The Lottery: Is It Ever Worth Playing?

By Jean Folger | December 17, 2010 AAA
The Lottery: Is It Ever Worth Playing?

Feeling lucky? You'd better be if you play the lottery. Depending on which one you play, you have roughly a one in 14 million to one in 140 million chance of winning a big prize. To put this in perspective, each person has a one in 2,320,000 chance of being killed by lightning; a one in 3,441,325 chance of dying after coming into contact with a venomous animal or plant; and a one in 10 million chance of being struck by falling airplane parts. Most people would agree that the risk of any of these events actually happening to them is pretty slim. Although winning the lottery is considered a good thing, we are, unfortunately, much more likely to suffer a shark attack or the zap of a lightning bolt than win big money playing the lottery. (For more, see Getting Rich: What Are Your Odds?)

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Independent Probability
Despite these statistics, approximately 57% of U.S. adults collectively will spend upwards of $50 billion each year in the hopes of striking it rich (Canadians spend more than $8 billion per year). Someone has to win the lottery, and the only way to win, of course, is to buy a ticket. The rules of probability dictate that you do not increase your odds of winning the lottery by playing frequently; each time you play the lottery there is independent probability - much like a coin toss where each and every toss, regardless of the number of tosses, has a one in two probability of landing on heads. The odds stay the same, in the lottery and the coin toss, regardless of the frequency of playing. You can, however, increase your odds by purchasing more tickets for the same lottery (for one certain drawing). Keep in mind, though, that two tickets might increase your odds from one in 14 million to two in 14 million, which is not a significant improvement, statistically speaking. Someone would have to buy a lot of tickets to appreciably increase their odds of winning.

The Pareto Principle: 80% of Sales Come From 20% of Customers
This may explain why in certain states, the majority of lottery revenue comes from a small percentage of players. A Minnesota study, for instance, determined that 20% of its lottery players accounted for 71% of lottery income; in Pennsylvania, 29% of players accounted for 79% of income, according to the NASPL. From a statistical standpoint, the more tickets someone purchases for a single lottery, the (marginally) better the chances of winning. Even if a person could afford to, however, he or she could not buy enough lottery tickets to guarantee a win unless he or she was the only person buying the tickets: as more tickets are collectively sold, the odds of winning inversely decrease.

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No Guarantees
No matter how much a person spends on lottery tickets, he or she is not guaranteed to win anything. Is there a better, more profitable, way to spend or invest the money? Let's look at the numbers. If a person spends $5 per week on lottery tickets, it adds up to $260 per year. Over 20 years (a typical long-term investment horizon for stocks and bonds), the total spent on lottery tickets would be $5,200. Putting $260 per year into bonds earning, for example, 3.8%, would yield $7,584 after 20 years, or $11,015 on stocks earning 7.3%. Therefore, if you just spent the money on lottery tickets and presumably won nothing, you would be out $5,200 after 20 years, as opposed to a profit with either of the investments. Of course there are no guarantees in the stock market, either, especially considering the recent volatility. Fixed-income investments such as government bonds may provide a less risky opportunity, but the tradeoff is that the returns are fairly low. (To learn more, see Compound Your Way To Retirement Now.)

To Play or Invest?
Many people see purchasing lottery tickets as a low-risk investment: where else can you "invest" $1 for the opportunity to win millions of dollars? The risk to reward ratio is certainly appealing, even if the odds of winning are remarkably small. Is it better, then, to play the lottery or invest the money you would have spent on tickets? There is no correct answer that applies to everyone. Much of it depends on what money is being spent: if it is earmarked for retirement or the kids' college, it may make more sense to invest the money. If, however, the money is tagged for entertainment, and you would have spent it on the latest Harry Potter movie anyways, it might be fun to take the chance, keeping in mind, of course, that you are more likely to die from a snake bite.

The Bottom Line
Can you afford to play the lottery? If the money is completely disposable, and you understand that even if you spend thousands of dollars on tickets the odds are against you, perhaps you can afford to play. If it's money you shouldn't be gambling with, or if you are banking on a big payoff to fund your retirement, you are better off saving and making small, low-risk investments until you have some play money. The most important things to remember are that playing the lottery should be thought of as entertainment, and not as an investment plan, and, just like any other form of gambling, the money that is risked needs to be expendable. (For more, check out Winning The Lottery: Dream Or Financial Nightmare?)

Find out what happened in financial news this week. Read Water Cooler Finance: Barack Obama Vs. The World.

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