Lottery

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Mobius Strip's picture

The current mega-millions jackpot is $640M, which gives you a lump-sum payment of $462M. Applying a federal tax rate of 25%, state tax of 0-10% and giving a little to your wife to spend, you’ll be left with about $300M (rounded).

The number of possible combinations is 176 million. Assume 300 million tickets are sold (just doubling the increase in jackpot since last drawing and rounding off). Should you buy a ticket or not? How about 2 or more?

jcole21's picture

I bought ten bones.  AF trip if I hit - we’ll circle the globe collecting an eclectic mix of BO-FO and IT bosses. It will be glorious, ending in India for a lecture by keynote speaker ChickenTikka on the merits of marriage.  Then we’ll head to Goa and party hard.

No quote needed

Black Swan's picture

I bought ten tickets, so I figure my odds are probably around 1 in 8.  Bring on the HCB’s!

redacted

Mobius Strip's picture

i heard Goa gives you a diarrhea after a little swim in the ocean, but otherwise the party there is sick.. wait, no pun intended. i also bought 10ish, you never know…

Sweep the Leg's picture

Lump sum of $462M, assume half gets taxed and you’re left with $231M.  There are 171M possible numbers.  I smell an arb opportunity.  Let’s pool our money together and buy all the numbers.  I’ve got $5 on it.

comp_sci_kid's picture

put in $20

itera's picture

Sweep the Leg wrote:

Lump sum of $462M, assume half gets taxed and you’re left with $231M.  There are 171M possible numbers.  I smell an arb opportunity.  Let’s pool our money together and buy all the numbers.  I’ve got $5 on it.

You’re assuming ther’se no pot split. You have 1 split and you’re F’ed

Hope. It is the quintessential human delusion, simultaneously the source of your greatest strength, and greatest weakness.

Sweep the Leg's picture

iteracom wrote:

You’re assuming ther’se no pot split. You have 1 split and you’re F’ed

Thanks for shattering my dream.  We only needed another $169,999,975.

The Righteous Hacksaw's picture

Excellent, I’ll work on my keynote and keep the Russian hookers and blow on standby.

Not everyone is expected to survive, but for those that do there will be great reward.

No Homo

ohai's picture

This lottery system is great for the government. Not only do ticket sales exceed the winning payout, but the winner gets taxed on top of that. Let’s say ticket revenue for a $640 million payout is $800 million. From the OP, the final payout after tax is $300 million. So, the organizers made $500 million. We should just slash taxes and organize a $1 billion jackpot every month. People are just lining up to give their money away. 

“I’m a CPA! I got money b***h!”

CFABLACKBELT's picture

Went in on a pot here at work; I know the odds are horrendous (I probably have a better chance of finding that money left on the street), but the thought of half my office winning and me being left out (I’d probably hang myself) was more than enough for me to jump in.

Supersadface's picture

iteracom wrote:

You’re assuming ther’se no pot split. You have 1 split and you’re F’ed

Sad but true.  And the odds of a pot split are pretty good; I was reading something that said (for this particular uber-jackpot) that the expected number of winners is approaching 1.9.  

CFABLACKBELT wrote:

Went in on a pot here at work; I know the odds are horrendous (I probably have a better chance of finding that money left on the street), but the thought of half my office winning and me being left out (I’d probably hang myself) was more than enough for me to jump in.

Was just talking about this at lunch with colleagues.  Really, in this scenario, all you’re buying is “regret insurance”, which I guess makes sense?

As for myself, bought no tickets.  Attempting to maintain my lifelong record of having never bought a lotto ticket or played any casino game where the house has an edge (though I still loves me some poker).  And no judgement against the AF folks who do buy a ticket, btw - I’m aware that people in this forum are very conscious of their odds.  To many people, the value of a ticket is not just the expected payoff.

itera's picture

the CFA curriculum actually has a behaviorial bias for buying lottery tickets.  I think it was framing bias?

But I usually go in on the office pots, usually 5-10 bucks, because can you imagine if they won, and you were the only loser left in the office after they all quit? lol

this actually happened to one guy, there was a news article about how some guy didn’t get his $2 in cause he went on a trip and the group actually won like $70M or so, and everyone became millionaires except the guy.

Hope. It is the quintessential human delusion, simultaneously the source of your greatest strength, and greatest weakness.

Sweep the Leg's picture

This jackpot is big enough that going in with a group still works out nicely.  When it’s like $200M, then a lump sum of around $130M, then taxes leave you with $65M and you have to split it 20 ways…$3.25M isn’t even worth playing.

king_kong's picture

I was on (in?) line at a newstand and a lady was filling out the bubbles to pick her own numbers for her Mega Millions ticket. The guy running the stand says “most people just do quickpick” and she says “well the guy on the news said you should pick your own numbers!”

I walked away shaking my head.

Mobius Strip's picture

it will be nice if it stays until next Tuesday’s drawing although it is unlikely given how many tickets have been purchased. i’d like to see it balloon to $1 billion, that would be a fine round sum

Inner Evil Voice's picture

If I win I’ll take the AF crew to the Masters and will bring the full Ben-Gals cheerleaders’ squad with us. If they think some teenager can be good on the sack then we’ll teach those chicks a lesson on what a championship pounding over a long weekend means. Who Dey!

Antticfa's picture
Yonis's picture

Speaking of lotto. Do these firms do well in terms of ROI? Are we talking say 40% returns per annum. Do tell folks. Cheers

itera's picture

3 tickets won.  Good thing we didn’t do that buy all the tickets idea

Hope. It is the quintessential human delusion, simultaneously the source of your greatest strength, and greatest weakness.

Supersadface's picture

Yonis wrote:

Speaking of lotto. Do these firms do well in terms of ROI? Are we talking say 40% returns per annum. Do tell folks. Cheers

To the best of my knowledge, most lotteries are state run, so you’re not gonna find out what their cost structure / payout ratio / profitability measures are.  However, there is a publicly traded lottery company out there.

Just pulled up their 2010 Annual and gave a look through.  Looks like operating margins of 17% in 2010 and 2009, net margins of about 11%, and asset turnover of about 4x.  So yeah, pretty, pretty, prettayyyyyyyyy profitable.  Company also discloses that their payout ratio (their largest cost) to winners is around 67%.  So in this case, yes, damned profitable.

It’s also trading at 4.2x TTM earnings, though management just burned through a big chunk of cash acquiring 35,000 video lottery terminals.  I also have no clue what the regulatory protection for this company is like - if they’re the only player in this space or if there are others, what kind of difficulties would be involved in setting up another lotto company.  Balance sheet also gives me a little pause (3/4ths of their assets are intangibles) and most of those were added recently with the acquisition.  Stock price is down by 50% over the past year (POSSIBLE EXPLANATIONS INCLUDE THAT THIS COMPANY IS LOCATED IN GREECE AND I DON’T KNOW IF YOU SAW THAT THING IN THE NEWS, BUT I THINK GREECE MIGHT BE IN TROUBLE OR SOMETHING).

So, the question is, who wants  TO BE A MILLIONAIRE to own a Greek lottery company?  STEP UP, fellas, an opportunity like this only comes along probably every few years when Greece is in fiscal trouble once in a lifetime.

chad.sandstedt's picture

Here is the Oregon Lottery’s financial statements for fiscal 2011.

http://www.oregonlottery.org/About/docs/2011cafr.pdf

higgmond's picture

I think probabilities and stuff like that go out the window when you’re talking that kind of money.  I play $10 or $20 on the Mega and PowerBall when they get over $300MM.  I know I’m not going to win, but the utility of $20 is basically zero for me (not that I’m some super rich guy lighting cigars with $100’s), while the utility of $100MM+ is off the charts.

I’m a creepy-ass cracka.

Supersadface's picture

chad.sandstedt wrote:

Here is the Oregon Lottery’s financial statements for fiscal 2011.

http://www.oregonlottery.org/About/docs/2011cafr.pdf

TIL that Oregon’s lottery had 1B in revenues in their 2011 fiscal year but only paid out less than $210mm in prizes.  To be fair, they have another $140mm in ‘prize liabilities’, but that totals up to a prize payout of about 35%.  They also had operating margins of about 50% and turned their assets nearly twice.  Sweet jesus, the lottery is an attractive business.

TL:DR; I would like to own a monopoly.

ohai's picture

Maybe you could start a business where you buy as many lottery tickets as possible (so you have a high chance of winning multiple lotteries). Then you sell tickets on this basket of lotteries. So, buyers of your basket lottery tickets have a chance to win $640 million, plus $200 million, plus whatever is in your basket. You can advertise something like “OMG $1 billion jackpot!”

This is taking advantage of the observation that lottery ticket buyers are attracted to large numbers, but are basically blind to statistics. Recall that lottery ticket sales surged when the jackpot reached $500 million. These new buyers ignored the fact that the number of buyers was also increasing and thus, their expected outcome did not improve. 

“I’m a CPA! I got money b***h!”

bchad's picture

Yes, I think the Grinold and Kahn book explicitly states that it is more profitable to own a casino than to invest in one.

You want a quote?  Haven’t I written enough already???

bchad's picture

ohai wrote:

Maybe you could start a business where you buy as many lottery tickets as possible (so you have a high chance of winning multiple lotteries). Then you sell tickets on this basket of lotteries. So, buyers of your basket lottery tickets have a chance to win $640 million, plus $200 million, plus whatever is in your basket. You can advertise something like “OMG $1 billion jackpot!”

This is taking advantage of the observation that lottery ticket buyers are attracted to large numbers, but are basically blind to statistics. Recall that lottery ticket sales surged when the jackpot reached $500 million. These new buyers ignored the fact that the number of buyers was also increasing and thus, their expected outcome did not improve. 

Didn’t we sell something like this to a bunch of pension funds in the 2000s??  :-)

You want a quote?  Haven’t I written enough already???

Black Swan's picture

ohai wrote:

Maybe you could start a business where you buy as many lottery tickets as possible (so you have a high chance of winning multiple lotteries). Then you sell tickets on this basket of lotteries. So, buyers of your basket lottery tickets have a chance to win $640 million, plus $200 million, plus whatever is in your basket. You can advertise something like “OMG $1 billion jackpot!”

This is taking advantage of the observation that lottery ticket buyers are attracted to large numbers, but are basically blind to statistics. Recall that lottery ticket sales surged when the jackpot reached $500 million. These new buyers ignored the fact that the number of buyers was also increasing and thus, their expected outcome did not improve. 

I actually really like this idea.  I have a feeling dealing with state regulations could really get in the way though.

redacted

higgmond's picture

There was an investor group that tried to buy every possible combination of either PowerBall or MegaMillions several years ago.  The logistics ended up being a nightmare and they were not able to buy several thousand of the possible combinations because some of the vendors backed out of agreements to run their slips.  I think they did end up with the winner though and added a few million by getting 4 or 5 numbers without the powerball or megaball.  Return wasn’t spectacular though if I remember correctly.

I’m a creepy-ass cracka.

CFAvsMBA's picture

Some stat prof up in canada cornered the scrachoff market by being able to predict winners and losers by the image on the card. 

dspapo's picture

CFAvsMBA wrote:

Some stat prof up in canada cornered the scrachoff market by being able to predict winners and losers by the image on the card. 

I’m not sure if it was the same story, but I read an article about a year ago about a guy who did effectively the same thing.  He couldn’t figure out how to make any money, though, since he would have to have the store clerk show him every ticket before making a purchase.

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