Thursday, June 28, 2007

Lottery Tickets, Risk vs Reward – A Middle Class Rant VI

Human psychology is both tremendously fascinating, and mind numbingly scary. Although, there are probably a million different examples that would illustrate the fascinating delusions of the human psyche there is one in particular that I’d like to talk about…the risk vs. reward calculation that goes on (consciously or unconsciously) in the human mind when they purchase a lottery ticket. Ok… let me set the scene; the average lotto 6/49 payout is about 3 million dollars, a single ticket costs $2 and the odds of winning are 1 in 14 million. Just to put this into perspective your chances of being hit by lightening in Canada are 1 in 2.5 million. So, if you believe you’re going to win the lottery than you must also believe that you’re going to be struck by lightening at least five times in your life. However, the human psyche doesn’t work like that and despite the overwhelming odds 3 million dollars is a lot of money to most people, and because the tickets are only $2 people are willing to play regardless of the near impossible odds of winning. I can understand and relate to their logic “$2 for a chance at the impossible” it’s worth the risk. However, what I truly find fascinating is the predictable and dramatic increase in ticket sales as the jackpot gets larger. This phenomenon is often colourfully reported in the media with headlines such as “$40M Lotto 6/49 prize sparks ticket frenzy”. These ticket buying frenzies force me to ask the question; who is buying all these extra ticket? Regular lottery players buying more tickets? Or is it irregular players that have been lured by the prospect of winning the $40 million? My guess is it’s probably a combination of the above, but the real question is still unanswered, at what point does the human mental logic chip kick in and say “$2 for the chance at winning $3 million – no thanks… but given the same impossible odds of winning $40 million - now that’s worth 2 bucks.”

9 comments:

Investoid said...

Right now, I'd have to say none. I've never bought a lottery ticket, regardless of the payout.

I think people implicitly believe they have a better chance of winning a higher value when the jackpot is higher. For instance, if the jackpot is $40M, they might believe it will be split 5 ways, which means that everyone gets $8M, while if there's only a $4M jackpot, it's likely going to a single winner, and that's not "worth it" for some people. It's the logic I've had described to me on more than one occasion.

b said...

The exact odds of winning Lotto 6/49 are 1 in 13,983,820. Since it costs $2 to play, any time the jackpot is greater than or equal to $2 x 13,983,820 = $27,967,640 there is a positive expected value to playing.

So anyway, I play every time the jackpot is over $28M. (If it went over $56M I'd play 2 tickets, etc.)

Encore is a total wast of money though, since you'd pretty much never have positive expected value.

b said...

Note that this is a very crude analysis. Here's a much better one I found: http://www.stat.umn.edu/~charlie/lottery/

Warren said...

When the reward (odds) are higher, people seem to want to bet more often for a chance at that "big payout".

I just went to Vegas and this is in action all the time. An example is craps, which I like to play. Many of the low payout bets are the ones with the best odds (lowest house advantage).

David said...

See, I don't play the 6/49 because you just scan your ticket and you're done. Keep in mind I probably only spend $30-$40 per year on the lottery, and that includes cheezy tickets in cards for people and things along that line.

I kind of like scratch and win tickets better, even though the prizes are lower. I pay my $2 for the sheer thoughts as your scratching. You know the ones, like 'If I just get an X I'm off to future shop' 'If I get X and Y I'm buying an apartment complex'.

I have no expectation of winning, but as your scratching it's fun to think if the next thing you scratch is the 'magic one' then your basically set for life.

I find the 6/49 boring because it's over too quick. You see the number, you look at yours, since odds are your not winning after 1-2 number comparisons the dream's already over.

Jordan Clark said...

Have you heard the saying that the lotto is the "tax on stupid people" ?

I don't want to come off sounding mean, but if people enjoy wasting their money on it I think it's fine, just means I can pay less on my taxes!

Anonymous said...

I don't play the lottery but I'm puzzled by the comparison of winning the lottery to being struck by lightening. How is it that we hear of people winning the lottery but we rarely hear of people getting hit by lightening? If the changes if winning the lotter is 1 in 14M and getting hit by lightening is 1 in 2.5M then we should certainly be hearing of more people being hit by lightening, no?

Deborah said...

I buy tickets once in while and then I don't check them for months cause I have a winner until I check it...

QUALITY STOCKS UNDER 5 DOLLARS said...

Lottery tickets can be lots of fun.