Your Investments
by NIH investment editor Franz "Pooch" Duveen
A lot has been written this week about the Big Game lottery in the United States. Much of the commentary has been about all the suckers lining up to buy tickets at odds of 76 million to 1. As usual, though, the press has misunderstood the principles of investment.
Specifically, what the press failed to do was calculate the mathematical expectation, or the average return that can be expected on investment. The jackpot in the Big Game was $325 million. To get the mathematical expectation we divide the return on investment by the number of chances (76 million) and get, roughly (because we're using rough figures) $4.25.
In other words, as long as a ticket costs less than $4.25, you have an expectation of profit. At a ticket price of $1, you have an expectation of profit even if there is a three-way tie for the jackpot (the complete expectation, taking into account all subsidiary prizes, may differ from the one we have calculated, but given the usual allotment of prize money by lotteries, it probably won't differ by much). You're probably going to lose if you buy a ticket, but as long as the ticket only costs a buck or two, most people aren't going to put their well-being in danger by buying one.
The question the press should have asked, then, is why wasn't everyone lining up to buy a ticket? Their failure to ask that question is but further evidence of the sorry state of the mathematical and financial preparation received by the journalistic classes.
April, 2002Your Investments © Coolth, 2002
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