As of last Friday, Mega Millions lottery was at almost 300 Million, and it’s currently at 356 Million! This has a lot of folks buying the tickets, hoping for early retirement and dreaming of what a dollar can buy – but is this just a bad investment, good fun or just a voluntary tax payment?
I’m sure many of you have heard the adage saying “lottery is a tax for people with poor math skills” and similar statements. These are based on the fact that the expected return on investment (ROI) for a lottery ticket purchase is at best 50 cents on a dollar, as that is the percent returned in form of player prizes. Per California laws, administrative expenses can be up to 16%, and the rest (“profits”) are given out to educational institutions. Based on these numbers alone, buying lottery tickets is a very poor personal investment choice, especially considering that any winnings are taxed as income – further lowering your expected “ROI”.
A more favorable view is to look at it as an entertainment expense. For example, last Friday a dozen of us pooled $2 each and got a stack of tickets. This probably led to at least 15 minutes of “what if we hit it” fun chatter, and maybe a bit of a thrill checking the tickets once the numbers came out. To me, $8/hour sounds like a fair entertainment expense rate – on par with movie ticket prices these days. (To be exact, it’s $4/hour, as 50% would be our expected “ROI”)
Also, while I’m not in the “please tax me more” crowd, I do feel good that part of that money is going to support public education – this is where most of my charitable contributions go anyway.
All this summed up, I would argue that limited purchase of lottery tickets is actually an excellent investment, as long as it fits your entertainment budget.The last statement is key – if you’re purchasing the tickets with money that otherwise would not be in your entertainment budget, you are indeed throwing away 50 cents on the dollar. However, if your trade-off is with another entertainment expense, you are ahead here – as you actually have a chance of a positive payout. Think of it as choosing to see a movie in your usual local movie theater, or in the special lottery theater, where you have just as much fun, but on average you end up getting half your money back after the show. As long as you value the two “shows” the same, it’s an easy choice to make.
I also emphasize the “limited purchase” part. While each person may give different entertainment value to things they do, I would argue that buying $2, $20 or $200 worth of lottery tickets gives most people essentially the same entertainment value. Sure, higher stakes may get your adrenaline flowing, but I consider checking 200 tickets a bit of a drag.. and I’m not going to dream of being a millionaire 100 times more. Basically, I see diminishing marginal (entertainment value) returns with incremental ticket purchase, which is why I would encourage everyone to think twice before buying more than a few dollars worth of tickets.