Ray Otero cannot buy a break. For the past three years, he’s spent $500 to $700 a week playing the lottery, but he’s only won big a few times: $1,000 once and $2,000 twice. Still he keeps playing. He’s sure his luck is bound to change.
Otero’s story, told in a recent New York Times article, is simultaneously funny, poignant, and exasperating. This New York City building superintendent simply wants the “easy life” for his family. He wants to find the money to move back home to Puerto Rico.
So why doesn’t he save the money from working? Because working is for suckers:
Working is for poor uneducated men — a sucker’s game, [Otero] said, where one must run increasingly fast to keep one’s place in line. “You’re making money on the one side and spending it on the other,” he said. “If all you’re doing is working, you’re never going to win.”
And so he’s poured his money into the lottery, looking for his chance to get rich quickly. So far it hasn’t worked. To make matters worse, his friend and neighbor, a doorman named Richie Randazzo, won five million dollars after only spending $30 a week on tickets. “It really isn’t fair,” Mr. Otero said. But what Mr. Otero doesn’t realize is that winning the lottery has nothing to do with luck.
Against all odds
My youngest brother, Tony, used to play the lottery. One day I had to get something out of his car, and I was shocked at the hundreds of scratch-off tickets tucked into every nook and cranny.
“Tony,” I’d said. “Why do you do this? You’re wasting your money.”
“No, I’m not,” he said. “I’ve pretty much broken even on the lottery. I’ve made as much as I’ve spent.”
I knew that this was highly improbable, but didn’t see any sense in arguing. Sure, a newcomer to playing the lottery might be able to claim she’s broken even because she’s only spent about $30 total on it, but has won fifty bucks. But the longer anyone plays, the more likely they are to be a net loser. The longer a person plays, the bigger loser they become.
Just for kicks, I looked through the New York state lottery web site. There are a variety of games offered. None of them have encouraging odds.
- The $1 scratch-off games offer odds of one in five. On average, you’d have to spend $5 to win anything, and even then you’re far more likely to win a buck or two than anything else.
- The more expensive scratch-off games ($5, $10, $20) have better odds (up to one winner in every 3.5 tickets), but more gradual payoffs. That is, it’s more difficult to win a big prize.
- The lottery drawings have even worse odds. The daily Take Five game, for example, has odds of about one in ten. But the base prize is just a free lottery ticket. The odds of winning money are one in 100!
There’s no question: playing the lottery as a strategy to gain money is a fool’s game. Play the lottery for fun if you want, but don’t do it because you think it’s going to help your financial situation. The easiest way to win the lottery is not to play.
A sure thing
If you really want to improve your finances, do something boring with your money. Put it in a savings account. Invest it in the stock market. (Hell, loan it to your brother-in-law. You’re less likely to lose the money with him than with the lottery.)
If you really want to win with your money, take advantage of the extraordinary power of compound interest. If you don’t have a Roth IRA, start one. Use it to buy indexed mutual funds. If that sounds too complicated for you, then open a savings account.
While it’s true that 3% isn’t a huge return on your money, it’s far more than the 80% loss you can expect every time you buy a lottery ticket. (See the comments for a more rigorous mathematical explanation of the actual expected returns.) If Mr. Otero would put $30,000 a year into into a savings account, he’d have about $164,000 after five years. He’d have over $350,000 after ten years. I suspect that’s plenty of money for him to fulfill his dream of moving back to Puerto Rico.
[The New York Times: Thousands later, he sees lottery's cruelty close up, via My Open Wallet — image by midweekpost]
This article is about Basics, Choices, Funny Money, Odds and Ends
The lottery is gambling any way you look at it, but $700 a week that is an addiction.
-Tabs
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I once heard the lottery described as a tax on fools. I’m not sure I’d go as far as to say that, but some people apparently don’t learn from their mistakes.
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Saving?
B-O-R-I-N-G.
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Lotteries are really just a form of state taxation since this is often where the extra money goes . . . it just happens to be voluntary.
I’m glad people like Ray Otero are more than willing to help out by paying additional these taxes so the rest of us don’t.
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Just thought I’d share a little story.
One of my old teachers used to caution us against the lottery for another reason. Studies have shown that, on average, folks who have won the lottery are much less happy than the average joe.
So, the moral of the story? Don’t play the lottery, it’s too dangerous. You might win.
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Good point with saying “Play the lottery for fun if you want” as that makes it as acceptable as buying a candy bar once in a while.
To really make money, we should make it illegal to throw cigarettes out of the window of a car. Charge each smoking loser $50 bucks and we can reduce the national debt within a decade! =)
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That story was really amazing. With that kind of dedication to scrapping money to together, this guy could really amass a large lump of cash. And he’s throwing it all away!
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when I was in college, I worked in a gas station for awhile. We had a lot of regulars come in and spend lots of money every night on the lottery. The daily pick 3 was the most popular. However, once a woman came in and bought $55 worth of tickets on a game that only paid out $50 for a win. That was sad.
That being said, they say that the lottery is a tax on people who can’t do math but I did some math. If I play mega millions twice a week for 30 years, that is $3120 which is not a lot over the course of a lifetime. The odds of winning are not very good(actually they suck) but if you win the grand prize just once then wasn’t it worth it? If you will actually miss the $2/week then maybe it is better spent elsewhere but I can spare it so why not? It’s a two dollar day dream.
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Something else to think about when purchasing lottery tickets:
http://www.cbc.ca/canada/story/2008/07/30/lottery-family.html
Here in Ontario, the OLGC now requires a verbal and visual announcement of the winnings because cashiers were telling customers they didn’t win when they actually did, and keeping the money.
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i play the lottery every week. $2 a week. I certainly don’t use it as an investment strategy, though i wouldn’t mind it working out as such…
@Christine
Studies show a lot of things, but i don’t necessarily buy into a meaningful correlation between winning the lottery & unhappiness… Playing the lottery & being discontent, perhaps, but that’s something else.
(Also, a lot of state lotteries put the money toward a variety of useful causes… i think of it as a foolish hope tax)
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I consider the lottery to be for entertainment purposes only. Spending $1 on a ticket once in a while just for fun isn’t a problem. Just as long as you realize your chances of winning are next to nothing and you’re only doing it for the fun of it.
@Victor, “we should make it illegal to throw cigarettes out of the window of a car”
Where I live it is illegal and I think theres an extra fine if you do it in a wooded area where it could cause a forest fire. It depends on the local/state laws though, but I expect its probably illegal in most places.
Jim
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And then if you DO win, they tax the
winnings….figuring you won’t mind
then. Yeah, it’s easy to look at people
like Mr. Otero as dummies, but it’s the
lottery administrations who are the
predators. Have you seen some of the ads?
Vultures…..
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Harm, you make a great point about taxes. I thought about that as I was falling asleep last night, but didn’t remember again til you mentioned it. That makes your lottery winnings even less than you expect them to be.
So, you’re taking $30,000 of after-tax money (let’s say $40,000 pre-tax), and converting it into maybe $2,000 a year of winnings, which, when taxed, are only $1,500. Not a good deal.
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My brother-in-law has all these books on how to win the lottery. They’re mostly tables of numbers that haven’t come up in a while. He assumes that means those numbers must be due to appear, and he spends a lot of money that he doesn’t have. I teach an undergraduate statistics course, and I like to use him as an example of Bayesian reasoning gone astray, where you can be misled by choosing too strong a prior.
(His “system” for winning at roulette would make you cry – as one might expect, it involves very little winning.)
On the other hand, my grandma is doing well in the lottery department. For my state’s scratch-offs, you can go online and see how many of each kind of ticket remains, and how many big prizes have already been won. Grandma checks that page every day and buys tickets only when the odds seem especially good. She keeps a spreadsheet of her lottery playing – her ratio of tickets that win to tickets that lose is 1:1.8, but after a big win of $25,000 last year, she could play at the same rate for the rest of her life and still come out ahead. She finds it entertaining, and it’s inspired her to learn how to use a spreadsheet program, which is a neat new skill for a woman in her eighties. (She’s also figured out how to chart knitting patterns by changing the dimensions of the cells and coloring them in – I was really impressed!)
And Harm, you can deduct your gambling losses to offset your taxable gambling winnings on the federal income tax, so it might be a good idea to save your losing scratch-offs for a year. State rules on this vary.
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I’m not aware of studies showing lottery winners being *un*happier than non winners, but I have personally read at least one study showing they aren’t any happier than non winners. (The study actually showed them as slightly happier, but not enough to be statistically significant.) So, I think the story that they’re unhappier is an urban legend.
On the other hand, I have read a long article about Jack Whittaker, who won a $300 million lottery and it ruined his life and the lives of pretty much everyone around him.
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Playing the lottery is a voluntary tax for people who are not very good at math. Sadly, most people who play can’t afford to do so.
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I’ve heard people on the subway discussing their lottery strategies the same way wall street traders discuss their trading strategies. It makes me sad — the lottery players have probably overheard wall street traders and they think they are just doing the same thing. Frankly I don’t think they are too far off.
Also, Mr. Otero probably would not have the first clue how to go about buying stocks, and the lottery ticket is available right there at the corner deli.
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Dave Ramsey says that lottery is a tax on the poor and people who can’t do math. I agree with him.
Also isn’t it amazing how some lottery winners seem to lose all that money in a very short time. Maybe it is because they are bad at math that they go through their winnings so quickly?
Here is a article on msnmoney about lottery winners who’ve lost all their money. http://articles.moneycentral.msn.com/SavingandDebt/SaveMoney/8lotteryWinnersWhoLostTheirMillions.aspx
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I’m way ahead on the lottery. I got that way by winning $300 the second time I played and not playing since. What’d be the point?
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I realized this goes completely against the whole “Get Rich Slowly” idea, but what if you’re doing all that stuff and now you’re looking for something you can do on top of it that could move along a little faster?
Right now I contribute to my 401k, Roth IRA and a House fund. But it’s depressing to watch them get horrific returns (or at least returns that follow the market index in this bear time). What should I invest in that will have a lot of risk but could have the potential for a huge payout?
I’m tired of the waiting game, I’d like to put some money into an environment I have some influence over where I’ll hit really big or lose it all, but at least it’ll happen now.
What would you suggest for that (and please don’t just say go to a casino)?
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I’m reminded of a quote from the old movie Wargames.
A strange game. The only winning move is not to play.
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@John
If you’re willing to (and can afford to) lose a portion of your capital, I’d say take a small percentage (maybe 5%) and put it into some sort of high-risk investment. I don’t know anything about the commodities market, but maybe that’s an approach. Or find a beat-up financial stock. Maybe Washington Mutual? Take your “play money” and put it into that and hope for a big return, but understand that you may lose it all. That’d be my approach, anyhow.
Right now, I’m willing to play this slow game, and so I’m going to stick to it. All my attempts at taking risk in the past have been miserable failures, and I have nothing to show for it.
I’m sure others will chime in with ideas, too.
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Kittie, very true about the deductibility
of gambling losses, I’d forgotten….in fact,
thinking along those lines (and if you have
a slightly larcenous mind, LoL) if you DO
ever win, you can spend part of your day
as the track or the corner convenience
store collecting discarded losing tickets.
One could make a case that they are worth
a quarter or so each, rotfl…
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I call the lottery a poor tax, but it really is a dumb tax. Playing $1/week is cheap entertainment to dream about what you do if you won, $700/wk is an addiction.
There are mathematically advantageous games for people to play, but they require hard work, a large bankroll, discipline, and studying / learning the game.
@Kittie: Gambling was my sole form of income for a few years. Tax law states that you must pay taxes on GROSS wins and then deduct losses instead of paying taxes on net profit / loss. Definitely a big screw over . . .
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Mathematically speaking, playing the lottery every week is completely idiotic. As JD pointed out, this guarantees that your chance of losing all of your money will be 100%.
In order to maximise your chances at the lottery, you should invest all of the money you ever intend to spend (in your whole life) on a single game.
For example, in Mr Otero’s case, he should sum up all of those $500-$700 a week over the whole of his life – assuming he lives for 30 years – to give a total of $936000. He needs to get all of that money together in one place, so probably he will need to sell a kidney and mortgage his house.
Having done so, take it all down to the casino and put it on red (or black, if you like). You have an almost 50% chance of immediately doubling your money. For this method to work, you are never ever allowed to gamble again.
This is much better than the expected return of $0 over the course of the 30 years if he had continued to pay out weekly.
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Now, none of that is meant to defend the lottery. Of course the lottery is a losing proposition day to day–as with any gamble, the house (here the state) is only offering the proposition because it stands to make money in the long run. But if you understand this concept, it will go a long way toward ensuring that your bets are smarter than most.
Because of this expected value concept, there are situations in which it’s smart to play the lottery. What Kittie’s grandma is doing is a form of this: strategically playing when the odds are better and the remaining payouts are higher. On any given play, she’s still likely to lose, but if she plays long enough and smart enough, she should come out ahead.
Another way to place smart bets on the lottery is to only buy tickets when the jackpot is in the record-setting $300 million range. Sure, you’re almost certainly going to lose. But you’ll be putting up such a tiny stake (since this only happens once every several years or so) and the payout is so immense that it’s actually an economically rational bet.
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I feel like I have read this basic story reposted 100s of times.
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Every gambling game ever invented has an expected value of less than what it takes to play. (Except if you can count cards or exploit the shuffling machine or … then your odds of getting certain cards goes up and your expected value can exceed the buy-in.) If the expected value were above the buy-in then no casino would exist for long, but lucky they set the odds, eh?
The only “rationale” reason I’ve come to find for playing the lottery is its life impact. If you can live without $5/week to play then so be it. $5/week will not change your life, but $100 million will. Has nothing to do with expecting winnings but 100% pure luck. And, no, you are not “feeling lucky”.
Even then I still don’t play the lottery. Skimming money off the buy-in then skimming money off the pay off (taxes) is what you’d expect from government and I won’t buy (pun intended) into it.
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The best way I’ve heard lotteries described is
“a tax on people who are bad at math”. I’ve purchased a few tickets over the years, mostly in pools with co-workers. I’ll be danged if they ever hit it big and I’m on the outside looking in! They’d all quit and I’d be the only one left in the department.
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“Working is for poor uneducated men — a sucker’s game, [Otero] said, where one must run increasingly fast to keep one’s place in line. “You’re making money on the one side and spending it on the other,” he said. “If all you’re doing is working, you’re never going to win.”
Oh the ironing. xEleventy
Escaping the rat race. You’re doing it wrong.
/this concludes the internet-meme comment for this topic
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I normally think of the lottery as a tax on the being deficient in maths. $500 a week is a lot of deficiency.
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@Daniel (comment #8): If you put the $8/month in a low cost index fund for 30 years instead of the lottery, you would have $18,000. It’s not much, but I’d take it over a dream of winning it big.
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As many others have said, I’ve long considered the state lotto a tax on the stupid.
Colin and Brian alluded to it when talking about expected value – but I’ll put it in even simpler terms: Casinos offer better expected values than state lotteries (except when the jackpot starts to get into the hundreds of millions of dollar range).
If a casino was running the lottery like they run their slots, you’d not get paid a measly 4 million dollars for your 1 in 100 million chance to win. It’d be closer 97 to 99 million.
Who’s ripping you off?
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A mathematician once told me that with most lotteries, esp. the big “powerball” multistate lotteries, your odds of winning were better by not playing. He went on to say one was more likely to FIND a winning ticket someone discarded by mistake, and win, instead of actually buying one.
The only time I ever won anything was when on a whim I bought a $1 scratch ticket with some pocket change. I won $2. I went back in the store, got my dollar back and got another dollar ticket, figuring that the entertainment value of getting the 2nd one was worth it, and hey, I got my dollar back.
I scratched it off and won ANOTHER $2. Now I should have stopped here, but I figured I’d go back ,get a dollar, and get another dollar ticket. I did, and somehow got ANOTHER $2 ticket.
At this point not only had I got my original dollar back, but I was ahead, and the entertainment value was pretty much done, since I realized there was no way in heck I was going to keep winning so I kept the money and went home.
Other than that, I don’t see how playing all these lotteries really works out for anyone. Even a slot machine pays better on average (but still has the advantage)
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$500-700/week?!?! My mind just boggles at the thought. I would think that using that money for his family would buy them the “easy” life he’s looking for, even in New York city. I don’t know how much money Mr. Otero makes, but I make a decent amount, and even so, I’d love to have an extra $500/week in my budget! I can justify spending a small amount on lotteries, just for the entertainment value, but that’s a serious chunk of change for a lousy expected return. For the record, I will sometimes buy a ticket when the payout gets large, mostly as part of an office pool, but I don’t even bother to buy on a regular basis – I know too much math!
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I’ve heard of the numbers of bankruptcies after winning the lotto. they aren’t surprising – people who win the lotto play the lotto so the odds of them being good at finances or delayed gratification is low. I have a friend in Georgia where the lotto pays for a lot of college scholarships. her quote is “the rich have paid to educate the children of the poor for years. the lottery is a them returning the favor. it is a regressive tax on the weak minded and is shameful.
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@Dave C.
That whole “working is for suckers” thing totally reminds me of Casey Serin, who also spouted the same line. Didn’t work out for him, either.
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$500 a week is $26,000 a year. In three years, that’s $78,000.
Given that he usually plays between $500 and $700 a week, he’s probably thrown away at least $80,000 (if not $90,000 or $100,000).
That’s insane.
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That’s a colossal sum of money. I see people regularly at local corner bodegas who spent ages at the counter buying this game, that game, checking this ticket, then that one. It’s insane. Re odds, my mother knows a man who has won the lottery not once, but twice! Ironically he is a surgeon anyway, so hardly needed the extra cash. I like playing with the gang at work when there’s a big prize. It’s fun – and insurance against them all winning and quitting and leaving me alone.
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The odds of winning the Super Lotto (available in many states) is constant, around 1 in 120 million. But the payoff varies depending on how many suckers (ahem, players) bought tickets and how long it’s been since the last winner.
So I buy a $1 ticket when the jackpot exceeds 126 million. That way my expected return is at least $1.05, provided there are no other winners. I’m practically guaranteed to come out ahead, right?
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the lottery is a tax for the ignorant.
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I personally think the lottery should be illegal as it is basically a tax on people who really can’t afford it. And even framed as some kind of game, how is it we can discuss welfare while simultaneously encouraging (advertising?) people to waste their money.
I’ve heard it as a tax on people bad at math.
On the other hand – if you are going to play, your best odds are to buy a single ticket. Yes, buying two or three tickets doubles or triples your chances, but that is nothing compared to the infinitely greater chance of winning by buying the first ticket. You go from zero chance of winning to one in a million (or worse) with that first ticket, the rest are just losers.
I remember in stats class we calculated lottery odds as average net winnings per person who plays. Might put a better perspective on it if every knew the average player loses $250 per game or something.
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It’s hard to feel sorry for someone who complains of a constant headache but who will not stop bashing their head on a wall.
I make just about $30,000 per year and I’m richer than this guy I bet. I’ll also wager that he complains that he needs a raise to make ends meet too.
Sad.
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I’m kind of a fan of when I have a bad day at work, I’ll pick up a $2 lottery ticket on the way home.
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Here’s a GREAT piece about the lottery on This American Life:
http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1182
It’s “Act Two. Show Me the Annuity” and talks about a guy who used to buy the jackpots from lottery winners who were paid in installments and wanted one lump sum. The “vast majority, he says, wish they’d never won.”
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Everyone else has already commented a lot, but one thing I will add about expected value is this:
You’re not the only one that says “I’ll play when the jackpot is greater than $X million”, where X is usually a round number like 50 million, 100 million, etc. I don’t remember whether it was “Stumbling on Happiness” by Gilbert or just an old statistics class, but if you follow historical participation numbers, you’ll find that waiting for the big jackpot doesn’t increase your expected ticket value as much as you’d think, because the odds of multiple winners (and thus a split pot) is so much higher.
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@Brian: my explanation of expected value was very simplified. The winnings of the jackpot is dependent upon the number of players who bet the same numbers, which in itself is a random variable. To make it worse the number of players is, as you pointed out, dependent/linked to the size of the jackpot.
So when the jackpot is more that draws more players which increases the probability of players having the same numbers which decreases the expected value.
I’d be willing to guess that the probability of the jackpot is also tied into the probability of people playing which makes calculating the true probability and the true expected value much much harder.
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The stories for past winners put always oil to the fire. This could have been you!!! … not many know that the chances of becoming a millionaire with regular saving and investing are much much higher then winning the lottery.
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JD,
This is the best blog post I have read in months. Just yesterday I had a discussion with a co-worker who purchased a lottery ticket hoping to win big.
I was told I should go buy one.
Funny thing is this person is 5 or so years older than me and I have significantly more savings and investments.
If I did by a lottery ticket every time someone said you are going to miss out, I know I would have a lot less when looking at my bottom line.
Derrick
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Poor guy. I play the lottery every tuesday and saturday, my dad always tells me only buy one ticket. Independent probability!????
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