Re: The lottery, The odds, and You
 

I dont know for sure these are just some of the thoughts I had about this topic over the weekend. I wouldnt go as far as to say that the tax implications always make it -EV but i would say that they greatly reduce the number of +EV possibilites. I am sure there is a way of figuring the probability of a split but it would be a guess at best because you dont know how many tickets are sold.

Most lotts put like %40 of ticket sales into the jackpot and the rest goes to various different places. This means that when a lottery jackpot is advertised as $200 million this is based on an estimate of ticket sales. Given the amount of the jackpot at the previous drawing and the estimated amount of the next drawing I would think you could deduce the number of tickets sold.

If %40 of all ticket sakes goto the jackpot and the jackpot increased from 160MM to 200MM for this drawring then would the following be true:

(.4 x X) = 40,000,000

Where X would be the number of tickets sold?


anyone have any other ideas on this topic?

Re: The lottery, The odds, and You
 

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anyone have any other ideas on this topic?

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When you talk about lotteries, EV alone is an absurd measure. A lottery has to be +CE (certainty equivalent) to justify playing.

A good starting point would be taking a random lottery and calculate how much you'd be willing to pay for a ticket.

Re: The lottery, The odds, and You
 

what do you mean by +CE? I have never heard this term before and am unsure of its exact meaning.

Re: The lottery, The odds, and You
 

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what do you mean by +CE? I have never heard this term before and am unsure of its exact meaning.

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A flat fee that you would take in exchange for the gamble -- basically the price you'd be willing to pay for the ticket. In case of a lottery with an e.g. $20 mil jackpot, CE is going to be (should be) much smaller than EV when you have any kind of risk aversion.

Re: The lottery, The odds, and You
 

While it is true tht a big enough jackpot can make a lottery +EV, it has to be bigger than you might think

When the jackpot gets big, a lot more people play, which increases the probability of a split jackpot. This reduces the EV somewhat.

The prizes quoted are usually the total payout of 20 year annuities. The true cash value of a "$50 million" jackpot is considerably less than $50 million.

Re: The lottery, The odds, and You
 

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A lottery has to be +CE (certainty equivalent) to justify playing.

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Bout time someone mentioned this. There's a difference in EV and EU.

(U = utility)

Re: The lottery, The odds, and You
 

I did some math at work today how big a Mega Millions & Powerball Jackpot must be for a ticket to become EV neutral.

Some things to note in my math:
-Exact odds and payouts were used.
-35% federal tax rate was assumed for jackpot winners,
-33% for $100,000-$250,000 winners,
-25% for $200 to $99,999
-I believe these accuratley reflect the tax bracket an average person will be pushed in after their lottery winnings.
-no taxes were taken out onwinnings under $200, how many people are actually going to claim these winnings?
-3% flat state tax was assumed on all winnings > $200 (I live in Illinois so that's the rate I used)
-I couldn't find any exact #'s on what % is taken out for taking a lump sum prize. Also to consider is lawyer/accountant/financial advisor fees for jackpot winners. I took 20% out of the 'advertised jackpot' for those considerations.

Results:
Mega Millions becomes EV neutral with a jackpot of $284, 958, 993
Powerball at $194, 859, 920.

Saying all that I have $5 worth of tickets in my pocket for tonights $145 Million Big Game which my expected value is sadly less than 60 cents per ticket.

Re: The lottery, The odds, and You
 

Once again, this calculation is not too meaningful except for giving the upper bound on how much you'd pay for this ticket. To calculate how much you should pay for this ticket, you need to build your utility function and calculate the certainty equivalent. I'd be surprised if you found that CE>$0.1.

Re: The lottery, The odds, and You
 

I think a princeton mathematician took a look at this in a slate column once - http://slate.msn.com/id/114577

Kind of neat to take a look at