Irrational Lottery Hysteria

By Ryan Snefsky

Over the last several days, I’ve heard some pretty ridiculous thoughts, statements, and ideas surrounding the lottery hysteria. Here are some of the best ones I’ve heard so far.

1. It makes more sense to play the lottery when you have less money because you need the money more. Furthermore, that’s why you see so many lottery winners that do not have a lot of money. Nope. Mathematically, it actually makes a lot more sense to play the lottery as you become more and more wealthy. Why? When analyzing whether or not to take a financial risk, the most important concept is understanding the analysis of risk vs. reward. Don’t worry. This concept is much easier to understand that you might think.

Most people view the risk of playing the lottery as being $1, or the cost of one ticket. And, of course the reward would be the current jackpot. However, when we’re looking at comparing who is in fact taking more risk, thus worsening their risk / reward ratio by comparison to someone else, we have to look at things in terms of percentages.

Suppose, for example, that someone with a net worth of $10 bought one lottery ticket for $1. This person would be making a highly unlikely bet with 10% of their entire net worth.

While it seems somewhat unusual for someone to have a networth of $10, there are more than a handful of people out there that don’t even have that. Many people actually have more debt than assets, which actually means that their net worth is negative! The numbers are even worse for these people.

Now, suppose a person who has a net worth of $1 million buys a single lottery ticket. They are risking 0.0001% of their net worth on a bet with a high probability of loss. Just to clarify this number, $1 divided by $1 million, equals 0.000001. This number converted from a decimal to percentage terms, which involves taking 0.000001 multiplied by 100, gives us a percentage of 0.0001%.

So, the person who is already a millionaire is taking less risk, as a percentage of their total worth, than the person who is not already a millionaire. Why, then, do we not see more high net worth individuals winning the lottery?

First, if you're already a millionaire, then you may already know how to accumulate wealth. And, would you really be that concerned with "winning" a few more million as a matter of pure chance, when you already have what it takes to make millions as a near matter of certainty?

Second, most millionaires that know what is takes to continue making millions didn't get to be where they are by making bets that have a tremendously high probability of loss. Even if we assume that 95% of business ventures fail, those are still far better odds than those of winning a lottery.

2. “I don’t normally play the lottery. But, now that I have a chance to win a lump sum of over $370 million, you bet I’m going to play.” At face value, this idea seemingly makes sense to a lot of people. After all, if the basis of making decisions is based on a risk vs. reward analysis, then it theoretically makes more sense to play as the potential reward grows in size. However, there is also a threshold at which the increased reward is negligible to the average person buying a ticket.

Here’s what I mean. Let me ask you a question. If you won a lump sum of $370 million dollars today, would it be life changing for you? I can’t imagine anyone answering this question with anything other than, “Yes!”

Ok, now let’s look at another question. Let’s suppose you only won a lump sum of $10 million. Would that be life changing for you? I venture to guess that most people would still answer this question with a similar, “Yes!”

Now, when I hear someone say that they don’t normally play the lottery, but they do when the jackpot is over $370 million, I hear them saying, “Winning $10 million dollars, which would completely change my life and grant me security for a long time, is simply not worth it. So, I don’t play when the jackpot is that low. But, winning a much larger amount, like $370 million, while providing me with a similar life changing amount of security, is definitely worth it.”

Whether these people realize it, or are willing to admit it, or not, their actions are suggesting that $10 million dollars is an insignificant amount of money to them; but, $370 million is not. Really?! I mean, this seems pretty absurd, right? But, yet it happens.

3. Always buy quick picks. The logic I've seen in this strategy is simply crazy. The idea is that when people pick their own combination of numbers, they are likely to play numbers that are in some way significant to them. In the world of behavioral finance, there is a term related to this way of thinking known as "anchoring".

Researchers have found that if they have test subjects spin a dial with 20 numbers on it, and then they asked the subjects to pick a random number between one and 20, a majority of the people will pick the number that they spun on the dial. This is because of anchoring.

When people pick "random" numbers on their own for a lottery, there is a common tendency to pick numbers that are significant to them, such as their dates of birth, anniversaries, etc. When a massive amount of individuals think and act in this way, it is not uncommon for several of them to play the same numbers. If some of the players play the same numbers and those numbers hit, then those individuals will have to split the jackpot among the winners. There are people out there that believe in using the quick pick, because they believe that their odds of having to split the jackpot will be lower... if they win.

How absurd is that? Think about this for a second. The numbers drawn for the lottery are what they are. They might be a combination that people are more likely to pick. Or, they might be numbers that nobody has ever picked before. Either way, numbers will be drawn and they cannot be changed. So, doesn't it make sense to just hope to pick the winning numbers? Wouldn't you be elated if you had to split $30 million three different ways? Wouldn't you rather win a $10 million dollar share of $30 million because you picked the right numbers than lose $1 because the quick pick picked the wrong numbers for you? I sure would. But, somehow many people strangely can't see this obvious fact.

4. Always pick your own numbers. I read a news story earlier today that talked about a guy who has won the lottery several times. He's even written a book about how to increase your odds of winning. The story claimed that the man recommended always picking your own numbers.

Maybe he picked his own numbers and won, possibly even every time. But, to draw conclusions that your own actions have any effect over the outcome of random events, is also absurd. The act of thinking this way also has its own term in the study of behavioral finance known as "quasi-magical thinking". To learn more about this, please see my article titled "Understanding Friday the 13th Psychology Can Help Make You a Lot of Money".

What have you heard?

What crazy logic or irrational thinking or actions have you heard of over the last week regarding the lottery hyteria? If you’ve heard anything good, please leave me a comment below.