Hacker News Reader

Comment by OJFord | Hacker News Reader

The lottery.

Honestly it bugs me a bit that I don't know the right way to model it - because so often people will slate it for having a terrible expected return (E[X]), but.. some very high percentage of us here could play every single week without noticing it (negligible downside), and yet winning however slim the chance would be somewhat life changing - even if it wouldn't make you quit work it'd be a nice windfall.

I suppose you can just view it as a microcap, very high risk investment.

I don't play, fwiw. I do have Premium Bonds, a lotteryish government scheme in the UK where you keep the invested amount and it can't go down (other than in real terms) but has a shot at winning various amounts each month up to the maximum of £1M. That's a lot easier to justify to myself, but I do wonder if it's a bit too easy to dogmatically hate on the lottery.

View on HN

The value is not in the winning part, it's in dreaming of winning. Compare that to a movie ticket, not an investment. At least before it becomes a habit. I'd guess people who buy one lottery ticket every year get much more enjoyment out of it than those who buy one every week.

I don't play either. I suppose it's a nice game if you can temporarily forget some leading zeroes.

Opportunity costs make the lottery a poor option. If you could only invest money in the lottery and nothing else, sure, it's better than no chance of multiplying your income.

But if you invest in an index fund, there's a very high chance of getting a 15-30% return on investment, versus a near-guaranteed amount of just losing the money spent on the lottery. It may not seem like a lot each ticket, but the costs add up over time.

A 30% return on the amount spent on tickets would not improve quality of life drastically for most people. Winning a big jackpot would. That creates a situation in which expected value might not be the best metric. Measuring it in expected quality of life, for example, would favor playing for many people including likely most reading this.

Quality of life is an interesting frame, though through that lens, some research tends to show that many (but not all) lottery winners actually are worse off in terms of life quality after winning.

From The Washington Post [1] (the links to the source studies are unfortunately broken): "When a team of economists tracked the fortunes of financially distressed people in Florida who had won the lottery, they found that within three to five years, the winners of big prizes (between $50,000 and $150,000) were equally likely to have filed for bankruptcy as the small winners, and the groups had similarly low savings and levels of debt. According to the National Endowment for Financial Education, about 70 percent of people who win a lottery or receive a large windfall go bankrupt within a few years."

However, I concede that if you win the lottery and spend it wisely (e.g. maybe invest virtually all of it and live off the interest spent reasonably), it's plausible it can greatly improve quality of life. So, assuming one acts carefully when receiving the large windfall, I agree with you now that buying lottery tickets is plausibly a good idea.

[1] https://www.washingtonpost.com/outlook/five-myths/five-myths...

> there's a very high chance of getting a 15-30% return on investment

Average yearly return for index fund since 1957 has been around 10%. It's been wild recent years but that should be seen as an exception.

Though you didn't specify the time period. So if you meant longer period, then fair enough.

If I bought a single ticket every single week, my cost is £52pa. I wouldn't miss it, fortunately, and I especially wouldn't miss the £7.70-£15.40 extra growth in my investments from putting it there instead as you advise. (And that's pretending that I can reliably get 15-30% every year.)

In exchange, I get extremely unlikely but extremely massive 'asymmetric upside'.

As I said, I don't do it, but sometimes I think actually it would be the rational thing to do. (What stops me is the thought: why stop at one ticket? how many tickets is the correct amount? clearly I don't know the appropriate way to model it (simply massive variance?) so I'll leave it alone. But it does bug me sometimes.)

I throw ~ $10 a fortnight at the State Lottery with zero expectation of winning (ie. lower than the formal E() chance of winning)

> We're extremely fortunate in Western Australia to have the only lottery in the nation, and one of the few in the world, where all profits are returned back to the community.

In the past year they've taken in a #billion and put out some $323 million in community grants and the rest in prize money.

To be honest, it's a tax I can get behind and it's win-win as it enhances the community I live in of some 2+ million people with the provision of flying doctor services, housing near hospitals for parents with sick kids, annual festival grants, etc.

I even applied for a received a $5,000 grant as a student back in the early 1980s.

[1] https://www.lotterywest.wa.gov.au/grants/our-role-in-the-com...

The lottery just an optional tax on people who either like to dream ... or are bad at math :).

I occasionally tag in to check their procedures | results (ongoing math consulting group job) so I know what my chances are and have no serious thought of winning big - I "play" because I can afford it, because I approve of where the money goes, and because between small ongoing "wins" (it does a good trickle payout), past grants, and salary from checking their books it's been an essentially break even venture to date with an outside chance of millions ..

TBH I don't think I'd play any other lottery - this one's pretty much about the proceeds staying local for me.

I knew a fella who systematically bought call options. He would lose most of the time. However, once he bought AAPL calls (many years ago) and rolled over the winnings to buy more. Turned 10k to several million.

He structured his investments to be able to do this, with a portion of it generating "play money" for these wild bets.

He'd accept that his investments would thus generate lower returns due to his betting, but he needed the thrill of it.

I see lottery as the same way. If you have a lot of passive investments and don't need the money, $40-50 a week on lottery is a rationale choice as the outcome can indeed change one's life. And to a level one could not reasonably achieve with hard work alone.

due to the odds involved in winning lottery, lottery is basically a tax on people who do not know maths

How many winners would claim the best thing that ever happened to them in life was winning the lottery though? I've read plenty of anecdotes of people who've won big only for it to destroy relationships, sense of self/purpose in life and other things that turn out to matter more than sudden "unearned" piles of money. I've never come across a story of anyone for whom winning the lottery was genuine positive force in their life. I guess that's the easiest reason to "hate" on the lottery from where I sit.

Well to be blunt, I think the audience skews less educated, lower socioeconomic class. The more incomprehensible the windfall the harder it will be, inevitably, to cope with.

If you're accustomed to having spare money to invest, not worrying about bills, have the option of taking many months off if too burnt out, then you're probably the type a) not to be playing the lottery; and b) to spread it across a few investment accounts or whatever while you think about what to do rather than splurge it.

And most importantly, anyone talking about it most definitely falls within that skew.

That's utility theory under a risk seeking utility function. You model E(U(x)) instead of the risk neutral E(x).

Richard Thaler, I believe, talks about how the lottery can be a rational bet. As there is very little downside if not played frequently, but if you win, as unlikely as it is, it is life changing.

Obviously this only applies to something like PowerBall or Mega Millions. There is no rational reason to play the scratch off.

The lottery seems like a really dumb thing.

Compare it to something like voting. There's a vanishingly small chance that your personal vote is going to sway any issue. The benefits of voting are only felt at a societal level rather than a personal one.

Lotto also has societal benefits, like funding schools and keeping organized crime out of the casual gambling market. Plus it's fun, on the order of, say, eating a mini bag of Doritos while you're stuck for three hours in a train station (but without the calories).

So why does the "I know math" crowd deplore the lottery but not voting? I'm guessing the real answer is that one is looked at as a low-class activity and one a high-class activity.

Edit: Just to be clear, my point isn't that voting is bad, it's that lotto isn't a pure math problem.

The vast majority of lotto cash comes from poor people. It’s a regressive / intelligence tax.

The government encouraging poor people to make a poor financial decision is really bad social policy IMO.

My view is that voting can still have a significant impact, even if you lose an election. A district seen as "safe" for one party that suddenly becomes more contested after one election (which happened many times recently) can inspire more attention to the district and its issues by more parties.

A narrow win or loss, in many contexts, can also lead to different decisions by the winners (especially if they seek re-election later) compared to a massive win or massive loss. In addition, voting is free (except for the time spent), whereas the costs from lottery tickets can add up.

I agree with you, though, that the lottery can actually have societal benefits. A notable example is that in Georgia, USA, a scholarship program for university is funded entirely by the state's lottery system (source: https://en.wikipedia.org/wiki/HOPE_Scholarship).

Reply on news.ycombinator.com