The lottery: An “investment” for fools (with bonus lottery simulator!)
Over the years, I’ve done some foolish things with my finances. I’ve squandered money on comic books. I’ve speculated on risky stocks, hoping to make a quick fortune. I’ve paid a gazillion dollars — or something close to it — in credit-card interest and bank fees. I spent large windfalls on the latest technological gadgets.
No, I’m by no means perfect with money.
One trap I’ve managed to avoid, though, is the lottery. Playing the lottery has never tempted me. Maybe it’s because I know the odds are always overwhelmingly stacked against the player — I know I can’t win the lottery, so why bother?
Caveat: That’s not to say I’ve never played the lottery. I used to play Sports Action, Oregon’s NFL-based betting game, once in a while. And I’ve bought an occasional scratch-off ticket. But when I do these things, I consider them one-time entertainment expenses, not paths to riches.
A Fool and His Money…
Not everyone is so lucky. For some, gambling is an addiction. It may start as innocent fun, but it grows beyond that, becomes a financial funnel, draining dollars from their daily lives. And some in dire financial straits may actually view the lottery as an investment strategy!
According to this Wired magazine article:
While approximately half of Americans buy at least one lottery ticket at some point, the vast majority of tickets are purchased by about 20 percent of the population. These high-frequency players tend to be poor and uneducated, which is why critics refer to lotteries as a regressive tax. (In a 2006 survey, 30 percent of people without a high school degree said that playing the lottery was a wealth-building strategy.) On average, households that make less than $12,400 a year spend 5 percent of their income on lotteries — a source of hope for just a few bucks a throw.
Just how foolish is it to play the lottery? It depends on the game you play, of course. I once calculated that for every buck my brother spent on a scratch-off game, he could expect to get roughly fifty cents in return. (That’s if he bought a bunch of tickets, of course. If you only buy a few, anything can happen.)
It’s even more depressing to take a look at the odds for lottery drawings. Here, for instance, are the odds of winning the Mega Millions lottery. They’re not good. You have about a one in forty chance of winning something. Your odds of winning the big jackpot (by matching the five main numbers and the bonus number) are roughly 1 in 175,000,000.
But that’s pretty tough to visualize, right? I mean, 175 million is a big number. No worries! Rob Cockerham at Cockeyed.com whipped up a little widget that lets you simulate the Mega Millions lottery. This is a great way to see just how fruitless the lottery is.
I liked Cockerham’s widget so much that I asked the GRS technical elves (who live next door to the GRS social media elves) to build one for me. Here, inspired by Cockerham’s original, is the Get Rich Lottery simulator. How much can you win? (Note that this widget is a little fussy in Internet Explorer. It seems to work fine in every other browser, though. Go figure.)
In fact, because I’m just that geeky, I wrote down my results for 100 consecutive plays. (I used “quick pick” and “play these numbers 1040” times.) In other words, that’s the equivalent of playing Mega Millions twice a week for one thousand years. In a millenium of playing the lottery twice a week, I never once won big. My biggest prize was $500. Other stats:
- I “invested” $104,000 in the lottery simulator.
- I “won” $11,554.
- Thus, my total return was -88.89%.
- After 100 virtual ten-year periods, the average I had left after putting $1040 into the lottery was $115.54.
My best result? After one virtual ten-year period, I had $386 remaining. I’d love to know how well you do playing with this lottery simulator; post your results to the comments below! Surely somebody out there in the GRS audience can win big!
Note: I’m not a complete stick-in-the-mud. I recognize that for many, the appeal of the lottery is that it’s fun. The Mega Millions jackpot reached over $300 million last week, for instance. Kris and her co-workers each pitched in a buck to buy a ticket. This is cheap, harmless entertainment. My beef is with folks who view the lottery as a legitimate path to wealth. Sadly, there are many such people…
Better Bets
Almost anything is a better “investment” than flushing your money down the lottery toilet. In his book Stocks for the Long Run, Jeremy Siegel crunched the numbers to find the historical performance of several common investments. The results? Since 1926:
- Gold has a real return (meaning: “after-inflation return”) of about 1%.
- By my calculations (not Siegel’s), real estate also has a real return of about 1%.
- Bonds have returned about 5%, or about 2.4% after inflation.
- Stocks have returned an average of about 10% per year, and a real return (or inflation adjusted-return) of about 6.8%.
These options are volatile, of course, meaning the returns one year can be negative (though not nearly as bad as playing the lottery), and the returns the next can be positive. If you’re looking for a “sure thing”, you’re left with so-called safe investments, such as savings accounts and certificates of deposit.
Savings accounts and CDs have paltry returns right now, but they’re sure to rise as the economy improves. And even a 1% interest rate crushes an ongoing 88.89% loss on your money. (Not to mention that the lottery numbers I calculated above don’t factor in inflation!)
Note: I can’t find any data on the relationship between savings-account interest and inflation. If I had to make an educated guess, I’d say that savings accounts return about 1% more than inflation every year, meaning that they’re on a par with gold or real estate in the long term. But this is just a guess!
Let’s assume you inherit $100,000 and want to invest it. Let’s also assume that you’re going to put it one investment vehicle and leave it there for thirty years. (And that your returns on this investment will compound monthly.)
- If you invested in gold or real estate (or a savings account), you might expect to have about $135,000 after inflation.
- If you invested in bonds, you’d probably have about $200,000 after inflation.
- If you invested in stocks, your could have over $750,000.
- But if you “invested” in the lottery, you’d have nothing. After ten years, you’d have just ten bucks left. After 17 years, you’d have a penny — which you’d promptly lose. And again, the numbers for the lottery don’t factor in inflation.
So, if you really want to strike it rich, don’t play the lottery. Do something boring with your money. Take advantage of the extraordinary power of compound interest to get rich slowly. 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.
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.
Bitter Irony
Many folks win big jackpots, only to lose the money — or their happiness. People are fools to play the lottery, and they often remain fools after winning. Some examples:
- Milwaukee Magazine: Lottery Hell
- Money UK: How the Lives of 10 Lottery Winners Went Disastrously Wrong
- USA Today: Lottery Winners’ Good Luck Can Go Bad Fast
- The Lotto Report: Sad but True Lotto Winners Stories
A 2001 article in The American Economic Review found that after receiving half their jackpots, the typical lottery winner had only put about 16% of that money into savings. It’s estimated that over a quarter of lottery winners go bankrupt. Take Bud Post: He won $16.2 million in 1988. When he died in 2006, Post was living on a $450 monthly disability check. “I was much happier when I was broke,” he’s reported to have said. Even when they win, lottery winners often lose.
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There are 162 comments to "The lottery: An “investment” for fools (with bonus lottery simulator!)".
In the book Insufficient Funds, there’s a really fascinating chapter about lotteries that says maybe they’re not so bad. They function kind of like tax refunds for some people.
We focus on the big jackpot, but people who play the lottery often get little jackpots. These little jackpots are often enough to buy say, a fridge. And they come with a relatively decent frequency.
For people who are incapable of saving– they have no self-control or they have family members who claim their money, the lottery works as a savings account with a negative interest rate. They are essentially paying a fee to turn a small stream of income into enough to buy durable goods.
In that light, it doesn’t seem so irrational for some people, such as the unbanked, to play the lottery. Obviously for folks who have access to free checking and savings accounts who are able to save money it doesn’t make a whole lot of sense. But for folks who can’t do that, the lottery is a way to buy big-ticket items that is less expensive than checking fees, loans from the appliance store, etc.
See Jim’s 30 March 2011 at 5:39 pm comment on the third page.
I like nested replies, but is there a way to have both nested replies and the numbers? Sometimes you want to reference someone else’s comment even if you don’t want to reply to it.
I used to play lotto in a small population state, and I always won back at least the cost of my tickets, and sometimes enough to buy an extra dinner out as well. Always. Then I moved to a huge state, and very quickly realized my odds were just so bad, it wasn’t worth it except as entertainment.
So I do think Nicole is onto something, but would add the caveat that it depends which lotto you’re playing – the Mega, or a state lotto – and how many other people are playing the same lotto.
Additionally, the people I know who play it do not consider it a savings strategy. For some, it’s entertainment. For others, it’s the only hope they can see of escaping poverty. Job market’s hopeless for many, interest on a savings account is a joke and has been for years, even modest housing is still much higher than it used to be compared to salaries. The old-fashioned, modest savings strategies do not make the eventual big difference they used to.
Jen, if you won more than you spent in any lottery then you were just LUCKY. That state may or may not have had better odds of winning but in total the players lose more money than they win.
I do not like nested replies and without numbered comments I now have no idea where I left off reading last night! Grrr. I liked commenting here because the format was different and now I see it’s changing to be a copy of other less interesting blogs. Too bad, blah.
One of the ‘lottery losers’ really stuck out for me, as he was much reviled in the UK press:
Michael Carroll (various criminal convictions yada yada), was/is? an obnoxious chav with very little to recommend him to society 😉
I suppose the US equivalent of chav might be trailer trash?
I tried the simulator and I “won” $2, giving me a -98% return! Definitely not helpful for my retirement portfolio, LOL.
It makes me feel better about my decision not to play lotto. I’ll stick with investing bit by bit into my Roth IRA.
great post. hopefully many will find it enlightening.
my only question/complaint is it looks like you ripped off Rob Cockerham’s idea right to a “T”, and added what I assume to be an affliate link (FDIC savings account) when you run the results.
While the post refers to his product, you do give people the code to post. Does this include credit to the original creditor? Does it include an affiliate link? Did you get permission (or is he ok with) you using his idea so closely?
The danger is that you could be monetizing someone else’s exact creation without their blessing
I hope this isn’t sounding too harsh, but as someone who has had their intellectual property ripped off, I guess I get a little defensive on other’s behalf.
A long time ago my Mom or Dad told me that the “lottery is for stupid people who like to pay voluntary taxes.” Kind of harsh and really I would change the “stupid” to “uninformed”.
I think the media should be required to disclose the chances for winning the lottery each time they post a story about someone winning $100 million. I also think it is wrong that the government is taking advantage of uniformed people and the people who can least afford it to collect revenue.
It would be interesting to see what would happen if you were allowed to spread your risk by purchasing multiple tickets.
I have family that routinely buy say $20 tickets at a time. This ups the chances of scoring a ‘small jackpot’ as Nicole pointed out above.
Personally, I think they would be better off with the single ticket (for entertainment value) and putting the remaining money into a savings account.
Maybe things are different in the US, but it’s difficult to think that it would be impossible to get a ‘free’ savings account, post office savings.
Someone will win the lottery, but it won’t be you.
(Paraphrased from Struck by Lightning by Jeffrey Seth Rosenthal)
‘
21% (Lets round it off to 25%) of Americans feel that the path to financial freedom and riches is by playing the lottery. Might be that 25% of Americans consider playing the lottery as the only investment strategy.
“Asked the most practical way to accumulate “several hundred thousand dollars,” 21 percent chose winning the lottery, according to a survey by the Consumer Federation of America and the Financial Planning Association.”
i’m not a big advocate of the lottery in any way, but i do tend to play for fun occasionally. but, i do apply some math / probability theory to the game.
wait! hear me out. i’m not a quack! you see, by your numbers above, the odds of winning the mega lotto is 1 in 175,000,000. If the payout is $175,000,000 (and assuming only one winner), your expected payout is actually break even on that $1. and, by purchasing one ticket, your odds of winning are infinitely higher than if you purchased no tickets, but purchasing a second ticket does not increase your odds substantially. so, when the payout exceeds $175,000,000, i’d be inclined to purchase a single ticket.
the math is hard to fathom with odds as high as they are, so to really see this, take an example that’s easier to visualize. let’s say i approached you with a bet to bet you a dollar straight-up that a fair coin would end up heads. that is, you would win $1 with 1 in 2 odds. it seems like a decent bet, but the expected payout is only $0.50! this is calculated based on the payout for the sum of each possible outcome divided by the total possible results: $0 payout for it landing on heads and $1 payout for it landing on tails. or $1 / 2. if i increased the payout to $2, your expected payout would be $1, and by probability theory, you should take the bet. if however, i increased the payout even more, say to $3, the expected payout actually goes to your favor to $1.5, which is what happens when the lottery payout goes above the 175,000,000 mark.
of course, with probability, you really have to have a pretty big sample set to realize that expected value. to put that in perspective, from the example above, you’d actually have to risk $175,000,000 just to potentially break even. now, with taxes on the winnings and the possibility (however remote) of multiple winners, it becomes obvious why this isn’t a good bet for someone with 175,000,000 dollars.
it is a “good bet” for someone with $1, however. and, that’s how i play the lotto.
My in-laws always talk about what they’re going to do when one of them hits it big in the loto… I then begrudgingly say, “it’s a tax for the stupid” then they say they’ll leave me out of their bountiful fortunes… then we laugh. We have gone on to exchange mostly scratch-off tickets for B-days between the adults. I won $100 his past year. 🙂
@ Nicole (#1) –
The lottery as a savings account with a negative interest rate for some people? That’s literally the most absurd comment related to money that I’ve ever read.
You had to really stretch this morning to come up with a counter argument in favor of playing the lottery.
Can you modify the simulator to pick random numbers for each drawing? that’s more realistic.
Obviously, While the chances of you winning the lottery are almost zero, someone does indeed win the lottery, and chances are it isn’t you.
I like to throw a few bucks in once in a while when the mega millions Jackpot reaches 150million or more. It’s fun, and entertaining. You pool your tickets with your family members and talk about what you’ll do with all your winnings, and when you don’t win, oh well, maybe next time.
It’s funny that this post showed up today. Just this morning, I passed a billboard on my way to work for the Florida lottery, and it got me thinking about how ridiculous it makes people. The funniest ones to me are the people that only play when the jackpot is really large ($100 million or more), as if anything less would not be worth it. I used to joke that the lottery was my parents’ retirement plan, but when I think about how much they have likely spent on tickets, it’s really quite sad. Playing once in a while is fine, but as the numbers show, don’t expect this to be part of your investment plans.
@11 Bogey
I don’t play the lottery. I don’t recommend playing the lottery. But for someone who cannot save on their own, the lottery is less expensive than many of the other vehicles that they could use to buy durable goods.
Perhaps you’d feel more convinced in the developing country context where secure banking options are not available. The chapter talks about that too. And I didn’t write the chapter, so I didn’t have to stretch. It’s a very thought-provoking book so I would recommend reading it yourself and making your own informed conclusions.
@1 JD
I think if you are not or have not studied the truly poor it is difficult to understand this concept. It is not an idea that middle class people can wrap their heads around easily. Imagine you’re living in an inner city or in a developing country. You cannot get a savings or checking account because you cannot keep the required minimum or these vehicles don’t exist. You may have tried before and ended up going into debt because of the large overdraft fees. Whenever you have money around, there’s a large chance someone else will steal it no matter where you hide it. Even if you don’t have family and friends with “emergencies,” you’re worried that keeping a large sum of money around, say enough to buy a fridge, would just invite criminal activity.
You could buy a fridge on credit from the local store, and end up paying several times over what the fridge is worth, and be in debt while you’re doing it. Or you could play cheap lottery tickets that pay out on the order of a few hundred dollars with surprising regularity whenever you play.
When researchers (I’d have to get out the book to see which ones) ran the numbers, they found that in the above situation, folks are BETTER OFF playing the lottery to buy durables than they are either paying the overdraft fees or “buying” an appliance from a rent-to-own kind of store.
Yes, it is very difficult for someone who is privileged with middle class relatives, knowledge about and access to credit, access to banks that pay checking to understand, but playing the lottery can be the most rational thing to do under certain circumstances.
To directly address your comment: Throwing money away compared TO WHAT? What if you don’t have access to a savings account, reasonably priced credit, or other safe savings vehicles? Then the lottery can be a better option than a loan shark or a mattress in a crime-ridden neighborhood.
Wow! You are working very hard to paint the Titanic here. These are some of the most ridiculous arguments I’ve read in a long time.
They just don’t hold water. Just because someone puts it in a book doesn’t make it so.
Your argument boils down to: ‘Play the lottery cause you got no other options for your money’.
Let it go…
I don’t like the phrasing, “People are fools to play the lottery, and they often remain fools after winning.” I think that’s painting with too broad a brush. If it’s for entertainment I don’t think it’s foolish. You’d spend more on a night out at a nice bar or at the movies.
Now, if this is the person’s primary way that they attempt to achieve wealth, then that is foolish. But, to call anyone that plays a fool is a little harsh.
I’d probably say, “Spendthrifts that win the lottery often end up back where they started–if not in a worse spot.”
Full disclosure: Yes, I’ve played the lottery. Yes, I’ll probably do it again. No, I don’t think that spending <$10 on tickets a year qualifies me as a fool. Now, if I spent the rent money on "the big win", that'd be a problem.
Sorry if this posts twice. I got a weird error.
I have friends who won’t buy a ticket, even for fun, unless the jackpot is over a specific amount. They figure the pain they’ll go through isn’t worth it unless they’re winning at least X million.
I play once in a while. I look at it like throwing coins in fountain. Nice if the wish comes true, but I’m not counting on it.
I do see the attraction if you are scraping buy. You don’t see how saving five or ten dollars a week in a saving account will ever make you rich. You can’t see a future where you aren’t working hard and full of worry about being able to provide for yourself or your children. So you dream about winning big, and use that five or ten dollars a week to buy religiously to try to make that happen. I don’t agree with it, but I can see how people can be attracted to it.
I’m told my grandfather once won a car as part of a charity lottery. Apparently when he was congratulated, he said that he’d need to win a car again tomorrow to break even.
Really valuable post, JD. I play the lotto every few weeks and of course am always disappointed. The simulator let me know that my disappointment is unlikely to let up anytime soon. 42 may be the meaning of life but it only won me $2 once as the Mega Millions ball.
However, the second half of the post is even more valuable, comparing the long-term rates of return of the other vehicles. A good reminder to get my money out of savings and into an index fund as quickly as possible to give more years for compounding.
There actually IS a safe way to play the lottery AND capitalize on modest returns in a savings account; it’s called prize-linked savings. Tested in Michigan Credit unions in 2009-2010, proze-linked savings an innovative savings product that links the lottery / a raffle system with regular savings deposits. Savers get to experience the “thrill” of the lottey by participating in monthly drawings for prizes like mp3 players and cash, while simultaneously building good savings habits and accumulating a good amount in their savings account: http://www.d2dfund.org/our_work/building_savings/prize_linked_savings
Actually, I love the lottery, although I’ve never bought a ticket and never will (I’m a mathematician). I figure it keeps my taxes lower when other people voluntarily give their money to the government.
Hi JD -not to be nitpicky, but here in Wis. we spell it Milwaukee, not Milwaukie. 🙂
HA! The first time I ran the simulator, I did it one time and won $2! In your face!
…then I did the twice a week for ten years thing and promptly lost 88% like you. damn.
My wife and I only play the lottery when a group of people do it at work. I view this as paying $1 or $2 insurance against the group actually winning. How terrible would it be if they actually won and we didn’t join in? It would definitely stink to be the only one left at work!
Just want to make a couple of points. For one, I consider buying a lottery ticket is a cheap way to buy dreams. I buy 1 ticket per draw and here the odds are one in 14 millions so you have one chance in 14 millions of winning. If you buy 2 tickets, the odds are not 1 in 7 millions buy 2 in 14 millions, so I buy 1 ticket and dream, if I don’t buy a ticket, I have 0 chance and no dream. Secondly, I do not manage my budget around winning the lottery, but I include what I spend on lottery (small amount) as part of my entertainment expenses. Some prefer to spend that money on football games or dining out, I enjoy my dreamming…
I agree with the point of this posting. People who spend significant amounts of money on the lottery would, on the average, be better off with normal investments.
However, the lottery provides more leverage than any form of traditional investment. For a buck or two a week, you could become a multi-millionaire. You would be delusional to count on it happening, but somebody wins. If you don’t play, it definitely won’t be you.
If you do play with one or two dollars a week, there is very little down side. Sure, you could save the $100 per year, invest it for 40 years, and it would finally add up to something slightly significant. On the other hand, you could also fund the ticket purchases by cutting out one pack of cigarettes or one Starbucks coffee every other week.
I ran the simulator 10-15 times each with the 10 year option selected. On the last one I won $21666! That would put me ahead overall, but barely considering that the next highest “win” over a 10 year period was $240.
So JD, one of your readers hit it big!
The only time I ever play is when my finance group at work (you’d think accounting types would know better, but no..) do one of those “collect $2 from everyone and buy tickets as a group” things.
I’m tempted to take control of it, collect $2 from everyone every other week for a year, then at Christmas give everyone $25 saying “we won we won!” and stop throwing away the money on lotto tickets but it seems ethically specious reasoning to do this.
Thing is, I can’t not contribute because it makes me look like a jerk at work if I don’t and on the ridiculous off chance they did win a few million I’d have to throw myself off a bridge for not playing (Kidding. Sort of.)
My argument has always been looking at the return on investment of each ticket. Your link to the Mega Millions analysis includes that toward the bottom, and that’s where the important stuff is.
If you’re doing any analysis based on repeated play, the return on investment is what your long-term trend is going to be. Assuming a grand prize of $56m, that works out to a 50% loss on each ticket.
Anyone who does that basic analysis can tell that playing the lotto is not a wealth-building strategy.
We actually have a concept in South Africa called ‘stokvels’. Basically, a group of (usually poor) people each contribute a certain amount of money every month. Then at the end of the year, one person gets to take the pot.
I’m not sure how they decide who that is, but it rotates so everyone eventually gets a turn. Basically, it’s more forced savings since you have to be accountable to other people.
What do you think?
@12 AndrewL, your expected payout over the long run ought to be the same. It is a gamblers fallacy that a combination of numbers are “due” to appear, but it doesn’t make you less likely to win by playing the same numbers over and over again.
I’m a little bothered by the people who defend the lottery because they play once or twice a year (or decade) for fun. The government has made a conscious decision to raise funds in a way that dis-proportionally affects the extremely poor by selling them false hope, and frequently increasing their need to become dependent on the government. I suppose it is the same argument at privatizing social security or legalizing drugs. You balance the freedoms of those that will use responsibly with the welfare of those who are too impulsive or too ignorant to do anything other than crash and burn.
There was a story on Freakonomics a few weeks ago about how the idea of a bank sponsored lottery might help people save more. The basic premise was that for every dollar you saved in a bank, you were entered into a drawing for a large sum of money. The account didn’t pay much interest (maybe close to 0) but people ended up saving even more and the bank made one lucky person really happy each month!
There is so much judgment of the very poor for gambling. On the surface, how could you not get mad about someone getting public assistance spending that money on the lottery? However, having worked closely with a lot of very poor people (and by very poor I mean homeless or people who make just enough to pay their rent and can’t buy clothes, don’t have phones, etc) I’ve found that a lot of people buy lottery tickets when they’re already in an impossible situation.
It seems foolish if you only have $20 to your name to spend even $2 of it on gambling. But what if you have $20 to your name, and owe $45 on your electric bill or it gets cut off? In this case you can either not play the lottery and there’s a 0% chance that you can pay the bill, or play the lottery and there’s like a 0.00000001% chance (or whatever). Then it can start to seem like a reasonable idea. Especially if you know you can’t really save up money because it will get stolen, you’ll be pressured to give it to family members, etc.
Don’t get me wrong, I’m against the lottery. I don’t think it should exist. I think it punishes those who are most desperate for money and least able to think about it rationally. But I also think we should stop judging people who play and calling them foolish.
I play the MegaBucks and Powerball along with 16 others at my work (only when jackpot is over $50MM). It’s worth the buck to me to fantasize about what I’d do with the money. The part about skiing and golfing in the same day is the best! Also, inviting my well-off brother and his family on a nice long cruise as repayment for his generous Christmas gifts to my kids is nice to think about.
In a way, I’d guess that it’s the same fantasy rush that people who pay for porn get (but I DO NOT do that).
I probably drop about $100/year on the lottery.
This tool is awesome! First, because we can play the lottery and not lose our hard earned money. Also, it proves that playing the lottery is a total waste of money.
I ran the simulation 50 times and averaged a loss of $922.68 or -88.72% return.
To your point on real returns (rate of return – inflation) on our savings accounts these days, you can see that inflation was 1.1-1.2% between June-November 2010. That’s almost directly in line with what I earned at ING last year. In 2008, money markets averaged 2.89%, while inflation averaged 3.8%. Here’s the link to the inflation numbers:
http://www.usinflationcalculator.com/inflation/current-inflation-rates/
I really enjoyed the series of Freakonomics blog posts and podcasts on the “No-lose lottery” that Tim mentions above. Definitely worth a read/listen: http://www.freakonomics.com/?s=no-lose+lottery&x=0&y=0
@9, I agree, as long as you go in having some semblance of an idea of what the odds really are, and know that buying $100 worth of tickets DOES NOT substantially increase the odds of ‘winning big’ vs. a $1 ticket.
I view the lotto as an opportunity, once or so a month, to buy a $1 ticket and day dream about what I’d do if I hit it. An occasional $1 ticket for a half a day’s worth of daydreaming is generally worth it, in my mind.
It’s the “just for fun” excuse that allows some people to gamble at all.
I remember my husband deciding he was willing to lose $1 worth of quarters in a slot machine at Atlantic city. He played his first quarter and got it back with another besides.
I saw that as a 100% profit and would have no problem walking away with another quarter for the laundromat. But he kept playing until he met his goal to lose $1 worth of quarters (besides the 1 or 2 quarters he won as well).
Going in with the mindset that he was willing to lose $1 having fun kept him at that slot machine until he lost everything he came with. I’m just thankful it was $1 and not $1000.
That said, the psychology of gambling is no different from the other ways people fool themselves financially.
The one I see most often is someone who buys a house planning to sell in only 3 years so they’re not “throwing money away on rent.” Of course they don’t seem to worry about throwing money away on interest, or closing costs, or homeowner’s insurance.
We’re all capable of amazing delusion–gamblers aren’t the only ones.
I guess it’s not called a lottery for no good reason. I’ve read there is more chance of you being killed by a donkey than actually scooping the jackpot (unless you work with donkeys, in which case BE VERY CAREFUL!). It’s the big prize in one go that lures but people think if they’re only throwing a few bucks at it here and there in can’t harm – but it soon adds up. So I agree trying to win the lottery is not what invest-meant.
Some family members of mine won a good sized lottery ($180,000). They played the lottery occasionally for years. When they won the money, they used it to purchase a reasonable house (houses are cheap here), a new car, paid off their bills, went on a cruise and then invested the rest. Since they now have no debt and no house payment, they are much better off than they were before. In their case they were so smart with the money they won that it really did change their lives for the better. However, I know they are are exception and most of the time it doesn’t go that way.
My fiancee and I went up to Niagara Falls with $50 we intended to blow at the casino. We figured it as an evening of entertainment, and when the money was gone it was gone. My lucky fiancee won $1500 on a slot machine, stood up, and said “let’s go home now”. Other people would have tried to turn that into bigger winnings–we just wanted to get out of there!
(We used our winnings to pay cash for our honeymoon!)
The bottom line is–don’t play more than you’re willing to lose–if you win it is a bonus!
For everyone worried about the lottery pool at work – my answer when I’m asked (and politely decline) is that if they win and hit it big, I figure I’ll get an instant promotion and big raise as part of the condition for taking over all of their jobs when they quit.
@Andrew:
“The funniest ones to me are the people that only play when the jackpot is really large ($100 million or more), as if anything less would not be worth it.”
You know, I can understand that sentiment. Say you play a little state lottery, and the jackpot is $2.5 million. The stars align, and you match all 6 numbers. Even luckier, you hold the only winning ticket, so you don’t have to share it with anyone.
You take the lump sum, and get $1.2 million. After taxes, you’re left with $800,000.
Your name and picture are splashed all over the news. “[YOUR_STATE]’s Newest Millionaire!” All your friends, family, and coworkers know you won the lottery. All come to you with their hands out. Your phone rings off the hook.
But you have a steel backbone, and manage to turn down every single request for money. Your friends and family distance themselves from you. What kind of cold-hearted jerk won’t share his winnings with his own family and friends?
And even after all that, you still have to keep your job. You can’t afford to quit. You’re only 30. $800,000 is nowhere near enough to sustain yourself for the next half-century (factoring inflation and taxes).
So you’re left with the worst of both worlds. You lose your friends and family, and you don’t even have a lifetime of leisure to look forward to to console yourself with. You still have to schlep to your 9-to-5 job and put up with the derisive “Mr. Millionaire” jabs from envious co-workers who perceive you as taking a job away from someone who really needs it.
Sounds pretty miserable to me.
I am not a lottery player. Not only are the odds pitiful, the idea of winning an enormous amount of money scares me. I would like to know how many people who bank 5 mil+ are still happy (I.e. Happily married, have healthy relationships with family, etc.). We don’t make a huge amount of money in our family, but I would not want to put any of those things in jeopardy for a sudden windfall. On the other hand, I could live with $500k. I don’t think that would change our family dynamic as drastically.
My friends and I like to go to the casinos about once a month, where we each play $10 – $20 every visit. Since we always bet very low, that money will usually last us quite a few hours. We have fun, and we consider the money to be entertainment money, not an investment. On different occasions I’ve won $100, $130 and $400, but I would say over the last 2 years I’ve probable just barely broke even (I usually lose my $20, and spend a few bucks on drinks every visit).
At these casinos, we often see people who claim to be there every night, or several times a week, sitting at slot machines for hours on end just waiting to hit it big. It’s quite sad, and I can’t imagine how much money they have lost waiting for the big money.
For us it’s a fun night out whether we win or lose, but for others it’s an addiction and a financial plan.
I could tell my sister that she would be better off putting her $2/week lottery habit into a savings account that earns 1% interest for 10 years. Probability she will end up with a sum of money that will significantly change her life: 0.
That said, I think having a savings account with a decent lotto bonus each month is a great idea. She doesn’t need $100M to change her life, but she needs more than $1000 over ten years. So if she can put $1.80 in savings and have 20 cents go to a lotto with a smaller payout (like $50k-$100k), it would be great.
J.D.-I come from a different view point. I don’t see the lottery as a chance for fun and I dont’ think most people even your so called “fools” or the poor really think they are going to hit the jackpot. I think people are buying a dream, like #24. I personally try to play the powerball and megamillions, which is $4 a week, about $200 a year since I miss a couple draws. I am debt free, max the 401k, and roth and I am doing well. Its a fantasy nothing more, like reading a $5 comic book. $4 a week is almost nothing to most people but I pinch every other penny and yet I still play the lottery. There is nothing wrong with a little dreaming and for some its all they have. Education for people who are stuck is key, because then they can increase their income and still dream a little.
I have never, ever in my life heard anyone claim that a lottery ticket *was* an investment. I’m not sure who this post is being written for, and I’m almost entirely sure that whoever that is doesn’t read GRS.
This Tyler dude has got to be the most contrary person I’ve had the displeasure of repeatedly coming accross.
Must be a very unhappy person. Does he ever have a positive response to anything?
Hm… I guess Anonymous here is not going to buy t-shirts for either Team Nicole or Team Tyler.
This gets into the whole moral question is it ok for the government or free enterprise to legalize items that are not harmful for the majority of people, but a minority? I’m thinking alcohol and lotteries. Most people know to indulge in moderation, but there is a subset it is a real destroyer of lives. But then again cigarettes are still legal and they pretty much have a 100% chance of harming one’s health and finances. I dislike the argument people should never play lotteries because it is mathematical suboptimal. Most enjoyable things in life are suboptimal. Should I never eat a donut because it cost me $1 and it’s consists entirely of fat and sugar? For lotteries it’s nice to spend 1 or $2 on a pleasant daydream. But if it becomes not fun, a compulsion, then it’s gone to become a problem.
Tyler, I was wondering the same thing. Not exactly a news flash that playing the lotto is a bad investment.
I like to think of the lottery as entertainment and I buy the occasional ticket for that purpose.
I can’t speak for all regions but in my area, a substantial amount of lottery revenue is used in charity and community projects. So, along with giving me something to dream about, it helps in brightening up the lives of many others.
Honestly, I do not see what the real issue is with the Lottery. I play it everyday($1.00 daily) and only play the Mega Millions and Powerball when the jackpots are over $100 million. I bet some of you on here complaining about the lottery being “stupid or foolish” are the same people who smoke cigarettes,purchase Starbucks instead of brewing your own or dine out several nights a week. I could say that these purchases are “stupid or foolish”, but I could never that judgemental. The point of the matter is I see the lottery as a form of entertainment. No matter how it is put, when you put money in the stock market you are taking a gamble…..
Heck, even buying a house is a better investment than the lottery!
*rimshot*
Funny I posted about this on my blog today as well.
I actually DO know someone who won a $150+ million lottery. That’s what prompted my posting. A real person who I have sat down and had lunch with and interacted with both in person and online.
So you know … it’s not that farfetched. 🙂
And besides, I play it for entertainment value only. $1 buys me 30 mins of fun lunchtime chatter with my sweetie about what we’d do if we won. It’s a better return than a movie ticket, at that price.
I won $45! … in 1040 tries.
I played a buck last week. 😉
It’s just for fun so I can dream abut quitting my job for a few minutes. I know it’s not a good investment.
@aggressive saver
“but purchasing a second ticket does not increase your odds substantially”
Umm, yes it does, it increases your odds by 100%. Mathematically, the second ticket gives you the same odds as the first – thereby doubling your chances. So, if you thought you were at a financial advantage with the first, the second should be the same.
What declines with subsequent tickets is the “feeling” that it is helping you win. That is hardly a strong mathematical foundation to base your purchasing decision on.
I’m Actually Quite Relieved To See You Touch On This Often Highly-Debated Topic, J.D.!
The Sole Benefit Here In Ontario, Canada, I Must Admit (To Be Fair)Is That A Percentage Of The Amount Accumulated By Each Lottery Company (It Ranges For Each) Is Siphoned Off Towards Governmental Projects, And If My Knowledge Of American History Is Accuarate, In The Essential Formation Of The United States Of America, The Lottery (And Various Other Raffles)Was A Primary Financial Vehicle The Government Utilized To Stockpile Enough Funds For The Building Of Various Infrastructures. (As Is Also Conducted Presently, Internationally.)
While This All Sounds Quite Kind-Hearted, The Truth Is That While It IS Fine For The Occasional Entertainment, It Is A Much-More Sound Financial Practice Of Simply Reverting To The Historic Habit Of Saving Money And “Hiding It Under The Matress” For This Has Much Higher Odds Of Producing & Maintaining True, Concrete Dividends (Unless Your Matress Catches Afire) Than False Beliefs Of “Winning Millions.”
What Has Always Struck Me As Peculiar Is This ‘Lottery Herd Mentality’ That Predominates When The Lottery Prize Amount Rises Due To Being Unclaimed (Read: Millions Of Dollars Were Collected And Little Was Won) People Become Quite Ecstatic At the Thought Of “Striking It BIG!” And Tend To Purchase MORE Tickets, Although Mathematically, As The Prize Outcome Amount Increases, Your Odds Of Winning, Infact, Decreases. (Basic Probability.)
I ,Myself, Am One Of Few Who Have NEVER Purchased Any Sort Of Lottery Ticket, Scratch Card Etc. Simply Because Of The Obvious Lack-Luster Odds, And That My Priorities For Entertainment Lay Elsewhere…
P.S. Ever Notice The Correlation At Convenient Stores & Bodegas Between Those Who Purchase Both Cigarettes & Lottery Tickets? There Should Be A Study Conducted On That Premise…Any Thoughts As To Why, GRS Readers???
I also recommend the Freakonomics podcasts on prize-linked-savings accounts (A.K.A. “no-lose lotteries”). The first deals with the concept and potential of a system where a large group of “players” agree to save money at 0% interest and “the house” invests this big pot of money, takes a share of the interest, and randomly distributes the rest amongst the players as prizes of varying sizes. The second deals with the political issues around such a scheme since (here in the US) the states have given themselves a monopoly on running lotteries and they use the money they earn from the lottery to fund so many projects.
Also, no one has mentioned this yet, but I think it is interesting that someone has cracked the random number generator on Cockerham’s simulator in order to allow them-self to win. As seen at the bottom of the result page:
In the 167849599 times this simulation has run, players have won $173088415
And by won I mean they have won back $173088415 of the $167849599 they spent (103%).
@Nicole
“I think if you are not or have not studied the truly poor it is difficult to understand this concept. It is not an idea that middle class people can wrap their heads around easily. Imagine you’re living in an inner city or in a developing country. You cannot get a savings or checking account because you cannot keep the required minimum or these vehicles don’t exist. You may have tried before and ended up going into debt because of the large overdraft fees. Whenever you have money around, there’s a large chance someone else will steal it no matter where you hide it. Even if you don’t have family and friends with “emergencies,” you’re worried that keeping a large sum of money around, say enough to buy a fridge, would just invite criminal activity.
You could buy a fridge on credit from the local store, and end up paying several times over what the fridge is worth, and be in debt while you’re doing it. Or you could play cheap lottery tickets that pay out on the order of a few hundred dollars with surprising regularity whenever you play. ”
If you are a person who literally cannot save $150 to buy a used refridgerator then you wouldnt need a fridge. You wouldnt have a home with electricity or the money to power the fridge. You would be a bum. In order to win $150 in the lottery, at a -88% return, you would have to spend $282 on lottery tickets.
You would literally be better putting that $1/week inside a jar. I also dont buy the thought process that a person would live in such a hellhole that any money accumulated would be instantly stolen, yet they would still manage to come up $282+ a year in lottery ticket money.
Logically it makes no sense. Financially it makes even less sense. Mathematically its retarded. This is a rediculous argument.
Mostly @Nicole:
This is probably a very naive question/comment but most banks/credit unions I’ve ever used or looked into have checking & savings account options that are free and either have no mimimum balance or at most a $5 mimimum (just a week or 2 of lotto tickets). Is it really that different in poorer neighborhoods? Will XYZ Bank have a branch in the suburbs with free checking/no minimum and a branch in the inner city with fees/mimimums etc for the same service?
That seems almost (though not quite) unbelievable.
I realize your comments addressed a number of other issues, but I’m particularly curious about this one.
I think my fiancee and I might buy scratch tickets for eachother for christmas this year. I’m sure we won’t even break even but it will be fun and we really don’t need anything. I did win $100 on a scratch ticket once…
My biggest problem with lotteries is that the goverment gets you both ways. First, they take a huge chunk off the top of the $2 (or whatever) you pay for your ticket before it ever hits the prize pool, and then when someone DOES win the $XX million jackpot, they take *another* huge chunk in taxes! I wish I could understand how they get away with that.
A couple other random thoughts:
1) One ticket gives you an infinitely better chance of winning that zero tickets does, but two only gives you (virtually) 100%-better chances, so buying one ticket is infinitely better than buying two (but still probably worse than buying zero).
2) I also buy a ticket every now and then, but only when I notice the state Lotto jackpot is over $x million, a number which just so happens to be the answer to “How much money would it take to get me to retire tomorrow?” Since that number’s about twice as high as what the jackpot usually starts it, it’s a good way to keep me from buying tickets too often.
3) My vice is playing poker and blackjack, not the lotto 😛 Although, I think I might actually be ahead of the game in both…won a fairly sizable poker tournament back in 2008, and got lucky with a $1,000 scratch-off ticket in 2009 (I buy maybe $50 worth of tickets a year).
@Adrian:
Why on earth would you type that way?
I read an interesting article in an issue of Wired magazine about a man who figured out a flaw in a scratch off lottery game ( this was in Canada) he realized that lottery numbers can’t be randomly generated (otherwise too many people woudl win) so he studied teh cards adn figured out how to pick the winners. I can’t remember which issue this was in (I read it in a waiting room) but that particular scracth off game got pulled after he informed the lottery commission of what was going on.
I’m not saying scratch off tickets are the way to go but there are certain ways to “game” the system.
Many opinions here fall across two categories:
a. Lotteries are generally not worthwhile
b. I agree with (a) but I play for fun
With (b), the “I play for fun” makes for a perfect defense — eminently reasonable. I only hope it’s true.
Every once in a while when a jackpot gets so big it makes the news, I’ll drop $10 on the lottery. I think it’s a good “investment” and I’ll tell you why…
It’s fun to fantasize about what I would do with my life if I had nearly unlimited funds. I would even argue that the the act of fantasizing is useful in identifying potential goals. “If I won the lottery, I would … stop working, study French, write a novel, go on a world cruise, volunteer for a meaningful cause …” One or more of those dreams identified in this fashion become so compelling that I will find a way to reach them without lottery winnings.
I know that the odds of winning are infinitesimally small, but they are greater than zero. So I will gladly pay $10 now and then for the freedom to dream without limits and mentally spend huge sums of money. Some people pay much more than that for “life coaching” that helps them reach the same type of conclusions I reach when I imagine winning the lottery.
But I don’t think of it as wealth-building strategy. Instead, I consider it entertainment and (oddly) personal growth.
I have hit upon a general strategy to explain to people what the likelihood of them winning the lottery is – just mention that playing ‘1 2 3 4 5 6’ has the exact same odds of winning as whatever numbers they pick.
Of course, I do get the entertainment/dream aspect. My fiancé and I talk about it and dream whenever the lotto gets big. But its cheap for us because we never remember to actually buy a ticket after the discussion. 🙂
I don’t buy lottery tickets … I am not a gambler; I would rather waste my money on tangible things, like wine.
Re: being judgemental: foolish, stupid, and ignorant are not the same thing.
Ignorant = uninformed/uneducated
Stupid = unintelligent
Foolish = incapable of applying intelligence or knowledge to decisionmaking
Of the three conditions, ignorance is best because it is easily correctible. Foolishness is correctible, but not easily. First of all you have to own up to it, and that is where most fools fail.
It is quite possible to be intelligent and educated, and yet still be a fool about money. I used to be.
I admit to playing the lottery on occassion. Much like a prior poster, I only play when the expected payout (odds * jackpot) is greater than the $1 cost of a ticket, and even then I only buy 1 ticket. I consider it a cheap license to fantasize about what I’d do if money was no longer an issue.
On the other hand, if you consider playing the lottery as retirement planning instead of entertainment, you aren’t very likely to reach that goal. As part of your budget allocated for entertainment, I’m not going to judge. Other (myself included) spend it on comic books, video games, and toys for the kids.
I personally don’t buy lottery tickets, but my SO and father do. They consider it an entertainment expense and they can easily afford the $10 per week they spend on it. Personally I’d rather put $10 a week in a jar and actually have something at the end of the year.
@amy Have you ever walked through a truly poor neighborhood? Seen a bank in one? 🙂
People who are in that situation aren’t right around the corner from a credit union or a consumer friendly bank. Many of them live paycheck to paycheck which they have cashed at the local check cashing store or grocery store (at a ridiculous charge for the service). The closest thing they have to a bank is the Ace Check Cashing place where they can get their paycheck transferred to some kind of debit card and pay 12% for the privilege.
Getting to a bank during regular business hours to open an account, should they have the money to, is also problematical.
For example, I’m a smart, educated, strong earner. I have spent the last 14 months without a car in a major metro area. When I take the bus/train to work and home, it takes me about 2 hours each way. If I leave work at 4, I don’t get home until 6 p.m. I don’t know of a single bank that is open that late. I am fortunate in that I have the freedom to leave work and take personal time to take care of personal business, or can borrow or rent a car if I need to run errands. Someone who is working a minimum wage job often doesn’t have that freedom – or can’t afford to miss a few hours of work for banking business. When you’re living paycheck to paycheck, losing $15 of income can be a crisis.
People who are safely ensconced in a middle-income lifestyle spend a lot of time saying “but why can’t they just” … they have no idea what exactly it is they’re asking.
JD, this is great and all but I consider myself an above average lottery player. I don’t think your simulator is taking this into account therefore skewing my results lower then real world results would be. I’m going to continue putting any extra money I have towards the lottery and my future millions.
There is an error in the widget. I played it and this was my result
“Mega Millions Games Played: 1040. Cost: $1040. Won: $118765. Return: -89%.”
Somehow I don’t think that is a negative return, but maybe my math isn’t as strong as I thought.
@Nicole
@Amy
@kh-your post appeared while I was writing mine 🙂
couple of thoughts
In my experience, the very poor do indeed run risk of money getting stolen or attracting major negative attention from friends, relatives & neighbors.
Also, there are very few to no actual bank branches in very poor neighborhoods; and walking into such a branch or having an ATM card can also attract major negative attention.
As an alternative to the big negative returns on lotto tickets, a few ideas:
#1-lay-away for the durable good purchase (maybe at a shop in a different neighborhood)
#2-pre-payment of rent (perhaps followed by #1 as cash flow allows)
#3-money orders or Western Union sent to a bank branch, trusted relative, etc
#4a-another possible “investment” at this income level might be, with extra $, to throw a party for your friends and build some social capital, so when you need help (cash or otherwise) you have some people to draw on
#4b-donate to local house of worship or community project (similar social capital idea as #4a)
I realize GRS doesn’t really focus on the very poor, but I bet other readers have some good alternative ideas too!
I refuse to play the simulator because I’m afraid if I won big on the simulator, then I would NEVER win big in real life. I would basically be beating the LOOONNNGGG lottery odds 2x. 🙂 I don’t like those odds…
@Amy – A person who has had problems with the banking system before (such as too many overdrafts) may not be able to open an account at a bank. Over 80% of banks in the US use ChexSystems which is essentially a special credit report for banks. From wikipedia:
“A consumer’s ChexSystems report contains banking irregularities such as check overdrafts, unsatisfied balances, depositing fraudulent checks, or suspicious account handling that other banks have reported in the past five years. The majority of banks that use ChexSystems will not open a new deposit account for a customer that has a negative item reported.”
Because of this many people who have been in financial trouble in the past cannot use a bank to start saving until their record clears in five years.
I don’t play, but I can see one conceivable reason to do so. When I’m making a purchase, I usually target the best value for my money — in many cases, I’ll take lower quality if it comes with a significantly lower price tag. Conversely, I’ll pay a bit more for a significant uptick in quality.
The percent change in expected return between no lottery ticket (zero possibility of win) and one lottery ticket (extremely small probability of win) is infinite. The percent change in subsequent lottery tickets is negligible.
One of the other blogs I read had an article on this, http://www.pfblog.com/archives/000685.shtml; *IF* you’re meeting your savings goals, have the money to spare, and would like to, why not? You have a small chance of immediately achieving your retirement savings goals; otherwise, you would have just spent the money anyway, right?
@60 I think you mean “ridiculous.” See, I can be insulting too. And I know how to spell.
There are plenty of tenements in South-side Chicago that you should visit sometime. Or you can read Insufficient Funds http://www.amazon.com/Insufficient-Funds-Savings-Low-Income-Households/dp/0871540789 and learn about what it is really like living under the federal poverty line and what your options are when you do so.
@61 Amy, see KH and other posters above. Or, read Insufficient Funds as it has an excellent chapter on the “unbanked.” It’s got plenty of statistics and survey information about access.
@ general audience
Obviously nobody who is reading GRS should use the lottery as a form of forced savings. Just the fact that you have the wherewithal to read this site means you’re not in the demographic who would benefit from a savings account that you have to pay for. That doesn’t mean that playing the lottery is irrational for everybody. It converts a small income stream into larger income lumps and charges a fee to do it. Just like getting an income tax return, only less predictable and with a larger fee.
Personally I don’t want to have these conversations if I’m going to be condescended to and insulted for providing additional ways of looking at things. It is a complicated argument that people smarter and more steeped in research than myself have made. Personally, I, as an expert in the field (though not specifically on poverty), think it has some validity. Maybe some more time thinking about the concept rather than rushing to call the argument “retarded” is justified.
It looks like most of the book is available on Google books. And it looks like the chapter I’m talking about is by Sendhil Mullainathan, who has a MacArthur genius award, and Eldar Shafir who isn’t a slouch either. The entire chapter is worth a deep reading because most of us have misconceptions about what it is like to truly be in poverty.
J.D.’s note: I just think it’s tough for us to wrap our heads around, Nicole, because it seems to defy common sense. If people want to save and don’t have access to banks, they’re better off putting the money under the mattress! Anyhow, I don’t doubt that poor people lack access to basic services. Though I’ve never written about the subject, there’s ample evidence that those who live in low-income areas pay *more* for groceries than other people do. Why? Because the stores near them charge more. Being poor sucks for a lot of reasons, and it doesn’t help when everybody’s trying to screw you over. I’ll go read the section you point to…
I found this article today on Yahoo! It only proves the point that the lottery is not a good way to make money. http://finance.yahoo.com/banking-budgeting/article/112427/most-lottery-happy-states?mod=bb-budgeting
I have never put my money into the lotto (been given scratch tickets) and I do agree that most people that play it probably make less than $40k a year. That said, I think it’s better to have it regulated by the government than back-ally hustlers. Although it seems “unfair”, it really is a CHOICE and even if we don’t agree with the choice, it’s better to make it safe (same ideas for abortion).
That said, I also think about what I’d do if I won the lottery – first, I’d need AT LEAST $3 million after taxes and what not…that would give me $50k a year until I died (or turned 98). But that’s not “rich” to me, it’s medium, but I’d keep working for that amount. If I got a stupid crazy number, let’s say $12 million after taxes, I might spend a bit of it at first, but then it would be the same thing – I could live off it, but what would I DO? I’d want to work anyway…
Finally, I won $104 on the stimulator, or a -89% return. Justifying my non-buying stance.
@75 babysteps
One of the chapters in the book (I think the one on developing countries) talks a lot about your 4a. Savings clubs are another way to turn small income streams into big sums of money. With these you have a party each week in which everybody contributes say, $10. Then each week one person in the group gets all the cash. There are obvious problems with this set-up as a repeated game– you can trust the lottery!
Layaway is a great option, but it isn’t always free and that option was going away until the recession hit and made it popular again.
Here’s the book Nicole is talking about. She specifically cites Chapter 5. I’ve started reading it (because I finished the rest of my work for the day — yay!) and it’s interesting… (I think the relevant section starts on the bottom of page 130: “Small to Big Transformations”.)
Another point about the lottery is that in many states lottery funds are used to support education. In my state the lottery funds the Hope scholarships. So if I choose to “waste” $1 every few weeks – maybe even up to $52 a year if I play once a week – some fraction of that is going to a good cause. So I’m getting a small bit of benefit for $1 a week’s worth of entertainment.
I played twice with the 1040 times, using two different set of numbers. I ended up winning over $22,000. I had a game where I had five of the six numbers including the Mega Millions number. Wish I was as lucky in real life!
Or maybe not. I remember a professor in college talking about how there’s a surprisingly high suicide rate among lottery winners. It seems that when people find out that money isn’t the source of all their problems, they just can’t cope.
I don’t play the lotto. Ever.
The accounting firm (!) where I used to work had a pool. In the 25 years they had been playing the – immaculately kept – records showed that the biggest win was $100, and the average win per week was $0.46. Considering the pool had 20 people on in, contributing $1/week for $30 years… well, you’d think accountants would know better.
I suggested that we start an investment club instead and invest only in Canadian banks (since we are Canadian) and that we would be much better off… but was soundly boo’d for the suggestion.
Fail of logic right there :/
On the other hand, as an accountant, I DO have a “lotto winnings 10 point plan” – though it actually works for any windfall from a lotto winning to an inheritance. So far I haven’t needed it, but one day one of my clients may… doesn’t hurt to be prepared!
Reading the book Nicole recommended is reminding me of tanda, which is a Mexican-American “rotating credit association”. Participants pay in a small amount, and then there’s one “winner” of all the money. The next drawing, it’s somebody else’s turn to win. It’s sort of like the lottery, but if I understand it correctly, there’s no leakage. All the money goes back to the contributors. And everyone takes turns “winning”. This is a sort of forced-saving lottery that makes sense to me. It’s not ideal, but it works because, in theory, there’s a 0% return on your money — you don’t gain anything, but you don’t lose anything either. I’m not sure how it actually works in practice.
I heard a radio interview with a mathematician a number of years ago that put the chance of winning a state lotto (odds about 10m-to-1) in perspective.
He roughly said: “You and your friend go to Manhattan with a nickel and a Dixie cup. One of you take the nickel to the top of the Empire State Building while the other places the Dixie cup *somewhere* in Manhattan. Throw the nickel off the building–the odds are ten times greater that the nickel will land in the Dixie cup than you will win the ten million to one state lottery.”
Odds in Mega Millions and Powerball are 17 times as high (sigh). Note 1: don’t throw a nickel off the Empire State Building–it is illegal. Note 2: I never miss a drawing for Mega Millions or Powerball–I donate money each week just to dream.
JD – those things sound like pyramid schemes. Do the “winners” keep playing even after they win? Or does the next jackpot come from new people? Is there a forced contract to contribute money even after you win? What’s to stop winners from ceasing to contribute after they get big payout? I guess if so, there’s a zero % return, but what if a person dies or is bankrupt and can’t contribute next week? Then you’d have to recruit a new member. Et voila…pyramid scheme begins.
@Nicole
“@60 I think you mean “ridiculous.” See, I can be insulting too. And I know how to spell.”
You havent defended against any of the intellectual attacks on your idea. You just keep saying “you dont know what its like to be poor”, which makes it difficult to hold a reasonable discussion.
As for middle class people not understanding what its like to be poor, I agree on a worldwide scale. No one here understands how it feels to work 7 days a week, 16 hours a day so they can scrape by with maybe $500 a *YEAR*. In terms of American poor, Im sure plenty of people have been in the situation. Even a person working part time at minimum wage is making over $100 a week, which means a used fridge would be two weeks pay, not anywhere near an insurmountable feat to save.
As for the lotter costing less than other savings vehicles, like a savings account at a bank, that is totally unfounded. In my previous example I showed you would need to buy $280 worth of lotter tickets to win $150, meaning if you bought 10 tickets a week, you are paying over $400 a year in “fees” to the lottery savings bank. I cant imagine any bank, family member, payday loan lender, or even loanshark charging more for such a small amount of money.
As for banks being unavailable to the poor, I also call BS on this. Banks are open on saturdays and on weekdays until 6 or 7 PM. This isnt 1955. Buses run on saturdays as well.
Finally, even were everything you said true, I *STILL* wouldnt advocate using the lottery in this way as there are 1000 other better ways to solve the root problem. Like open federally run banks with guaranteed no fee accounts for anyone making less than ~$15,000 a year for instance, and place them in strategically poor areas.
There is ZERO reason to advocate lottery use amongst the poor as a means to “save” for a refridgerator.
I understand the point you are trying (probably futilely :)) to make and I’m interested in the book you’re referencing.
I would like to share a personal story that you will probably recognize and understand. It’s an experience that was a real eye opener for me, raised in a middle class household, good schools, etc. We’re originally from Ohio. My husband’s job transferred him to coastal South Carolina (tourism is the big business there although he wasn’t in tourist directly). Major hotels and condos are clustered up and down the coast; the farther inland you go the more rural the territory becomes and the less you see of the actual residents of the state (not retirees from up North or tourists, etc.). One day shortly after moving there, I was sitting at a light on a hot, sunny day and a bus that had to have originated sometime in the 1960s pulled up to the light and I glanced over to see it was full of all black people (the population unseen as you drive into and out of the coast). I realized shortly after that this was how the unseen residents are brought into their seasonal hotel jobs every day.
I eventually worked at a credit union as a teller. I came into contact with plenty of these folks who are bused into their jobs by the hotel. They do not have checking accounts, only savings as someone mentioned above because banks and credit unions do run credit reports and/or Chexsystem reports. If you’ve had difficulty maintaining a checking account in the past or poor/no credit you won’t get a checking account. So these folks would come in on payday to cash their checks. I have no idea how they manage their money but it would come as no surprise to me that theft (from someone known to you, i.e., family) would occur. It also seems ridiculous to assume, based on my experience, that people in this situation could “save up” for a new refrigerator (if needed) as someone above mentioned. These are working people who clearly are still poor. One dear, older lady would come in on payday to cash her check and she never had any I.D. Why would she need a driver’s license? She’s bused in to her job. It used to frustrate me (because we were required to ask for I.D.) and I would think, “sheesh, the DMV is right next door, why can’t she spend the $20 to get a state I.D.?” As the years have passed I’ve come to regret that ignorant assumption. Twenty dollars to me was not a big deal. Twenty dollars to her could have been a fortune.
Anyway, there are other things I saw living there that I’ve kept as part of my education in life, but I thought I would share this small experience as just my 2 cents in the conversation.
Thank you very much for sharing this!
Nicole, it’s still a bad system isn’t it?
On top of being charged a cheque cashing fee, you’re also charged to store your money in the lottery? Isn’t that even worse?
A little like payday loans. I know they serve a purpose, but it just seems wrong to me.
I want to read that book!
I have to agree with what i think Raghu Bilhan (#8) is saying …
“Asked the most practical way to accumulate “several hundred thousand dollars,” 21 percent chose winning the lottery, according to a survey by the Consumer Federation of America and the Financial Planning Association.”
I don’t know that it’s necessarily a statement that those people consider the lottery a legitimate investment strategy so much as it might be a commentary on their pessimism about being able to save and accumulate that much on their salaries.
I also take issue with calling the various lottery games (note, I said “games”) a tax on the stupid or un-informed. I seriously doubt that the majority of lottery players think they’ll win big. I think most are like me, and use it as occassional entertainment. Calling it a “stupid tax” is pejorative and unnecessary. Just because you don’t find playing lottery games entertaining doesn’t make me (or anyone else) stupid because I do. I could call all the millions of people who support professional sports “stupid” and call those tickets a “stupid tax” too since sports are not my cup of tea, but I don’t because it is inappropriate and not true. It is simply a different set of priorities and what people consider worthwhile to spent money on.
“Reading the book Nicole recommended is reminding me of tanda, which is a Mexican-American “rotating credit association”. Participants pay in a small amount, and then there’s one “winner” of all the money. The next drawing, it’s somebody else’s turn to win. It’s sort of like the lottery, but if I understand it correctly, there’s no leakage. All the money goes back to the contributors. And everyone takes turns “winning”. This is a sort of forced-saving lottery that makes sense to me. It’s not ideal, but it works because, in theory, there’s a 0% return on your money – you don’t gain anything, but you don’t lose anything either. I’m not sure how it actually works in practice.”
Your real return would still be below zero after inflation, unless inflation was zero or negative. Assuming everyone wins an equal number of times and those who win are required to continue contributing until everyone has “won”.
I will openly admit that over the past year I’ve introduced a small amount of my monthly budget for lotto tickets. Any wins go back into the budget so i.e. if I spend $10 a month and win $2, then next month I only spend $8. I’ve never won more than $20. But if you get the tickets like the crosswords and bingo, they actually do take time to play, and I’ve found them to be… fun. There is a huge stereotype about “poor” people playing the lotto, and I don’t know how we fight that other than beginning financial education at an early age in school. Budgeting and spending control are things that you have to learn and practice all life long, so you can play the lotto for entertainment instead of a desparate financial “Hail Mary Pass” with your paycheck.
@Sam:
If my back-of-the-envelope calculations are right, each Dixie cup would have to be approximately 25 feet in diameter for that to be true.
I’m not sure what the diameter of a Dixie cup is, but if I assume it is four inches, then one million of them would cover only about 87,000 square feet, which is only slightly larger than the footprint of the Empire State Building itself.
I just cannot play the lottery or any kind of gambling because I’ve seen the damage it does & I’ve never seen anything good come out of it.
My mother lost her home & everything she owned & was on the street with two babies & pregnant because her first husband gambled it all away.
I’ve worked at my local food bank for years. A few years ago a casino opened up in our town & now we almost daily have people coming to the food bank & admitting they lost their money at the casino & can’t buy food for their children.
Even if someone had enough self-control to spend only on recreational gambling I wouldn’t want to be lumped with the majority of people who do. Why go to a casino & spend time with people who live this way?
I cannot even go into the restaurant & eat that all my friends rave about.
I know, I am harsh & dogmatic against this but I’ve lived through & seen the horrors it brings. I’ll invest my money in boring things let fools throw theirs away.
@Nicole
While you make some interesting arguments, coming from a developing country, other smarter people come up with other, more sensible options than playing the lottery. In Jamaica, there is something called a “partner” drawing in which a group of people come together and each contribute a certain amount of money each week. This amount is pooled and a different person in the pool gets all the money each week on a rotating basis. What happens then is you wait until you turn comes and plan large purchases accordingly. This works well when people are not able to access bank accounts
JD and Brenton – I live in Mexico, and my Mexican friends love “tandas”!
Pretty much everyone puts in a certain amount, say $100, a month. If you have 12 people, that’s $1200 in the pot each month. Throughout the year, each person takes turns receiving that money.
Usually it’s organized by someone who needs money right away, so they get the first month of money, then pay it off throughout the year. It’s great for the organizer… they basically get a no-interest loan from family and friends, with a convenient payment plan.
Basically it’s just a forced savings plan… put in $100 a month to get $1200 sometime within the next year. I’d rather just put it under the mattress… same money “invested”, same outcome, but I don’t have to trust people that aren’t me haha.
@jen – I come from a household of abusive alcoholics and I’ve seen and experienced firsthand the damage that alcohol can do to a family. I still personally enjoy a glass of wine in the evenings and the occasional cocktail when my sweetie and I go out.
It’s one thing to say that based on your experience, you choose to avoid it, but labeling everyone who does not share your aversion as a “fool” is … foolish and ignorant.
I enjoy paying my idiot tax on powerball when it is over $100 million. It is pure entertainment and I maybe spend $20 dollars a year on it. Overall do I think it is a regressive tax? Probably, However let people make their own decisions.
@JD #87, and #89.
Say you and four friends get together and contribute $ 50, totaling $250. One of you will take the money in March, someone else will in April, etc. By July, everyone will have taken the 250. No loss, no winnings, no pyramids, just a rotating pool for “forced savings”.
Of course, you are going to do this with people in which you can trust!
Hopefully ppl have a life plan. However, I used to dream of marrying Michael Jordan, or having Oprah type of money. I think its okay to at least dream about hitting the lottery. Yes 1 in 175 M is alot. But what if you hit for @250K? i’m not an advocate of playing the lottery on a regular basis, I do it every pay day. But its a vice thats less harmful than smoking and drinking everyday, and usually less expensive. I would just say play responsibly, but dont plan your life on winning
I am one of those people who picks up loose change from the ground, which goes into a piggy bank and is counted up each New Year’s Day (only started this last year, but it came to almost $10 for just part of 2010). That found money becomes my lottery ticket slush fund for the year. Never won a thing, but it’s fun to play. Easy come, easy go. 🙂
More seriously, on the topic of why poor people waste money on the lottery: IMHO, because the lottery is one of the few things in the life of the poor that is truly impartial; a homeless guy or welfare mom stands exactly the same chance to win the jackpot as the millionaire. I was raised in a working poor family one step away from homelessness, and believe me, life is VERY different from the middle or upper class. When I was poor, money was something the world gave only begrudgingly (minimum wage for long hours of manual labor) and quickly taken away (higher bank fees due to small deposits, high interest rates, higher grocery costs at the urban supermarkets because no car to get to the ‘burbs). Society constantly says the rich are great and the poor are worthless trash, and if your life experience is being considered worthless trash, it’s hard to embrace the mindset of the middle to upper class that you see as the ones telling you this. But the lottery doesn’t tell you this; it says for the same price the rich pay, you stand the same chance to win as the rich do. That’s a powerful message. The fact that that chance is infinitesimally small is irrelevant; it’s still a chance, given with more dignity than most employers (or government agencies) give.
BTW, I highly recommend Barbara Ehrenreich’s “Nickel and Dimed.” Bottom line: it’s hard to make something out of nothing.
I love Nicole’s brilliant posts! Of course it makes perfect sense– you should submit the story to Freakonomics. That would make a great short video btw. Can I steal the idea? Or– I’m wiling to pay royalties 😀
No, seriously, that is utterly brilliant.
Whoo! On my third try of the 10 year approach, I won a whole $250, including $157 for getting 4 balls plus the mega millions. That’s a mere 76% loss!
PS- I read the rest of the thread and some of the responses are hilarious (in a good sense– thank you for the laughs). Also, it’s amazing how much the American middle class cannot see outside their little bubble–wow! For those interested in the 3rd world perspective, check out the writings of Hernando de Soto– his basic argument is that underdevelopment is caused by a lack of a proper legal framework to support modern capitalist economies. E.g., no protections for private property, difficulties obtaining property titles, lack of bank services, etc. This is a world most of the people who post here have never seen, or have seen but never understood. There are other realities out there where your “reason” does not operate. Doesn’t anybody read science fiction here? Or at least watch Star Trek? Other cultures are like other planets in that TV show. Understand at least this much.
Anyway, awesome read, all around.
I worked at a gas station/convenience store in college and it was the same folks every night – on their way home from work, pick up a 6 pack, smokes and lottery tickets. They would make conversation…”today’s my lucky day, I’m going to hit it big”….”sell me a winner today, young man”. I knew even if one of them did hit it big, the money would be gone quickly for many of the reasons you listed, JD. It really was sad how little financial knowledge these adults had.
The worst were the few times one guy would come in and buy tickets and not even scratch them – he would just have me scan the barcode on the back. I felt like telling him just to give me the $5 and someday I might give him $20 back if I was feeling generous.
BTW, cool app.
I won $75….playing 1040 times. -93% I’ll hit it big next time.
@105 El Nerdo– Thanks, but I can’t take credit for it. I read it in a book chapter that was written by a couple of people who actually are certified brilliant (see previous posts for link to googlebook). You can use it so long as you cite it since they’re academics.
What really drove the point home for me was when I was a kid, my parents would let us each pick our own set of numbers every week. I started picking 1 2 3 4 5 6. I told them that it had the same odds as their numbers, but my parents would get really annoyed for wasting the dollar since “it would never win.” Somehow telling them, “Like I said, exact same odds as theirs.” never really helped.
I’m stunned by Stephanie’s comment (#19). Had no idea somethig like that existed.
Ok, these are not your original ideas, but having a person around who knows and thinks about these things is a wonderful break from the monotony of the internet. It’s like talking about Ulysses– nobody I know wrote it, but finding someone to talk about it is great fun.
Anyway, I hope this doesn’t put a burden on you, but keep up the awesome posts.
I too have never played the lottery – not once. OK, my sister sent me some scratch offs in a birthday card once. I won a couple of buck (literally $2) and collected the cash, not another ticket.
I hate the concept of the lottery and it makes me sad to think of the people, uneducated and poor as your article states, who must feel that the lottery is their only chance at making money.
I once worked in an office where the department pooled their money and bought lottery tix each week (or was it each day?) I wouldn’t play, even after relentless teasing and later guilt throwing where they finally said that the reason they weren’t winning was because of me.
I’ll never forget the bottom desk drawer of one of my co-workers, stacks and stacks of losing tickets, rubber banded and waiting for god only knows. It was a pathetic and sad sight. Luckily, she was not poor so could afford to lose all this money on buying tickets, but clearly she was addicted.
This was a neat little gadget that can shed some light on how the lottery actually works. This is assuming you use the same numbers over the entire span of time playing the lottery. I do admit that I had to run the gadget a couple of times just to see if I’d get the same results. The first time I won a whooping $12 over a year’s twice a week purchase. The second I won $159 for that year, which did create a small profit for the “money” spent. I’ve never been into the lottery thing. My parents have and still do purchase a couple tickets each week. A few years back they did win $70,000 or so but Uncle Sam was kind enough to take half of it for taxes. Knowing that, I realized that winners really don’t win because the US Government is going to take their share of your winnings whether you want them to or not.
I like to play the lottery occasionally. But its a game for fun. Its like any other form of gambling. Its like play the slots in Vegas or wagering on the office NCAA pool. Gambling is not an investment strategy. Its gambling and you should expect to lose money. The house always wins in the end whether the ‘house’ is Vegas, the race track or the state lottery commission.
I won’t try this because if I win I’ll feel even worse than if I lost!
Think of winning a jackpot of over $176,000,000 numerically. For those of us who are already astute when it comes to money, there is a sensical way of looking at ticket purchases. Reply #9 shows the example of purchase vs. payout. I will elaborate some more.
If a payout was worth over $176,000,000 and you paid $0 for 0 chance of winning, you could NEVER win. The distance between a 0% chance of winning and 1 in 176,000,000 chance of winning is enormous.
Let’s postulate that the big jackpots only surpass $176,000,000 an average of 5-10 times a year. If an 18 year old purchased one ticket each time this occurred until they died (~78), they would only spend $300-$600 in 60 years. Most human beings have vices that cause them to spend that much money in a month or two, with little to show for it. I am a believer that the lottery can be played responsibly, as long as you understand the mathematics & probabilities.
Seems just like real life….but much cheaper.
Mega Millions Games Played: 1040. Cost: $1040. Won: $80. Return: -92%
Nicole, It seems to me that people may have taken your comments as an endorsement of the lottery as a reasonable savings plan. However I believe you were pointing out the reality that people in desperate poverty may tend to treat lottery as savings due to lacking good alternatives and self control. Its the same reason that payday loans are much more popular among the poor. It makes more sense to get a $200 payday loan with virtually predatory 760% APR interest if the alternative is being evicted cause you’re short $200 on the rent.
Using the lottery as a savings account is not a good choice. But it is a choice made by many poor people.
Civil and thoughtful discourse is a defining feature of GRS. That being said, the quality of the posts usually drives the quality of the commentary. In this instance, to refer to a human being as a fool because they opt to play the lottery, irrespective of how many times they play or under what circumstances stifles dialogue and encourages people to be judgmental.
I think by nature human beings are more indulgent and have more empathy for people who have similar character defects. It’s like my well-meaning mother-in-law riding my husband for losing a few pounds using harsh and insensitive language when she’s been a smoker for the last five decades. For her, compulsive overeating is not a vice she indulges in or succumbs to so she has very little understanding for people who struggle in that area. Because JD has never played the lottery – it’s hard for him to understand its appeal. If someone were to say “Hey Fool – stop buying comic books, or tech gadgets or _________(Insert your preference here), nothing about that language facilitates growth or change. JD changed when he saw fit, other people’s judgment or ridicule probably did not inspire him. I believe that’s how we all change.
The “other” mentality is pervasive in today’s society where divisive and vitriolic language is disguised as healthy political / social discourse. The proverbial “THEY” (insert race, class, sexual orientation, age, or religion HERE) is in the collective situation they’re in because they do this or that. Being in a cultural or intellectual vacuum where we cannot even perceive what choices people are confronted with everyday is not a good place to be.
The post says 30% of people who did not graduate from high school say the lottery is a way to build wealth. *Gasps in horror – really. That’s the least of their problems for that demographic.
We can have this conversation in a silo, the demographic in question probably does not have regular internet access or even if they did they probably would not be inclined to read GRS. We can all have a hearty virtual laugh at some else’s expense, someone who probably has not had the same privilege or opportunity that we have had. Yeah -that makes for an interesting post. …….. (*dripping with sarcasm*)
Tackling this subject makes sense and is a good start, but doing so in such a flippant and insensitive way does not bode well for me.
Last point -I agree wholeheartedly with El Nerdo, give em’ hell Nicole…..
P.S. The middle class have their vices as well buying more house than they can afford, sending their kids to schools they cannot afford diverting much needed resources from retirement portfolios, prematurely or habitually starting businesses without enough cash in reserve, etc.
@120 Jim
Yes! What an elegant and succinct way of putting it too. That is exactly what I was trying to say.
@121 Thanks, Dreamchaser. 🙂
@112 Not to beat a dead horse, but Insufficient Funds also talks about turning savings into lotteries. I’m fairly sure the folks writing it had a hand in implementing it. There’s a lot of very exciting stuff going on in government and finances right now, even though it’s not getting as much press as say, what’s going on in the Middle East.
Thanks for the thoughtful posts, Nicole!
Yay, I helped! 😉
My only experience with lottery was when my sister bought a “wedding present” for a very poor couple (university poor- not life poor) ten tickets. They won $2. I asked her why she would do that to them- knowing $10 would have bought them a meal—it was fun. She has never known poverty.
Poor people- truly life poor? I taught their kids for five years. Days of trying to keep 6th graders in school instead of working—sometimes the streets.
The banking that Nicole refers to is even in small towns. You don’t have $100 to get started- no account. It is tough out there. There is a reason the “found” $90 are on the feet of their children? If it were in the house it would be gone by the time they got home. If it were on their person- they would have a black eye by evening. Spend it while you have it. Sad but true.
No lottery for me- I’d rather give my $2 to the shelter downtown. As long as I am going to give it away, I’d rather it go to someplace that will use it instead of the government.
Back when I was in college (in Atlanta), i remember talking to a friend, a first generation American, who didn’t follow through on her financial aid paperwork and missed the deadline for what would have been her senior year. She was leaving the next day via train to go back home to Louisiana and would have to stay out of school a year. She told me she was flat broke. She had one dollar to her name and used it to play the lottery, because “it couldn’t hurt”. I remember thinking she was crazy and not too bright. That was back before cell phones too. Anyway, she lost the dollar. I have another friend who is also a first generation American and the same thing goes for her. Still struggles to make ends meet, but always plays the lottery and talks about what she’ll do when she wins the lottery. I’m a minority 3rd generation American and I wonder what’s up with these two new Americans because I’m pretty sure my grandparents would slap me if I ever spent a dime on something so frivolous.
I’ve heard the lottery referred to as “a tax on people who are bad at math.”
That said, I buy an occasional ticket. I probably spend less on lottery tickets in a year than some people spend on coffee in a week.
When I lived in Alaska I used to buy one ticket to the Nenana Ice Classic, a lottery in which you bet on the exact day and time that the ice would go out in Nenana. Hey, it was Alaska — we had to make our own fun!
I’m not addicted to the lottery, but am to this app. Thanks for posting!
@#19,#32,#36 (with link), #59: great reference to the Freakonomics story. If you haven’t heard it do to post #36.
For all of those who say they play the lottery for the fantasy of winning it all, here is a story I found on the web:
“Some studies show that 70 percent of lotto winners eventually squander all their winnings. The poster boy for this fact is Jack Whittaker, who won $315 million in 2002. Jack started out being very generous with his money, but that led to a point where everybody wanted something from him. He felt extremely lonely and this led to drinking and gambling problems.
To cope, he wanted to provide everything for his granddaughter, Brandi Bragg. This led to a drug problem for her, and two years after Whittaker won the lottery, his granddaughter was found dead. In 2009, Jack’s daughter, Brandi’s mother, was also found dead.
This is a shocking, but somewhat common story for other big winners. The 20 percent of lottery players who contribute 82 percent of lottery revenue are disproportionately low-income, minority men who have less than a college education. It is always a big story when someone hits the jackpot, but what does not make the news are the stories of many others who hurt their bad financial position by playing the lottery. With only a 1 in 120,526,770 chance of winning the Powerball, there are hundreds of thousands of people with very sad stories.
Powerball winner Jack Whittaker, said, “Well, I wish that we had torn the ticket up. Family is what is dear. I don’t know where it’ll end, but you know, I just don’t like Jack Whittaker. I don’t like what I’ve become.”
I don’t think the lottery makes you go bankrupt.
You always hear the stories of lottery winners who go bankrupt. Sure that does happen. Throw a lot of money at once at someone who has no idea how to handle it they will possibly squander it. It happens for lots of people who get a lot of money at once or just mismanage their money : Pop stars go bankrupt, movie stars go bankrupt, sports stars go bankrupt, Donald Trump has gone bankrupt, Dave Ramsey declared bankruptcy, etc.
There are lots of examples of boring low income people who go bankrupt and lose all their money. If you aren’t a lottery winner in the first place it isn’t as news worthy.
I have yet to see any credible evidence that lottery winners go bankrupt at a very high rate. Its always just anecdotal stories of individuals. And I seriously do doubt the 70% figure cited.
I think people are missing something — lots of commenters have said things like “if they just saved that $1 a week for the next 10 years, they’d end up with a good chunk of change.” There have been several variants on this message.
Guys, run the numbers. They would NOT end up with a significant chunk of change. I’ll take one commenter’s number — $100 per year, invested for 30 years at, let’s be generous, 10%. They’d have $19,000, which after 30 years of inflation is more like $10,000.
Big frickin whoop. Ten grand thirty years from now is not much motivation. It isn’t going to do anything for you when you find yourself too old or sick to work and with no money. Might as well spend a few bucks to dream about winning $100M with the money.
I play instant game lotteries (scratch-offs) regularly, and just as in my other monetary strategies, I track spending and winnings and set a limit for how much I am willing to lose per month. Even playing equities and securities, you have to accept the expectation of loss. A stock I purchased a few years ago and added to regularly through ING sharebuilder tanked and while I have not sold it yet (to consolidate my loss), there’s no guarantee that it will ever recover. In fact, the company is in dire straights and might have to sell out. Many things in life are a gamble and with great risk comes great reward. Lottery, just like anything else, only becomes bad when one does not moderate themselves in it. Even saving can become bad when one becomes a miser and lives out his/her life hoarding pennies only to die rich so that someone else reaps the benefits — often times Uncle Sam.
@Andy (#126) – I’m not sure if Whittaker is a good example of the atypical lotto winner. Per Wiki, he had a net worth of $17MM prior to winning the lottery and was the CEO of a successful contracting firm.
http://en.wikipedia.org/wiki/Jack_Whittaker_(lottery_winner)
But say you get a lot of happiness from playing the lottery. Maybe the same as someone else gets from playing video games, buying a comic book, returning a library book a week late, or drinking a latte. Instead, what you are buying is hope. Over the course of 30 years, that’s about $10k for a $5 chance at a dream. It’s not a new car. It’s not a trip to Mexico. It’s a dream that your world could change. That, for $1 or $5, you could have a chance. You can spend some time dreaming about what you’d do with the money.
I don’t play the lottery. And I’m not endorsing spending a lot on the lottery. But, I don’t know…is it so bad for people? It’s a tax on people who are bad at math. But it’s a lot better than buying a candy bar or a Coke or a pack of cigs.
As long as they only spend as much as the other person would spend on the Coke/candy bar, you have a point. What about those who gladly buy 10-20 (or even more) tickets on a regular basis?
@Nicole et al, I think people can’t imagine what it’s like to live with the uncertainty that comes with poverty, but they also don’t have a sense of how unfriendly the institutions middle-class people use to accumulate wealth are to people with low or unpredictable incomes.
I’ve been involved in attempts to extend no-fee savings accounts to the under- and un-banked. It’s extremely frustrating, mostly because of bank bureaucracy. The bank sees no difference in applying the standard fee to the account and then waiving it at the end of the month (either automatically or because someone called and yelled at them, again) or in 3 months, or whenever they get around to putting a new account code into the system.
But for the underbanked person, who may distrust the bank in the first place because of past experience, it feels like their money is disappearing and (perhaps) reappearing in a way they don’t understand and have no control over. We’re talking a $6 fee on a monthly deposit amount of about $10 here, so it’s a huge proportion of the amount saved.
If that’s not a disincentive to save, I don’t know what is. And you can see how it doesn’t feel that different to playing the lottery, except the payout is much smaller!
Stephanie– Some of our students will be working on a project in the local community to bank the unbanked as a senior thesis next year. I would love to read a guest post on your experiences.
J.D.,
From your comments directed towards Nicole and the discussion she created, it seems like you aren’t quite sure how you feel about the lottery and those in poverty. Your first comment almost seems to pity her supposed ignorance on the matter, and your later comments suggest you see her point of view. It would be interesting to see a post on how those in poverty see the world around them financially and the true opportunities they have compared to the perceptions of the middle class.
My guess is it would compare to when I used to read Forbes and Money magazine. The articles discussed how to invest an extra $100,000 a year and mutual funds for the uber wealthy. Those were followed by profiles on the best yacht clubs on the east coast. I would guess our discussion on the best investments to get an 8% return would seem just about as out of touch to those in poverty as a yacht club sounds to me.
I liked the article overall, I agree the lottery is entertainment only and should not be a path to wealth.
However, the last portion of the article I feel was a little adventurous on the writer’s part and perhaps should have been better researched. Savings accounts do not consistently return 1% over inflation, this suggests that people putting money into savings accounts as a path to wealth will beat out inflation over time which they do not do. It also indicates a 1% return on real estate, which as a real estate investor I cannot agree with.
Real estate is quite different from most other investments in that money to purchase it can be leveraged (meaning your up front cost can be minimal making any return that much larger) and if done correctly it can provide both ongoing cashflow and a capital gains return when sold. Whenever I see numbers reflecting the ‘return’ on real estate, it seems like they are looking solely at the difference between the purchase price and the selling price, and not the money made along the way or the leverage used, both of which changes these numbers significantly.
The article has a good premise, but in order to speak intelligently about comparing more complicated investments, I believe further research should be done.
Thank you for listening.
I played your lottery game soooo many times. I think my best result was -75%. Even though I only buy tickets on a dream and only when the jackpot is over $200M, this was a stark reminder of the futility of it all.
I used to be against participating in the office lotto pool, but I’m having second thoughts after reading this article:
http://www.nypost.com/p/news/local/he_out_of_luck_SFNCcaLtOfTb8ry5Pj6WKK
I’d consider it to be a form of entertainment more than anything else though.
Complete bullshit article.
You make a case that the lottery is a bad investment vehicle (no shit) and then come to the conclusion that you shouldn’t play the lottery. Playing the game and using as an investment are completely different and you know it.
Even as a limited investment, the cost the play the Mega Millions lottery responsibly (1 ticket per game = $104/year) verse potential outcome of becoming a multi-millionaire is a unique opportunity. What other investment choice does one have which leaves open the possibility of a completely life-changing influx of money for the low cost of $104 per year? None.
I agree with this post and enjoyed the simulator. I’ve never bought a lottery ticket in my life and always viewed it as a fool’s tax…
with that said, my husband has spent $5/week on an office pool for the past few months, and recently they hit the lotto jackpot:)
I’m so glad that we had conservative, frugal financial mindsets beforehand. After splitting it and taxes, we walked away with enough to pay off the house (no other debt), fully fund 529s, and get an incredible retirement portfolio set. We both love our freelance jobs and will continue working, but not more than 30-35 hours/week. We were able to claim the winnings with a trust, so no publicity either. After seeing all our financial dreams come true (and we’ve had our share of bad luck in the past), I think a small amount of lottery money here and there is worth the chance to dream for a few days. And you never know!
I have an issue with your wording that you “Can’t” win the lottery. Certainly, if you don’t play, you can’t. But if you play, you can. Granted, the odds of winning the jackpot are very, very, very low, but that’s not the same as “Can’t,” that’s just highly unlikely.
Fascinating conversation. Spending a few dollars here and there for a weekly lottery ticket is fine by me. I know the odds of winning are ridiculous, however here’s what keeps me playing; if I don’t buy a ticket, I have no chance of winning. If I buy a ticket, I have as good a chance of winning as anyone else does.
My plan for how to invest and allocate my lottery winnings is firmly in place for WHEN I win. Believing it’s possible is part of the process.
Twice a week, every week, 52 weeks out of the year, a few people win $250,000 in the Mega Millions, or $200,000 in Powerball. More people win “less” (if you can call a $10,000 bonus “less”). Every few weeks, a ticket hits the big jackpot.
So, to say this isn’t a “worthy investment” is a little harsh. Tell it to the Albany 7, who just split that $319 million dollar jackpot. I’m sure they no longer think it’s just a lark.
Somebody’s gonna win it. Why NOT me? 🙂
Are any companies that run a lottery publicly traded? Seems like a potential investment opportunity.
I play the lottery when the numbers get real large. It is fun. You get to talk about what you’d do if you win the money. I pay more to go to the movies or even buy a Coke for that matter.
Further, does many people actually play the lottery as an investment? I doubt it. I don’t even put money into the market as form of investment anymore, as the odds are stacked against the normal person.
As someone who enjoys playing an occasional scratch-off ticket (less than $100/year), I see nothing wrong with playing the lottery occasionally for entertainment purposes.
As someone who won a $75,000 scratch-off jackpot, all I can say is that the rush of having a winning lottery ticket is unlike anything most people have ever experienced. (Then reality sets in when the government takes their taxes out of your winnings.)
If you want to criticize people for risking $1-$2 on a dream and the rush of winning, go ahead. That is your right. My point is that most of us have a vice or two, and the self-righteous crowd usually doesn’t have a squeaky clean backyard. Most of us have something that makes us feel good that we waste a little money on occasionally.
I could criticize someone for spending $50 on a bottle of wine to feel good, or $10 on a beer at a ballgame to feel good, or $5 on a sugar-laden drink at Starbucks to feel good, or grocery shopping at Whole Paycheck to feel good. But I would never do that, because it is your right to do so.
Here is a quote from Jim Rohn
“I’ve also found that income rarely exceeds personal development. Sometimes income takes a lucky jump, but unless you learn to handle the responsibilities that come with it, it will usually shrink back to the amount you can handle.”
If someone hands you a million dollars, you’d better hurry up and become a millionaire. A very rich man once said, “If you took all the
money in the world and divided it equally among everybody, it would soon be back in the same pockets it was before.”
It is hard to keep that which has not been obtained through personal development”
I have always felt that the lottery was the most cruel for of psychological warfare. It is so sad to watch someone who by the look is obviously desperate for the cash will spend his money on this sham. The “state” gets rich and the individual remains poor on the elusive hope of “something for nothing.” There is no free lunch!
Michael Brown
Ironically enough, I ran the 10 year spinner once and won.
“You played 1040 games of Mega Millions. It cost $1040. You won $10053.”
I’m off to go empty my Roth IRA… Winning!
Ah yes, playing the lotto. It’s fairly clear that anyone playing it thinking they’re going to get rich either don’t understand the odds or think the odds somehow don’t apply to them.
It reminds me of an episode of The Simpsons, really. There’s a big jackpot, so Homer buys 40 tickets. Marge says to him, “Homer, the chances of winning are 30 million to 1.” He holds up all his tickets and says, “No, it’s 30 million to 40! I can’t lose!” I think this is the mindset a lot of people who play every drawing have.
I once looked at one of those “Tips to win the lotto” sites. And it’s filled with completely nonsensical “tips”, such as: “Don’t ever play all odd or all even numbers. The chances of winning are much higher if you use both evens and odds.” No, that’s totally and completely wrong. Every number combination has the exact same chance of coming up as every other. My stat professor in college once told us, “If you play with numbers long enough and use a too small sample, you can find patterns that aren’t really there.” And that’s what these lotto tip sites apparently do. Either that or they just make everything up. Admittedly, there’s no such thing as being truly random, every system has a bias. However, the companies that run lottos switch old balls out for new very frequently, so the bias isn’t there long enough to detect. They weigh every ball prior to every drawing and switch out any that don’t meet the weight requirements. (And these weight requirements are very exacting. I think the threshold is something like 1/1000 of an ounce. I saw a video on it years ago, and I know the digital scale they used had a whole lot of digits after the decimal.)
If you have to play the lotto, at least play scratch cards. They have tremendously better odds of winning something. (For Pennsylvania anyway, scratch off cards seems to run around 4.75 to 1, against. But that’s any prize at all, not the top prize. But still, the MegaMillions overall odds are something like 64:1 against.)
Actually, if you look at the odds correctly it IS a positive investment once the jackpot reaches 174 million or higher, because your reward is higher than the risk. (play 174 million times and you’ll win, theoretically, so anything above that is in your favor). Unfortunately, the odds of that investment paying off before you die/go broke are slim.
Super impressed with this post and the widget, JD! I’m going to link to it on BargainBabe.com and post the widget, too. Looking forward to seeing you at the Financial Blogger Conference in October.
Just thought of something else. The comparison to investing $100,000 all at once isn’t quite apples to apples. The lotto “investment” (how it hurts to write that) is added little by little (or, more accurately) taken away little by little). A one time $100,000 investment in the stock market is an all-at-once massive investment.
I think a more apt comparison would be how much you’d earn in the stock market investing the cost of biweekly lotto tickets. If each ticket cost $1 you’d have $8.66 to invest in stocks each month.
The return would still be massively better than -88.89%, but no where near $100,000->$750,000. Crunch the numbers for us, JD!