Play the Lotto Like a Trader

. April 2, 2012
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Good odds look better than they actually are. A $540 million jackpot isn't worth $540 million if they pay it out over decades, once you take inflation and unearned interest into account. Calculate the odds based on today's lump sum payout. It will always be less than the advertised jackpot.

Photo by Mike Fleming
And then there are taxes. You'll lose nearly half of the lump sum payout to the government unless you can find a way to defer or eliminate being taxed on your winnings.

And then there's the law of diminishing returns. Dollar for dollar, $1000 spent on lottery tickets is a house payment that will keep some people from foreclosure. $1000 after you already have $100,000 cash is less precious. An extra $1000 after you have $540 million is peanuts.

Would you buy $1000 in lottery tickets to have an 11% chance to win $10,000? How about $1 million in lottery tickets to have an 11% chance to win $10 million?

Some of us would go for the first option, though I honestly don't see why after taxes and deferred payments are taken into account. Almost no one would go for the second: $1 million in your pocket today is not worth risking to have $10 million, which will not really be worth ten times as much to you.

When it comes to money, slow and steady wins the race.

More here: Is the $540 Million Lottery a Good Bet?