Are Lottery Tickets Sucker Bets?

Maybe we need "truth-in-winning" laws. Truth-in-lending laws force financial institutions to disclose all interest and miscellaneous costs to borrowers. But similar standards apply only inconsistently to state lotteries, magazine subscription "sweepstakes," and similar schemes aimed at people afflicted with get-rich-quick mentalities.

  

The sad reality is that winning $1,000,000 in a state lottery won't even come close to making you a millionaire. The biggest reason is that lottery commissions typically spread top prizes across 20 checks and 19 years of payments. (You get a first check when you win, and then one at the end of each of the next 19 years.) State governments effectively collect the interest on your winnings. Another consideration is taxes. State, federal, and local taxes usually absorb at least 40 percent of your prize. Thus, winning $1,000,000 usually generates annual checks of roughly $30,000 because taxes are withheld. Still a tidy sum, but what is this income stream worth today?

  

Suppose 10 percent is the standard interest rate. Your winnings are worth $30,000 + $30,000/1.10 + $30,000/(1.102) + ... + $30,000/(1.1019), or a grand total of $282,732. When interest rates and taxes are considered properly, it would take a cool $3,569,184 as an announced prize to yield a present value of $1,000,000 and truly make the winner a millionaire.

What are the odds against getting rich by buying lottery tickets? Typical state lotteries brag that they pay out half of their revenues in prizes. Most gloss over taxes and the length of time for payout. In fact, lottery commissions usually buy annuities from financial institutions to handle payoffs to winners across time. They pay less than 30 percent of the face value of the announced winnings for these annuities. And then the states collect taxes on your winnings. Consequently, on average, "the house" collects roughly 75 percent to cover its expenses out of all revenues from lottery tickets.

  

On the other hand, roughly 3 percent of each bet, on average, goes to cover the operations of a   gambling casino in Las Vegas or Atlantic City. For example, the average payout to craps players is $35 paid out for every $36 that gamblers bet. Casinos support their operations by collecting $1 out of each $36 bet. Unlike states that collect state income taxes from winners, however, casinos don't collect a "casino tax."

  

This analysis suggests that, if you cannot control the impulse to gamble, you are likely to do much better by dealing with private organizations instead of a state government. Lottery tickets are a terrible gambling strategy, shunned by economists, statisticians, or almost anyone with any sense about what payoffs should be to warrant a financial investment. Most lottery tickets are, unfortunately, sold to misguided dreamers and poor people who don't know about better investments.