The Powerball lottery drawing later this week has an estimated jackpot of $1.4 billion, the largest in US history, easily beating the $656 million Mega Millions prize in 2012. Although I don’t buy lottery tickets, the size of the prize made me wonder about the odds involved and whether it might be worthwhile to pick every single number to guarantee winning.
You have to apparently pick five separate numbers between 1 and 69 and then a sixth number called the Powerball that ranges from 1-26. The odds of picking the right set of numbers are one in 292 million. That implies that the number of combinations is 292 million and since each ticket costs $2, one could guarantee winning by buying one ticket for every possible number by spending close to $600 million, assuming that one has that amount of money lying around.
But one problem is that the $1.4 billion will be paid out over 30 years. If you choose to take the money immediately, which is a more accurate measure of the value of the prize, you will only get $868 million. Another problem is that if others buy that same set of numbers, you would have to share the prize equally and so you would make a profit only if you are the unique winner.
But the killer is that you have to pay taxes on the money. Since you will be paying the top marginal rate of 39.6%, that means that you will take home about $524 million, thus guaranteeing that you will take a loss even if you are the unique winner.
But even if the prize rises to such a level that you will clear a profit even after taxes as long as you are the unique winner, there is a major problem: time. Even at the rate of buying one ticket per second, it would take over nine years to buy every combination.
Since the drawing is tomorrow at 11:00ampm, you can forget about it.
Meh. I’m still gonna drop $2 on it. Because such is the draw of $1.4 billion that I’m willing to drop $2 (no more, though, since I already know I won’t win… I basically never win anything, so).
It’s 11 PM, not AM, so get cracking.
It’s been attempted before: http://www.nytimes.com/1992/02/25/us/group-invests-5-million-to-hedge-bets-in-lottery.html?pagewanted=all
Thanks Reginald @#2!
But one problem is that the $1.4 billion will be paid out over 30 years.
Yeah -- lotteries are pretty ponzi scheme-ful: what they are doing is giving you the interest on the money, basically. They keep gambling with the principal -- so there’s a “substantial penalty” if you actually want to get the money right now.
I can’t understand why anyone would take the deferred payment option. That entails trusting a state government to, you know, not go broke or something. I’d take the cash, pay the taxes, and diversify the loot to banks in germany, switzerland, england, and the bulk of it to a tax haven. Managing an amount of dough like that is a full-time problem. I’d probably buy a congressperson or two just so I could have them do chicken dance at kids’ parties or something, too. And (in other postings in this blog) I’d fund a gigantic amount of litigation against cops. I hate those fuckers. And I’d have my congresspersons wear chicken suits and deliver my lawsuits by hand. The Koch bros don’t flex their muscles nearly enough.
I believe setting up lotteries is a pretty well-understood art form now. Voltaire made one of his fortunes as a young man by subscribing one of the Paris city lotteries. Apparently they didn’t get the cost structure quite right (you also need to make sure that buying huge numbers of tickets is prohibitively time-consuming within the expected time-window of a winning drawing) I’ve never found a detailed description anywhere of how Voltaire did it but he was able to manipulate a sure win in the lottery and he made a killing.
Imagine winning that jackpot. You’d be an instant job creator.
If I could borrow 600 million dollars, I’d stop at that step. Then I’d use several millions to hire a whole lot of lawyers and live it up on the residue. I’m pretty sure I could keep the ball bouncing around in the court system until I died.
The Bonzo Dog Band had a bit about a lottery winner:
Interviewer: What will you do with it all?
Winner: I think I’ll become an alcoholic.
There are up to 10 entries per ticket, so it would only take about 11 months to print them all off 🙂
… oh, and the bulk of the $600m you spent on tickets could be declared as a gambling loss, reducing the amount of taxes you’d have to pay by a significant margin (I didn’t do the math, just saw that someone else did).
Basically, if you share the jackpot with 1 other person, you still come out something like $80m ahead, more than 1 other person and you’re $15m in the hole.
… assuming you started buying tickets a year ago, of course.
kyoseki,
That is a good point. I don’t know the tax laws regarding gambling but if you could write off the costs of the tickets against the winnings, then only the profit of $868-$594=$274 million would be taxed at the 39.6% rate, which leaves a net gain of $164 million. Not bad, even if it is just about 12% of the publicized $1.4 billion.
I always have to laugh at the people who will line up to buy a ticket when there is a super large jackpot, but couldn’t be bothered when it is only something like $10 million. What, $10M isn’t enough to live on or something? The odds are the same either way.