moneyFYI
Financial Freedom Is Merely Organized Common Sense
When Should You Buy Lottery Tickets?
With the stock market as it is just now, I have decided to add a lottery ticket to my portfolio.
Daniel Bernoulli would do it
I am following the thinking of Daniel Bernoulli, the 18th century Swiss polymath. In his thinking on probability he decided that we make decisions under uncertainty based on the likelihood of a desirable outcome. Desirability in this context has to do with the “utility” of the outcome.
Some details. Canada’s Lottery 6/49 tickets cost $3.00. The current jackpot tomorrow is $24,000,000 if I win and many subprizes if I don’t get all the numbers. There is about 1 chance in 6 of winning something so 60 cents of the $3.00 is my expected cost of winning at least a free ticket. Other prizes range up to a $million, so I am guessing that is worth another 30 cents. That leaves $2.10 to invest in the big prize. The odds of winning it are around 13 million to one so that’s worth paying $1.86 for. That leaves me 24 cents short, but I am still willing to make the purchase.
Why?
Based on expectations, it is a losing proposition and as everyone knows lottery tickets are a “tax on the stupid.’ The question is Bernoulli’s idea of utility. The utility of $24,000,000 is quite large. The utility of the $0.24 expected loss is quite small. So on balance I am ahead accepting the near certain loss.
Bernoulli is not the only one who might make this purchase.
Further support for the idea
Paulo Coelho de Souza the Brazilian novelist offers this thought:
“It’s the possibility of having a dream come true that makes life interesting.”
I think dreams are valuable and since this one costs an expected loss of just 24 cents, I choose ot buy it just to make life a little more interesting.
If you use this reasoning to buy a ticket when you ordinarily would not and you win, I expect a small commission.
Watch for the idea of utility when making decisions with incomplete information
I help people understand and manage risk and other financial issues. To help them achieve and exceed their goals, I use tax efficiencies and design advantages. The result: more security, more efficient income, larger and more liquid estates. Please be in touch if I can help you. don@moneyfyi.com 705-927-4770
moneyFYI 