Monday, April 02, 2012

Mega Ripoff

You all heard the hoopla about the "largest lottery jackpot in history." By the end, the media marketing frenzy had succeeded in driving the jackpot "value" up to a claimed $640 million. For a mere dollar you could buy a 1 in 175,711,536 chance at unimaginable wealth. The Supreme Court was hearing arguments about a case which will shape the future of America and either fundamentally redefine the nature of our government, making us into subjects rather than citizens, or retain the founders vision of limited government which respects individual sovereignty, but based on television coverage, you would think that the lottery was the only newsworthy event of the week. How many times can they ask people "what would you do if you win?" and why can't they find someone with better ideas than "I'd pay some bills?" What kind of bills do these people have?

Now that the results are in, we can evaluate the hysteria and determine if buying a ticket was a wise purchase.

Just looking at the numbers, a 1 in 175,711,536 chance at winning $640,000,000 is a good deal. The expected value of that purchase is $3.64, so the one dollar ticket price is a bargin. As they told us in every other sentence, this is the largest jackpot in history, so if a ticket was ever a good buy, it is now, right?


In spite of the widely touted jackpot value of $640 million, each of the three winners got "only" $105 million. While $105 million is still a huge amount of money, it is not anywhere near a record lottery payout, and it makes the numbers much less attractive. A 1 in 175,711,536 chance at winning $105 million is an expected value of less than 60 cents. Paying a dollar for those odds is like taking two quarters and a dime as change for a dollar. Add the expected value of the smaller prizes and the total is still less than 80 cents.

Since the last Mega Millions jackpot was won in January, more than $1,469 million has been spent on tickets. In return, the lottery paid out $105 million to three winners and a total of about $294 million in smaller prizes. The big winners are the state governments and the lottery commissions who raked in $670 million in profits and the Federal Government which collected more taxes than anyone won.

But surely the big losers were the ones who drove up the jackpot in the weeks when there were no winners? Once the jackpot got so high the odds tilted in our favor, right? Again, wrong. In the 4 days leading up to the Friday drawing, people spent $740 million on tickets to win a total of $609 million. Even with the biggest jackpot in history the lottery only paid out 83 cents for every dollar spent.

A few years ago the Consumer Federation of America and the Financial Planning Association published a survey which found that 21% of the population agreed with the statement "Winning the lottery represents the most practical way for me to accumulate several hundred thousand dollars." Last week that strategy worked for 3 people but failed for hundreds of millions. On the other hand, systematically investing 10% of your income in a diversified, tax sheltered diversified portfolio of stocks and bonds is very likely to result in accumulating several hundred thousand dollars, given adequate time.

1 comment:

todd said...

One of my good friends swears that is how he is going to retire. I didn't say I had smart friends. But then again, they can't say that either.