Hot answers tagged

114

You're asking if lottery ticket can ever produce a positive expected value (EV). The short answer is, "no". There's an interesting article that goes into the details and is heavy on the math and graphs. The key point: Even if you think you have a positive expected value due to the size of the jackpot being larger than the number of possible numbers, as more ...


83

The other answers here do an excellent job of laying out the mathematics of the expected value. Here is a different take on the question of whether lottery tickets are a sensible investment. I used to have the snobbish attitude that many mathematically literate people have towards lotteries: that they are "a tax on the mathematically illiterate", and so on. ...


62

There is a clear difference between investing and gambling. When you invest, you are purchasing an asset that has value. It is purchased in the hopes that the asset will either increase in value or generate income. This definition holds true whether you are investing in shares of stock, in real estate, or in a comic book collection. You can also purchase ...


53

All of the above can happen. Lottery winners are invariably people with little experience in handling extremely large amounts of money. For most lottery winners, everything about their life changes overnight. They typically take the lump sum prize, giving them immediate access to a fortune, with no guaranteed income beyond that. They quit their job, move to ...


51

If you just buy a few lotto tickets normally, then no, it's not going to be a good investment, as @Jasper has shown. However, there are certain scenarios where you can get a positive expected value from a lottery. In 2012, it was revealed that some MIT students found a scheme to game the Massachusetts state lottery. The game, called Cash WinFall, had a ...


41

When you ever get suprised by a large sum of money, then do not immediately quit your job and do not immediately spend it on the first thing that comes to mind. Pay the tax on your winnings Before you start planning what to do with your winnings, make sure you know how much of it you are actually going to see. In many jurisdictions you need to pay quite a ...


27

From a mathematical expected-value standpoint, there is no difference between gambling (e.g. buying a lottery ticket) and investing (e.g. buying a share of stock). The former probably has negative expected value while the latter probably has positive expected value, but that is not a distinction to include in a definition (else every company that gives a ...


27

Some causes I can imagine: you you you you The simple fact is, God doesn't make you do stupid things with money. Anyway, you're on the right track: you know the threat is there, you're asking the question. It's all about financial education and beliefs There's a grand unification issue at hand, and it's not strategies to dodge "this money-sink", or "...


26

This question feels like an EL&U question to me, and so I will treat it as one. Investment, noun form of to invest, originally from the Latin investire, meaning to clothe, means: [T]o commit (money) in order to earn a financial return Merriam-Webster Online Dictionary, Invest, vb. tr., definition 1 As such, when a person commits money with the purpose ...


23

Others have already explained why lotteries have negative expected value, so in that sense it is never wise to buy a lottery ticket. I will provide an alternative view, that it is not always unwise to buy a lottery ticket even though the expected value of the lottery ticket is lower than its cost (i.e. a loss). The question is what you mean with "wise" A (...


22

The billion dollar jackpot is a sunk cost, a loss for prior bettors. If you had $292M and could buy every ticket combination, you'd be betting that not more than 2 other tickets will win on the next drawing. Even if 3 won, you'd have all the second place, third place, etc tickets, and would probably break even at worst. Forget this extreme case. If I gave ...


17

Why must terms must be mutually exclusive? This (false) dichotomy is what seems to cause the most debate. It is the SINGLE EVENT OUTCOME that defines gambling. Gambling will involve an aleatory contract. That is, the outcome is specifically tied to a single event that determines profit/loss. This could be the outcome of a race or the roll of a dice, but ...


13

I'm going to offer a contrarian answer. Depending on how big the jackpot is, I would suggest that your best bet might be the annuity over the lump sum. Not because of math, but because of behavior. Let's say that you are looking at a jackpot of hundreds of millions, and the annuity option is tens of millions each year. For me, even the annual payment of ...


13

You are falling for the common misconception that 'high' taxes means 100% taxes. Which is of course wrong. Take a simple example (all numbers are millions!): You win 10 in the lottery, and they keep 50% of it - which is 5 - for taxes. You whine, and blow 2 of the remaining 5 in Vegas. Now you have 3 left (instead of 5), and at the end of the year - ...


12

If the lottery pays you $970M, and then you make $1000 gifts to a bunch of people, yes, the initial lottery payment is taxable, but the $1000 gifts are below the gift tax threshold and thus not taxable. However, many states allow you to choose how winnings are distributed. This is so that if a group of people wins, they can each receive and get taxed on ...


11

I estimated that the mean expected cash value of a $ 1.00 MegaMillions ticket in the July 5, 2016 drawing was about $ 1.23 = $ 0.18 consolation prizes + 258,890,850:1 chance of winning part of a cash jackpot that increased from about $ 289.6 million to about $ 313.3 million. I estimated that the mean expected cash value of a $ 2.00 Powerball ticket in the ...


11

In general, you can only deduct expenses in the year the expenses were paid. The only exceptions to this that are talked about in Publication 17 are investment interest carryover and charitable contributions carryover. Gambling losses cannot carry forward to future years, for most tax situations. Per the IRS: "If you itemize your deductions on Schedule ...


10

Question: Does a billion dollars make you 1,000 times more happy than a million dollars? Answer: It doesn't. What counts is not the amount of money, but the subjective improvement that it makes to your life. And that improvement isn't linear, which is way the expected value of the inrease in your happiness / welfare / wellbeing is negative. The picture ...


10

The lottery commission will withhold tax, typically, 25% federal. For large sums, the millions people dream of winning, the problem lies in that you can't deduct more than 50% of MAGI as a charitable deduction. So, the year you win, say, $4M, you can donate $2M, and keep $2M but have a tax bill on that $2M.


10

It is correct, in general. Gift tax is indeed at 35%, but you have the first 14K of your gift exempt from it for each person you give to, yearly (verify the number, it changes every year). You can also use your lifetime exemption ($5.45M in 2016, subject to change each year), but at the amounts you're talking about it still will not be enough. Charitable (...


9

Why would I need a Lawyer to collect what I won? Is winning in some way Illegal? I don't understand why I would Opt to give a Lawyer 1/3 of what I won just to collect it. Some states allow for an entity to claim winnings rather than an individual, in such states hiring an attorney to set up a trust can preserve your anonymity. Even if your state doesn't ...


9

The key point is that most people have risk aversion. The marginal utility of a dollar of wealth declines as you have more of it. Thus, given the same expectation value, you would prefer a scenario with less uncertainty. In buying insurance, you are hedging because the payoff is negatively correlated with an existing risk, making your overall outcome more ...


8

I realize that most posters are US based, but the UK on Saturday had its biggest ever payout (a miserable £60m). Because of the rules there, the estimated "value" of a £2 ticket was between £3 and £5. http://www.theguardian.com/science/2016/jan/09/national-lottery-lotto-drawing-odds-of-winning-maths


8

Although this has been touched upon in comments, I think the following line from the currently accepted answer shows the biggest issue: There is a clear difference between investing and gambling. The reality is that the difference isn't that clear at all. Tens of comments have been written arguing in both directions and looking around the internet entire ...


7

I am reminded of a dozen year old dialog. I asked my 6 year old, "If we call a tail a leg, how many legs does a dog have?" She replied, "Four, you can call it anything you want, but the dog still has four legs." Early on in my marriage, my wife was heading out to the mall, and remarked that she was "going to invest in a new pair of shoes." I explained to ...


7

logically, yes. legally, no. any reasonable definition of an "investment" must include some types of gambling and insurance. lottery tickets specifically are really crappy high risk/high return investment. obviously most people try to avoid investments with a negative average expected future value, but from a purely semantic perspective anything with a ...


7

When you win a lottery or have other gambling winnings (over the threshold), you will receive a W-2G form from the payer. You could submit IRS form 5754 to the payer to inform them to split the winnings and issue separate W-2G forms accordingly. Note that certain payers do not honor the form and will only distribute a single W-2G form. (The World Series of ...


7

Why is there a difference between the jackpot and the Cash Option - $374 million dollar difference. Taxes aside, suppose you were given a choice of $900 million today or $900 million over 30 years. Obviously you'd take the $900 million today and invest it wisely, earning 10% a year and having much more in the future. You wouldn't just buy mansions and ...


7

It depends how the money flows. The money comes to you first, then you dole it out If the corpus of the lottery winning is first paid to you (some taxes withheld), and then you dollop it out to various persons, you will owe taxes on the full amount. In the US and similar tax mechanisms, For amounts paid to individuals, you have already paid taxes. ...


Only top voted, non community-wiki answers of a minimum length are eligible