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When You Should Play the Lottery

by Ryan Guina

Yes, sometimes you should play the lottery. Why?

Well, if anyone out there has watched poker on TV, or ever played with anyone who is fairly serious, you will be familiar with the term “pot odds.”

Basically, pot odds states that the amount of money in the pot is sufficient enough to justify calling the bet. In this case, the bet would be the $1 lottery ticket, and the pot would be the jackpot.

The $390 million Mega Millions jackpot from the March 6, 2007 drawing is one example of a time when a $1 bet is a good bet. Your odds of actually winning the main jackpot are one in 175,711,536. Based on the odds, if you purchase 175,711,536 different tickets, you will win the jackpot 1 time. You could also win many other smaller prizes ranging from $1-250,000. And every losing ticket would count as a gambling loss for tax purposes. Of course, you would also have to pay federal and local taxes on the winnings.

When should you play the lottery?

I usually buy one ticket anytime the jackpot is higher than the stated odds of winning the jackpot. For the Mega Millions lottery, that means I will buy one ticket anytime it gets around $175 million or so.

Does that mean you should go out and spend your life savings on lottery tickets? Hell no! The actual expected rate of return over the long run is $.50 on the dollar.

But to spend $1 for fifteen minutes of dreaming is good, cheap fun.

Did I buy a lottery ticket on the 6th? You bet. I won $7. ;)


Published or updated December 29, 2011.
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1 Q Yuan

Does that mean that if you have $175M to buy all the tickets, you will get out with $390M, not including the small prizes? That is an overnight double already. Is that how rich get richer?

Interesting article.

2 Ryan

Lol… Absolutely not. :)

Theoretically I guess you could buy all the different number combinations, but I’m not sure if there are any machines capable of printing them all, or if there are rules in place to prevent it. (I’m guessing there are rules against it).

But, even if you did buy all the number combinations, it is likely someone else would also have the winning number and you would have to split the jackpot – resulting in massive losses!

3 Blaine Moore (First Time Home Owner)

I don’t think that you would have enough time to print all of those tickets, and I sure as hell wouldn’t want to spend the time filling out the forms. That’s way too much work.

I’d rather just invest the money.

4 broknowrchlatr

I’ve thought about this too. At first I came to the same conclusion. But, my reason for not buying tickets is based on marginal utility. As an ammount grows, its relative value is less. So, if I spent $20 on lottery tickets, that $20 is worth way more than the last $20 of a milti- million dollar prize.

In fact, I think any ammount over about $10,000,000 adds nearly zero value.

I think Mega millions is dumb anyway. I think that they should do it this way: when someone wins, they win 10% of the total ammount. Then, the other 90% is given evenly to everyone who matched all but the last ball. So, the total jackpot wills till rise to unbelievable ammounts. Say it gets to $200 million and 1 person wins and there are 20 people that have all but the last ball. The 1 person gets $20 million and the other 20 people share the remaining $180 million ($9 million).

If there are 20 or so people winning each time it hits, I would be much more interested in playing.

5 Ryan

Blaine,

I’m guessing if someone had $175M they wouldn’t be interested in the lottery. By the time you figure in the decrease in the final payout from taxes and taking the cash option, the dollar amount would be substantially less than the investment.

Broknowrchlatr,

Having more winners can easily be achieved by reducing the odds of winning, but your way is fun because it adds to the “what if” factor, and actually penalizes the person whose matching numbers were more difficult to achieve. LOL.

Either way, $1 every few months is kind of fun for me. I DO NOT recommend lottery tickets as an investment! ;)

6 Joel

Besides… most of the huge jackpots are paid on an annuitized basis… meaning the total of payments you receive over the entire 30 years or however long the payment period is is the payment amount.

I’m sure that when you run Present Value computations on it, the $390m is worth less than the hypothetical $175m to buy a win (ignoring taxes and multiple winners!).

7 Ryan

Hi Joel,

Very true, but many lotteries also give a cash option when you buy, or even at the time you win. I would have to take the cash option. Like you say, the time value of money makes it worth the cash option!

8 Phillip T Jackson

You have to include for inflation, taxes, and you need to approximate the odds of splitting the pot…. When I add these other factors, I get that it is 90-97% pot odds which isn’t bad considering the fact that 27% of the money is going to good governmental funds (college scholarships, etc.)

9 Ryan

I agree, Phillip, the pot odds are rarely 1:1, but let’s be honest here… for a $1 entry, the return is pretty good if you win. There are also quite a few other winning tickets that range from a few bucks all the way up to $250k. I don’t personally make it a habit to buy tickets, but I sometimes buy then when it reaches about $150 million. If only to dream. :)

10 Dividend growth investor

I think that if I had 175 million dollars, i would actually invest in the lottery company or found one, as opposed to buying 175 million tickets. Of course people who play the lottery are usually very poor people, who want to get rich quick. Even when these poor people do hit the jackpot, they don’t usually keep the money for long and its a tragedy for them.. I think that the number one reason why financial education is not a prerequisite course in school ( it could only be found in college i think) is because states make way too much money from lotteries on the expense of their citizens..

11 kentuckyliz

I don’t pay attention to the lottery…however, if one of us at the office happens to notice a massive jackpot, we occasionally pool our $1s and therefore have access to more chances than if we bought an individual ticket. The people and contribution amounts are recorded on the collection envelope as a record of share purchased. It’s fun to do as a group. If we won a big jackpot, yeah, we’d have to share it, but hey, nice problem.

Once every few years, I’ll go with family to the gambling riverboat, but I’m so cheap, I don’t like to lose money, I’ll watch other people gamble, then play the penny slots for a while. My sister and I sit next to each other and we’ll whoop and holler at winning ten pennies in a play, and people look at us as if we won a huge jackpot. We have fun putting everyone on.

In general I don’t like gambling.

12 Alan

You know it’s not a bad thing to buy a lottery ticket every so often. It’s fun to dream about what you could possibly do with all that money. I’ve bought 2 lottery tickets in my life and I didn’t win anything in either of them. But it was a fun experience and there’s always that if factor. What if you do win? Just what if…

Plus you can’t win if you don’t buy a ticket so one in 170 million is still better odds then none at all.

13 nalien

I play lottery occasionally. In my state (MN), there is a game called northstar cash. It’s one dollar to play, and you pick 5 numbers between 1 and 31. It’s done 7 days a week, jackpot starts at 25,000, odds of winning jackpot are 1 out of 169,911. So, when it gets to 170,000 or higher, it’s a good bet to play.

I know the jackpot relatively small, but the odds are SOO much better. (170 thousand to one, or 170 million to one…) And 175,000 would certainly be life changing for me.

However, it’s been a while since it got that high :(

Another interesting thing about MN lottery:

Years ago, as a grocery store clerk (grocery store sold lottery tickets), a gentleman came through my line to turn in winning tickets. Prizes over 600 are taxable, those under 600 are not. Lottery retailers may pay out any prize under 600. The gentleman had 5 seperate “Daily 3″ tikets. The default bet for daily three goes to a “straight/box” bet, where .50 of your bet bets on your three numbers IN ORDER, and the other .50 bets on your three numbers in any order. Straight pays better (500 to 1, odds 1000 to 1), box is more likely (pays 160 to 1, odds 330 to 1). Anyway, he had 5 individual tickets, each with 1 dollar bet on STRAIGHT 3-6-9. 3-6-9 won that day. He had FIVE winners of $500, thus EACH ONE WAS UNTAXABLE. It would be more convinient to just print one ticket with a 5 dollar bet, but then they payout would be 2500, and would be taxed! Our store policy was to only cash one $500 winner per person per day, but I let him go thru the line twice :D.

Ever since, I have played 5 individual dollars on a straight number OCCASIONALLY, but have never won (it did come up out of order, but i wasn’t betting on box…)

14 Ryan

nalien,

Thanks for sharing! I’m pretty sure the $2500 is still taxable, but he wouldn’t have to fill out the tax forms because each winning ticket was less than $500. He is still responsible for claiming the winnings on his taxes. However, with no paper record and the winnings paid in cash, it would be extremely difficult for the IRS to prove.

I still play on occasion, but the jackpot needs to get to the $150M range or higher. That limits the times I actually play to a couple times per year. It’s all in good fun. ;)

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