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August 6, 2005
That's a Lotto Bull!
There's a television special on TLC this week called "Jackpot! Overnight Millionaires", that contrasts the homes and lifestyles of lottery winners before they hit the jackpot and after. My wife and I watched it last night.
It's true, the lives of these lucky winners are pretty comfortable. We're taken on a tour through their lavish homes, decked out with seventy thousand dollar dolphin statues and grand ocean views from every window.
The winners were even generous enough to supply their winning methods for picking numbers. For one, the numbers just magically came to him. Another just used the "quick pick" random numbers. A third's advice was simple: there is no secret number-picking method. You just have to play consistently, every week, to improve your odds.
What are the Odds?
Is that true? What are those odds, anyway? In the television show, they didn't really mention how much of a long shot it is. Is there any way that you could reasonably expect to win the lottery?
In the US, the odds of winning the grand prize of the multi-state Powerball game are about one in one hundred twenty million. Those are pretty long odds. In day-to-day life, we so rarely come into contact with nummbers so big, we probably can't even imagine how much one hundred twenty million actually is. Let's try and correct that by putting it into perspective.
You probably know that airplanes are statistically much safer than cars. It gets spouted every time someone mentions that they're nervous about flying. And it's true -- it's highly unlikely that you'll die in a plane crash. But at one in 40,000, it's 3,000 times more likely than winning the Powerball jackpot. In fact, you're 500 times more likely to die of bubonic plague!
The chances of finding a four-leaf clover in one try are one in 10,000. A long shot, but you're 12,000 times more likely to do that than hit that jackpot. You're also twelve times more likely to become the President of the United States, and six times more likely to be named a saint. Are you expecting to be sainted any time soon? I can't say that I am.
But it's My Best Shot!
The thing that struck me the most watching this show was the financial condition of these winners before hitting it rich. One man said he was down to his last three dollars before buying the winning ticket.
Many who buy lottery tickets are desperate. They think that their only shot at financial independence is to win it, no matter how slim the chances. But with a little patience and discipline, they could dramatically increase their odds, perhaps not of becoming lavishly rich, but certainly of achieving financial independence and never worrying about money again.
Consider buying ten tickets every week for fifty years. This means that you will have bought 26,000 tickets over the years, increasing your odds of winning to about one in 4,600. That's only slightly better than your odds of dying of electrocution (one in 5,000).
On the other hand, if you had invested that ten dollars every week in the stock market and earned an average of 11% annual return, you would have $871,616! You can try out the numbers yourself using our Savings Growth Calculator.
You can understand why the frugal so rarely buy lottery tickets! In fact, my odds of winning are zero -- you can't win if you don't play! But like so many other little things you can do to save money, this is just part of a lifestyle that is guaranteed to build wealth. And those are odds I'll take.
Posted by Frank at August 6, 2005 10:52 PM
Comments
Posted by: david
at August 6, 2005 11:45 PM
The lottery is like another tax on the poor.
Posted by: Reality Bites
at August 7, 2005 8:28 AM
The problem with all of this pragmatic planning/saving is that people would like to be well-off TODAY (which translates to 50 years from now as well if you have any sense whatsoever), and not finally coming into money when you're 50 or 60.
Posted by: Jeff
at August 7, 2005 9:11 AM
That's true, Jeff, I'd also rather be well-off today and be able to enjoy it my whole life, rather than just finally in my retirement.
But I'd also rather be well-off in my retirement than never at all.
Add to that the fact that living below my means now, in order to get there, means that I don't have to worry about money even before I'm wealthy. That's quite a liberating feeling.
Posted by: Frank
at August 7, 2005 9:24 AM
This is a great post. What I find interesting is the number of lottery winners that end up with ZERO after a little while. (I don't have the statistic handy, but I know it's pretty high).
If they couldn't manage their money well before, they certainly won't manage it well after they win!
Hazzard
http://elym.blogspot.com
Posted by: Hazzard
at August 7, 2005 11:49 AM
11% percent is a pretty unresonable return. over 50 years it would be closer to 8%
Posted by: hubs
at August 7, 2005 9:27 PM
You can also read this article for the downside
http://www.lottoreport.com/AOLSadbuttrue.htm
Frugal for Life
Posted by: Dawn
at August 7, 2005 11:06 PM
It actually is not true that your odds of winning increase by playing week after week. Each drawing is a separate event, like flipping a coin. If you flip a coin 10 times and each time it comes up heads your odds of getting tales on the 11th time are not any higher - it is still a 50/50 chance. Each flip is independent of all other flips - just like each lottery drawing. I guess you could say that just being in the drawing increases your odd - from zero all the way up to 1 in 120 million (or whatever they are)! - but having been in last weeks drawing - or the last 200 weeks drawings - does not increase your chances this week.
But it sounds like most of us reading personal financial blogs aren't really counting on the lottery anyway!
Posted by: Jason
at August 8, 2005 7:02 AM
1 in 120,000,000
The same chance as flipping a coin and having it land heads 27 times in a row.
(Rounded up from 26.8385 and assuming it never lands on edge)
Frank, you keep talking about the stock market's average return of 11% (same as the Motley Fool guys). Can you point me to a site that actually works the numbers out? I'd hate to take that 11% purely on faith.
Posted by: Sukotto
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at August 8, 2005 8:18 AM
Jason, you're correct in saying that each time you have the same chances of winning, but the probability of winning at least once out of 26000 tries *is* higher than just once.
Consider flipping a coin: the probability of flipping heads on one flip is 0.5. But the probability of flipping heads at least once in ten flips is much higher than 0.5 (in fact, it's .999).
It's been a little while since my last math class, though, so I used this page to help, if you're interested: http://faculty.vassar.edu/lowry/binomialX.html - my variables are n=2600, k=1, p=1/12000000 (playing 10 times a week in my example).
Posted by: Frank
at August 8, 2005 8:25 AM
Good form, Sukotto! This is my source for the 11% figure: http://www.finfacts.com/stockperf.htm
But as hubs indicates, there is debate over the most valid methods used to determine the averages and how best to apply them.
I still need to do more research into this topic -- I'd appreciate any links you send my way.
Posted by: Frank
at August 8, 2005 9:08 AM
You're certainly right. I think we may have been looking at it from different points of view. I was thinking that playing the lottery was a series of decisions made each week to play or not to play, not a single decision to play for an extended period of time. Someone going into the store and deciding that week to buy a ticket based on the notion that they must have a better chance of winning that week because they have lost the past 500 times they played - they would not be correct.
Posted by: Jason
at August 8, 2005 10:02 AM
I'm actually $1 better off each week that i don't buy a lottery ticket.
Posted by: Andy
at August 8, 2005 10:37 AM
I admit to playing the lottery occasionally when two things happen - the prize gets over $10 million at the same time as I am feeling a little low. BUT the purpose of playing the lottery is NOT to win - in fact I have been known to not check the ticket. The purpose is to make it possible, however unlikely, that I could win so that I can spend the next few days imagining what I'll do with all the money. The fantasy is worth a dollar to me. And, in fact, if I don't check I get better value since I have the possibility sticking with me for a few more days.
Posted by: owen
at August 8, 2005 2:48 PM
Prior to my personal finance epiphany last year, I was a complete MO-RON with money and I regularly told anyone who would listen that my entire retirement plan was based upon winning the Lotto.
Now of course, I have de-moronized myself with money but dude... from you I have discovered that I still mught have a chance of becoming a saint!
If I don't die of the plague first. You know.
Posted by: laurie
at August 10, 2005 12:40 PM
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Tracked on August 8, 2005 3:41 AM
Heh...my stats professor used to always tell us re: gambling: "The less you bet, the more you lose when you win."