The Lottery
“The state lottery is just about the only financial vehicle that offers some folks a realistic opportunity to materially impact their economic circumstances.”
David Cowles
We all love to gamble, most of us anyway; but why? If we know the rules of the games, we know that we are unlikely to walk away a winner; and unless we have a problem, most of us gamble for the fun of it.
When we go to Vegas, we don’t expect to come home with life changing riches – casino limits make that a virtual impossibility. If we’re smart, we expect to come home slightly poorer than when we left. We gamble because we enjoy the games themselves. Plus, it is an undeniable thrill to “beat the house”, even if only to a modest extent and for a short period of time. Bottom line: for most of us, gambling is not a financial planning strategy.
Or is it? 60 million Americans play state lotteries every year. In states that have lotteries (44) the average adult invests more than $300/year in numbers, scratch cards and other proposition bets. While it can be fun at first to scratch a card looking for winning numbers, after a while it can get tiresome. Yet we still do it. Why?
Simple, we do it to get rich! “Whoa, I thought you just said that you couldn’t get rich gambling.” That’s right, I did say that, and it’s true…in casinos! Lotteries are a completely different kettle of fish. Here’s how they work:
In the better games, approximately two-thirds of the proceeds go back to the players as ‘winnings’ while the state retains the other one-third to cover costs associated with the games and to fund budget items like education, transportation, or healthcare. Of the portion that goes to the players, about half is distributed in ‘small’ prizes after each draw; the remainder goes to fund the ever accumulating Jackpot.
Take Jackpot heavy Powerball. One third of the proceeds go to fund the Jackpot; if no one claims the Jackpot on the first draw, that unclaimed amount rolls over to the next draw. In any sequence of draws the Jackpot begins at around $20 million, not a bad haul. But if no one wins, the Jackpot will at least double on the next draw. There is no theoretical limit to how high the Jackpot can get but we know it can at least reach $2 billion IRL (100x the Draw #1 prize).
Many politicians and economists have noted that lower income people spend a higher percentage of their assets on state lottery tickets than do higher income folks. Of course they do! High earners are able to save money systematically; they have the option to participate in HSAs, IRAs, 401(k)s and other tax advantaged accumulation vehicles. They can even “play the market” and pick the next Amazon.
A dollar invested in the DJIA 15 years ago is worth $10 today. $1 invested in Apple on the same day is now worth $100. Beats any savings account I’ve ever had! (Of course, you have to know what to buy and when to buy it; but we enjoy thinking we can outsmart the experts…and occasionally we do…just as we occasionally beat the house in Vegas...or win the Lottery.) Unfortunately, though, many Americans do not have ready access to equity markets.
So here’s the fundamental question: does playing a ‘good’ state lottery constitute a viable financial planning strategy for someone of modest means? The answer, surprisingly, is yes! The state lottery is just about the only financial vehicle that offers certain folks a realistic opportunity to materially impact their economic circumstances.
What’s the magic? A state lottery takes a little from the many and delivers a lot to the few. Sounds like the worst form of ‘robber baron capitalism’, doesn’t it? And it is! Except you are the robber baron. Where’s Bernie Sanders when you need him?
But wait! The ‘few’ in this case are ‘selected’ randomly. You don’t need to be rich to win the lottery. You don’t need to have attended a posh prep school; you don’t even need an Ivy League education. Nor do you need to be born a genius…or work 60 hours a week. The lottery is a way, often virtually the only way, for many ordinary Janes and Jims to change their circumstances.
Here are questions you will not be asked by a licensed lottery agent:
Where did you go to school?
What is your race, religion, gender preference or sexual orientation?
Are you living in the United States legally?
Have you ever been convicted of a felony…or been in prison?
What’s your credit score?
Still not convinced! Scared off by the 300,000,000 to 1 quoted odds? Perhaps you should be, but let’s dig deeper into the economics of investing your life savings in Lottery tickets:
If you buy one ticket, you have one chance in 300 million of winning the Jackpot on the next draw. But depending on where you are in the cycle, that winning ticket could be worth anywhere from $20,000,000 to $2,000,000,000, a swing of 100x. Obviously, buying tickets is a better deal when the payout is $2 billion than when it is $20 million.
But I promised to break it down. You bet $2.00. $0.67 of that goes to the state to fund various public services, $0.66 cents is returned to the players after each draw in the form of ‘small prizes’ and 66 cents goes to fund the ‘progressive’ Jackpot. So how much did you invest?
Not $2 because 66 cents is returned to the players after each draw. So at the most, your net investment is $1.34. But that assumes you attribute no value to the various public programs that the Lottery supports. If you believe those funds are spent efficiently and that you share proportionately in the benefits of those programs, then your net investment is only 66 cents.
But let’s not get carried away. Let’s use the most conservative figure: $1.34. Now that $1.34 could win you as much as $2 billion…except it doesn’t. That advertised $2 billion payout is spread over 20+ years. If you elect a lump sum, which you will, the payout is more like $1 billion…still enough to pay the rent and have some left over for a vacation to Jamaica.
So the return on my $1.34 investment is about 750 million to 1. But the odds of my winning are 300 million to 1. So my return is $2.50 per $1.00 invested. Not many fund managers can match that sort of return.
In fact, by the time the advertised payout is $800 million, the state’s advantage has disappeared entirely. Beyond $800 million, you’re playing with the house’s money.
Arguably, it is the paradigmatic example of ‘doing well by doing good’. I buy a lottery ticket every week…but I never win. Bummer! But some of the money I lose comes back to me, and others, in the form of lower taxes and/or enhanced public services. Additional funds come back to the players in the form of small prizes.
Or maybe I do win, maybe I even win big! Then money well spent, I’d say.
According to American political folklore, we ninety-nine percenters are supposed to spend our days wringing our hands, stomping our feet, resenting the one-percent. For the most part, we don’t do that! More often, we take whatever steps we can to improve our economic lot; one of those steps may be the judicious purchase of state lottery tickets.
David Cowles is the founder and editor-in-chief of Aletheia Today Magazine. He lives with his family in Massachusetts where he studies and writes about philosophy, science, theology, and scripture. He can be reached at david@aletheiatoday.com.
