Buying lottery tickets can be fun but financially foolish. A lottery player buying a Powerball or Mega-million ticket has only about 1 in 260 million chance of winning the jackpot.
A really innocent, but absolutely annoying obstacle on the road to financial freedom is the popular weekly lottery ticket. In Baltimore, for instance, lots of office workers who are lottery fans often pitch in a few bucks every week for a group lottery tickets while dreaming about escaping the mundanely boring life that is the cubicle. Generally speaking, it is quite understandable why many people fall for the ‘lottery trap’. Take Powerball, an American lottery. Last January, the size of the jackpot was astronomical: $1.6 billion. The billboards were not big enough to advertise this amount which was split among the three lucky winners from Tennessee, Florida and California.1 For several days before the Powerball lightening bolt finally struck, lotto fever gripped the American public: long queues formed outside shops and gas stations selling lottery tickets. The day of the draw was also the happiest day for lottery officials, as sales were ringing up at a rate of almost $800,000 per minute.2
We hold this truth to be self-evident
There is no doubt that buying a lottery ticket can be fun. However, it is also financially foolish. Just consider this: a lottery player buying a Mega million ticket or a Powerball ticket has only about 1 in 260 million chance of winning the jackpot.3 This means that winning these lotteries is the ultimate fantasy. In spite of that, the optimists and dreamers around the country believe they can defy the astronomical odds of winning. The bottom line is that lotteries like the Mega million and Powerball are designed to be a bad deal for the players. But, for the states they are definitely a good deal: lotteries sales generate funds for plugging state budgets and funding good causes.
It is really not an exaggeration to say that lottery designers are getting better at their jobs. For the lottery agencies, the unwritten credo is to make sales more sensitive to the size of the jackpots than the chances of winning. The winning of a particularly large prize is often followed by a brief period that is similar a ‘halo effect’ – a brief period of bias shown by customers towards lottery playing because somebody just won the jackpot. During this period ticket sales remain high even though the jackpot has reverted to the norm. So it is only natural for lottery agencies to go to great lengths to increase the size of the jackpot.
One of their marketing strategy in that regard is usually to make the jackpot seem bigger than it actually is. Often, winners are given the option of either to collect the lump sum of the jackpot, or to take an annuity payments that will last for many years. Hence, it is not a surprise that the designers of, say, Powerball or Mega Million, advertise either large mind-boggling amount as jackpots or sums that represent over 29-year pre-tax value of an annuity that the winners can opt to receive. Most of the time, the winners choose to receive a lump sum instead of an annuity. In that case, they receive just over 60 percent of the lump sum. But then, they will be owing at least 40 percent of it as income tax.4
Another approach they use to boost the potential pool of participants is to boost the jackpot by expanding a lottery’s geographic scope. This approach is the bread and butter of the organizers of Powerball and Mega Million, the two largest American lotteries. The organizers of these two lotteries have forged a type of strategic alliances with other state lotteries. The effects of these alliances is very obvious: Powerball and Mega Million lotteries are now available to residents of 44 states in America.5 Even EuroMillions, a favorite lottery played by nine European countries, is following this strategy too. So far, the organizers has twice offered a jackpot of 190 million euros (which is about $206 million).6
Sometimes Powerball follows a more risky strategy. There are some weeks in which the chances of winning are so slim that no one can guess the right combination of numbers. Each time this happens, the organizers simply rolls the prize over to the following week and this makes it to grow even larger. Last October, both Powerball and the British national lottery changed their rules to reflect this strategy, which makes it harder for the players to win by increasing the number of balls in the draw. For the British lottery players, this change is unlikely to douse their enthusiasm for lottery, even though it slashed the chances of winning from 1 in 14 million to 1 in 45 million. The chance of a winning guess also fell from 1 in 175 million to about 1 in 292 million in America.7 The saving grace for the players is that they are not entirely helpless: if the lottery agencies make it too hard to win, they can simply lose interest in playing the lottery. The lottery agents are aware of this basic fact too. So, while lowering the chances of winning the jackpot, they are also boosting the chances of winning lesser prices – a strategy that helps them to hold the attention and the interest of the players.
While approximately half of Americans buy at least one lottery ticket at some point, the fact has remained that playing the lottery is a bad investment. No doubt, buying an occasional scratch-off ticket or even a Powerball ticket can be an innocent fun or, for some people, a one-time entertainment expenses. But given that the odds of winning are always overwhelmingly stacked against the player almost anything is a better investment than flushing money down the lottery toilet. What makes lottery even more dangerous is that the vast majority of lottery tickets are purchased by the poor and the less educated members of the American society who often view the lottery as an investment strategy. According to the available published evidence poor households in America tend to spend about 9 percent of their yearly income on lottery tickets. For instance, households with annual take-home incomes under $13,000 spends, on average, $645 a year on lottery tickets.8 It only fair to say that, even among those who have the least, the lottery hype is still hard to ignore. The unhappy truth is that while it is for many a source of entertainment to play, the lottery often hurt, not help, people’s financial predicament. And, for especially the poor, playing the lottery can push people deeper and deeper into a downward spiral of crippling poverty.
1Stanglin D., Estepa J.(2016, January 14). Winners in 3 States to Split Record $1.6B Powerball Jackpot. USA Today, pp. Retrieved February 12, 2016 from http://www.usatoday.com/story/money/nation-now/2016/01/14/powerball-thur….
2Lottery: High Stakes. (2016, January 16). The Economist, pp. 79-80.
3Missouri Lottery (2016). Understanding Powerball Chances. Retrieved February 22, 2016 from http://www.molottery.com/powerball/understanding_chances.jsp
4Lottery: High Stakes, op. cit., p. 82
5Multi-State Lottery Association (n.d.). Mega-Millions. Retrieved February 22, 2016 from http://www.powerball.com/megamillions/mm_map.asp
6Lottery: High Stakes, op. cit., p. 82
8Williams G. (2010). Poor People Spend 9% of Income on Lottery Tickets; Here’s Why. Daily Finance. Retrieved February 23, 2016 from http://www.dailyfinance.com/2010/05/31/poor-people-spend-9-of-income-on-lottery-tickets-heres-why/