Financial Planning 101 preaches there is no greater fundamental truth than the fact that buying a lottery ticket is a waste of money. It is a tax on irrationality for most and on desperation for some. Instead of spending the money on lottery tickets, you can pay down debt, invest in high-quality stocks or bonds, or donate the money and get the tax write-off. With Powerball Lottery fever sweeping the nation — the latest drawing is expected to be in the neighborhood of $1.5 billion, the biggest lottery jackpot of all time — the dreams of winning the money become intoxicating for anyone who buys a ticket. That is a lot of money.
But it is always a terrible idea to buy a lottery ticket.
Except for maybe now.
Relying on our behavioral economics "expected value" training (and our love for the French mathematicians Blaise Pascal and Pierre de Fermat), we know that the value of a future gain in a "probabilistic" event like a lottery drawing should be directly proportional to the chance of obtaining it. The math is rather simple: take all the possible outcomes of the lottery drawings minus the cost of actually playing (in this case $2) and multiply each of those possible outcomes by its probability of actually happening. Then add up those numbers. The sum is the expected value of the lottery drawing. The Powerball Lottery website publishes the odds of winning and makes the after-tax calculations (yes, Uncle Sam needs to take his cut) pretty easy:
Given the huge size of the jackpot, the expected value is a positive $0.92! It is no longer irrational to buy a lottery ticket, i.e., wherein the expected value is a negative number (BTW - the crossover point is about $875 milllion). Of course, this calculation does not take into account some of the other nuances associated with lottery, namely state income taxes, the annuity vs. lump sum issue and the possibility of multiple winners.
Based on our simple math, there has never been a better time to buy a lottery ticket ... and when you win, we would be happy to help you create a financial plan!
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