Comments on: How words bring down economies

By: Cyde Weys

Cyde Weys — Tue, 25 Mar 2008 17:29:01 +0000

Jeff: Here's one article on the subject, though without too much effort you can find much more. That's the article I had in mind when I was writing this post though. And yeah, buying lottery tickets is the riskiest "investment" around. Even if you put in hundreds of thousands of dollars, the chance of losing the vast majority of it is going to be many nines long. I guess you could say it's the ultimate speculation, though with worse returns. $242 million is the break-even point if no one else is playing, so the point at which you stand to double your money is when the lotto is at least over $500 million (which hasn't happened yet). Needless to say, there are many more investment opportunities that give you a much better shot at a 2:1 expected return.

By: Jeff V

Jeff V — Tue, 25 Mar 2008 15:01:27 +0000

Even if you found a situation where buying a lottery ticket would have and expected return that is positive (taking the probability of losing * cost to play + prob. of winning * cash flows from a win) I highly doubt that it would still be considered a good investment when you factor in the required return on an “investment” as risky as a lottery ticket.

For example, a stock that is considered no more or less risky than the market as a whole would have a risk premium in the neighborhood of 6% (this changes constantly)and a beta of one.

You derive that stock’s value using the CAPM by adding the return on a 10 yr treasury note–which is considered risk free– to the market risk premium of 6% * beta which in this case is 1.

The beta (or risk coefficient) of a lottery ticket would be astronomical. I couldn’t imagine that you’d be compensated for the level of risk in your “investment”.

Also, is it really true that fine wine investments beat the S & P? Do you have a link or something that I could check out? That is interesting.

By: Cyde Weys

Cyde Weys — Fri, 21 Mar 2008 03:17:23 +0000

The odds of splitting a jackpot are not minuscule. It happens all the time when the jackpot gets really big because so many people are buying tickets. I vaguely track these lottery winnings and many of the really big ones are won by two people, sometimes even three or more people. If these occurrences halve the EV on a large jackpot, that's emphatically not minuscule. That means that, to achieve the same expected payoff, the ticket price would have to be half as much! For instance, just check out the Wikipedia article: the break-even point is at $242M if no one else is playing!

By: Kelly Martin

Kelly Martin — Fri, 21 Mar 2008 03:01:28 +0000

There was actually one time where the payout on some lottery (in Missouri, I think) exceeded the cost of buying all the tickets, due to a multiplier rule of some sort.

The odds of splitting a jackpot are astronomical even when compared to the odds of winning the jackpot, and as a result has a miniscule effect on EV.

By: Cyde Weys

Cyde Weys — Fri, 21 Mar 2008 02:04:03 +0000

Are you also factoring in the odds that someone else will win the jackpot, thus causing you to have to split your winnings? When the jackpots get really big, lots more people start playing, and the chance of multiple people winning at once shoots up by a lot. It must be once in a blue moon that the expected payout of a jackpot really does exceed the price of the ticket multiplied by the chance of winning. And even then, it really shouldn’t be considered an investment, more of a favorable gamble. Not that 99.999% of lottery ticket buyers know how to do all of the proper analysis anyway.

By: Larry Pieniazek

Larry Pieniazek — Fri, 21 Mar 2008 02:00:56 +0000

A lottery ticket can be considered an investment, when the expected value of the ticket exceeds the cost. You have to calculate the odds of winning, do a NPV on the payment stream, take into account taxes, etc, but my analysis has shown me there are times when Powerball or Mega Millions tickets are investments. Not often, but it does happen when the jackpots get way up there.

Even though I confine my buying to those times, (the rest of the time it’s a “stupidity tax”) I still do it only for the thrill… even if it IS technically an investment you probably still shouldn’t look at it that way.

By: Cyde Weys

Cyde Weys — Fri, 21 Mar 2008 01:55:07 +0000

I’m not sure if you got the wrong link or what, but when I put invest into their dictionary search these are the top three definitions, which are entirely consistent with the modern usage of the word:

1 put money into financial schemes, shares, or property with the expectation of achieving a profit. 2 devote (time or energy) to an undertaking with the expectation of a worthwhile result. 3 (invest in) informal buy (something) whose usefulness will repay the cost.

And if it really does have some ancient meaning that’s different than the modern usage, then I’m naturally referring to the modern usage in the blog post above.

By: drinian

drinian — Fri, 21 Mar 2008 01:00:43 +0000

If you want to reclaim the true meaning, you're going to have to use the word only when investing power with your subordinates, or dressing yourself (cf. the Compact Oxford English Dictionary). Given those historical meanings, I tend to think of investment more broadly, as purchasing things that will have value to me. My car may not appreciate in value over time, but having a reliable car is a valuable thing to me.