Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

There was a time when I believed the old axiom:

“The lottery is a tax on people who are bad at math.”

I understand the math, and I have for quite some time. But a few years ago, I started watching poker on TV. I especially enjoyed The World Poker Tour. I’ve never played poker, but certainly learned a lot about the game by watching.

Two interesting concepts that caught my attention are:

pot odds — the ratio of the current size of the pot to the cost of a contemplated call.

and

equity or expected value — the product of the expected odds of winning the pot and the amount of money in the pot.

Looking at these terms with respect to the local jackpot game yields the following:

Probability Top Prize Pot Odds Equity
1 in 75 $2 1 in 95 million $0.03
1 in 141 $3 1 in 95 million $0.02
1 in 306 $7 1 in 95 million $0.02
1 in 844 $10 1 in 95 million $0.01
1 in 13,781 $150 1 in 95 million $0.01
1 in 15,313 $150 1 in 95 million $0.01
1 in 689,605 $10,000 1 in 95 million $0.01
1 in 3,904,701 $250,000 1 in 95 million $0.06
1 in 175,711,536 $95,000,000 1 in 95 million $0.54

Another way to analyze this is by looking at the history of the pot:

Probability Top Prize Pot Odds Equity
1 in 175 million $12 million 1 in 12 million $0.07
1 in 175 million $16 million 1 in 16 million $0.09
1 in 175 million $26 million 1 in 26 million $0.15
1 in 175 million $37 million 1 in 37 million $0.21
1 in 175 million $47 million 1 in 47 million $0.27
1 in 175 million $59 million 1 in 59 million $0.34
1 in 175 million $69 million 1 in 69 million $0.39
1 in 175 million $83 million 1 in 83 million $0.47
1 in 175 million $95 million 1 in 95 million $0.54

So you can see that as the prize goes up, both the equity goes up but the pot odds go down. The bottom line here is that betting $1 can net you a very large sum of money. How can I afford not to play even though the odds of winning are still very clearly astronomical.

So why do I play? In a word: Hope. It is unlikely that I will ever get to a point in my life where I won’t have to worry what anything costs just by using my head and working hard. It could happen, but it’s probably no more likely than winning the lottery. But all of us still like to dream about what life would be like if we could get up every morning and have our own agenda, rather than carrying out some else’s.

So to balance the mathematician in me who knows that this is a sucker’s bet with the child in me who still hopes that life could change in the blink of an eye, I have a simple set of rules that I follow for playing:

  1. I don’t play until the prize reaches at least $50 million. I figure that the actual lump sum cash payout of $50M is about $30M. After taxes this is probably only worth something like $20M, and then in order to make this money last I can spend somewhere between $500,000 and $1M per year.
  2. I play $1 for the first $50M and then $1 for each $50M (or fraction) for any amount over $50M. So Tuesday’s jackpot is $95M, so I bought 2 tickets.

That’s it.

What would I do if I won? First, I’d photocopy the ticket. Then I’d carefully drive to my local bank, open a safe deposit box account, and deposit the ticket inside. Then I’d find a REALLY good lawyer who could advise me on the best way to collect my prize while revealing as little as possible about myself. I have considered waiting something like 3 to 6 months so that any media hype over the drawing dies down.

After collecting the prize, I would ask my closest friends and family what I could do for them that would be fair and make them happy. Then I would try to accommodate their requests to the best of my ability and prudence. I would put the balance of the money into various investments. Next, I would look for a nice home, and finally I would look to start or buy a business.

How about you? Do you play the lottery? What would you do first if you won?

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6 Responses to “Why I Still Play the Lottery”


  1. Eric H Says:

    I agree that wining the lottery brings hope. I believe most would go further and give to a few charities too. The caveat I see with playing the lottery is the seemingly all at once change in life and lifestyle.
    I would absolutely agree that, for a time, your life will be grand. Frankly, if and when I do have a lottery ticket in hand, it causes me to day dream more so than when I don’t have a ticket in hand. Unfortunately, thh day dreaming is usually during very important, yet very boring meetings or conversations.
    With the bene’s comes the inevitable dark side of winning a lottery. People you know or may not know coming out of the woodwork with hands out.
    Finally, what about one’s spending habits prior to winning a lottery? If debt issues are present today, most likely you’ll have very large debt issues after a lottery win.


  2. ScrapperMom Says:

    I’m not sure if this even applies if you only play the big jackpots, but how does the scenario change if you only win a portion of that 50m prize? How does your investment/spend strategy change when you only win a fraction of the pot, say $10k or even up to $50k? How does one put that kind of small windfall to work for them?


  3. MITBeta Says:

    Eric:

    I like to think that I have learned enough about handling money to make what I win last. Notice that I have calculated an approximate 2% to 4% draw down, which will theoretically last forever. I think I can learn to live nicely on $500,000 a year. The real trick will be trying to teach my kids the value of a dollar. I do agree with your other comments — there is such a thing as “instant millionaire syndrome” that causes people who become suddenly wealthy to become poor again just as fast. This all hearkens back to my earliest posts that suggest that stuff will not make us happy, but people will. Winning the lottery will give me more time to spend with the people about whom I care, hopefully on the deck of a sailboat! :D


  4. MITBeta Says:

    ScrapperMom:

    If we win more than 20 times our incomes, I can figure out how to make the money last so that we never need to work again and still maintain our current standard of living. Continuing to work is just gravy, and I’ll do it because I want to, not because I have to.

    If I were to win less than 20 times my income, I would first pay off all consumer debts, then if there’s still something left, fund any shorter term savings goals (down payment on a new house, etc.), if there’s still some left I would split it between the current mortgage and long term inventments. Then I would refinance the house to substantially lower the monthly payment and thereby substantially increase our monthly cash flow.

    The money that goes into long term investments should, with luck, reduce our retirement age.


  5. Sara Says:

    I play the lottery only occasionally, though I like your method for it. I also like the way you plan to keep it on the d-l (sorry, I’m in college and say stupid stuff like that).

    The first thing I’d do is buy a house on a beach somewhere, probably Mexico, then talk to an investment advisor to make sure I can make that money last the rest of my life (I’m only 19, so I’m hoping I have plenty of years ahead).

    Also, my favorite plan would be to buy lots of period costumes, and dress up in them whenever I feel like it. I figure the fact that I’ll be rich will make me seem eccentric rather than nuts.

    Then I’d fund my brother’s business plan - he’s got a good head for business, but he’s getting a degree in agricultural systems management - not a lot of skills he can parlay into the real world.


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