“Record” Lotto Jackpot

A lot of people are excited about the “record” Lotto jackpot.  It was a statistical inevitability, that a record would be set in early 2012.  Why?

In January 2012, the price of a ticket doubled from $1 to $2.  If you double the price of the ticket, then the jackpot doubles!  That guaranteed that a record would be set.

Even though it’s a record jackpot, it’s still a sucker bet.

The “rake” on a Lotto ticket is 50% or more.  Less than 50% of the ticket sales are returned as prizes.

Even though there’s the accumulated jackpot from previous drawings, there’s also going to be a lot of tickets sold.  It is very likely that there will be multiple winners, sharing the jackpot.

Also, you have to look at the lump-sum amount and not the annuity.  The annuity payout is worth less than it sounds, due to the time value of money.  If you are stupid enough to play the lottery and lucky enough to win, you’d be better off investing the lump sum in gold, than taking the annuity.

Even worse, sometimes the insurance corporation goes bankrupt.  There is a legal precedent that says “If the corporation that provides the annuity goes bankrupt, then the person who ‘won’ the lottery is an unsecured creditor.”

Also, you pay taxes on the winnings.  You’d owe the top Federal tax rate AND state taxes.

It was inevitable that there would be a record Lotto jackpot.  They doubled the price of the ticket!  Even with the huge jackpot, it’s still a sucker bet.  The “rake” is more than 50%.  It is very likely that there will be multiple winners.  You have to consider annuity vs. lumps-sum.  You have to include taxes on the winnings.

3 Responses to “Record” Lotto Jackpot

  1. Negative, ghostrider.

    The ticket price of Powerball went from $1 to $2 in January. The Mega Millions game is the one with the record draw tonight – still with a ticket price of $1.

    In this one case, the EV of a ticket is positive. With a $540m jackpot (lump sum cash value of $389.8m) and combined federal/state/local income taxes of 39.6% (in AL; ~50% in NYC), a winning ticket would be worth about $250m (~$195m for NYC). The jackpot odds are 1 in 176m, so there’s an EV greater than the price of the ticket for this one draw, even if you live in NYC.

    All this to say yes, it’s stupid to play the lottery, but it’s just a form of entertainment.

    • I thought it was the other one.

      It’s still negative EV. You have to consider the odds that there will be multiple winners – very likely.

      • After-the-fact analysis:

        Jackpot wound up being $640m (cash value of $462m). Prize was split 3 ways ($154m each). So, because of the multiple winners, a post-hoc calc of EV is still negative. If only 2 tickets hit the jackpot numbers, it might have a positive EV.

        All in all, a lottery ticket’s worth an afternoon of daydreaming, at least to me. It’s not an investment strategy. :)

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