do "own" a portion of the strata if you bought a "freehold" instead of a "leasehold". The latter is rent free for a period that is usually 99 years and after that date, you lose whatever value you had and have to enter into a lease with the land owner.
Jesus was a compassionate social conservative who called individuals to sin no more.
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.
And in the meantime you are shelling out for taxes, maintenance, and being rooted in one area.
If you think that rental rates don't include the taxes and maintenance, you're naive.
And in many areas, house prices go down. So when you buy a house for an investment, you are really speculating
The question is not one of absolute values but of relative. "Buy instead of rent", not "buy for investment". When you leave a house, even if the value goes down, you still likely have some equity. When you rent you walk away with nothing.
The OP was saying that he was buying not for the investment but because he could install air conditioning and a hot tub even if he couldn't get his money back on them when he sells. He won't get his money back on them when he rents, either, so what's the reason to buy?
Yes, I know everyone in the media and our politicians calls home ownership an investment, but they are wrong. 2008 proved that.
2008 proved that people who bought houses they couldn't afford lost money. My house has doubled in value. When my bank offered me two options (fixed and ARM) I opted for the one I could afford. That meant looking five years down the road and seeing the balloon. There was no gun held to my head to pick the wrong option.
The people making money or I should say, making the decent returns, on your house are the banks.
Why yes, they make money off the loan (as they should -- they take a risk loaning money and they don't have it until I pay it back), but I will still have a good chunk of change should I ever decide to sell. Not as much money as I spent total, but nothing to sneeze at. And at no point in my loan was I ever upside down, simply because my eyes weren't bigger than my stomach.
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.